When Ratan Tata announced his intention to manufacture and sell a car at Rs. 1 lakh ($2,300) by 2008 few would have foreseen the diverse reactionsfrom the global auto industry. Initial reactions ranged from scepticism to downright disbelief. However, across the globe, the concept has received powerful support. Carlos Ghosn, the head of Renault-Nissan, has endorsed the idea, not just for India but for the European market too. Within India, there is plenty of excitement as to what their collaboration with the Mahindras would lead to _ a car costing around $3,000!
The small car proposition turned conventional economics on its head. After all, a big car contributes more to profits than a small car.
The only way a focus on small car will yield profits is by chasing volumes. For a market like India’s that may not be a viable option for new entrants. That in any case was the logic that must have deterred Ford and General Motors from developing an ‘India specific’ car when they set up plants in India in the mid-1990s.
In India, cars are distinguished from one another in terms of price-points _ A, B, C and D. Since the mid-1980s, Maruti has been the dominant player in the small car segment.
(For a long time, in fact, Maruti gave Indian customers their only modern car in its 800). The Tatas’ announcement suggests that a car below the A segment _ a 600 CC car at a previously unheard of price tag _ is on the way.
There are other established manufacturers in India _ Honda and Maruti _ which have publicly stated their intention to stay away. The thrust of the Tatas’ message is not on challenging anyone to match them in the selling price of a small car.
The issue is really one of efficiencies; in this case, of using what Mr. Ghosn calls Indian engineers’ penchant for frugal manufacturing and management practices.
India’s low cost manufacturing facilities have also attracted investments for supplying cars to the global market.