Nano: Tata’s Costly Promise?

There should be no doubts about that innovative idea, market it is targeting and given the technology and process knowledge, Tata Motors will bring out the Nano as designed. But, question need to answer is, is it going to be a costly promise?

Back in January, when Tata first unveiled the Nano at the Delhi auto show, this would-be king of econo-boxes grabbed more attention than anything shown at the North America International Auto Show in Detroit held the same month.

No matter. The Nano, a 623cc-engine compact that will get 20 KPL, instantly won kudos as a showcase of frugal Indian engineering. It sent shock waves through the auto world as carmakers reassessed how cheaply they could make small vehicles. For Ratan Tata, the car symbolized something much grander than just another product.

Steel Prices:
One problem is that Tata's cost concerns with the Nano are more serious than those faced by other automakers. First, at a time when global steel prices are touching record highs, prices in India are rising even faster.

Singur Plant:
Rising input prices aren't the only factor increasing costs. Tata Motor admits that its Nano plant in Singur is not ready yet because of protests and it might drag a bit, adding the costs, or it’s manufacturing has to be shifted to Pune site; which can’t handle Nano production yet, adding to total cost of operations.

No surprise, then, that analysts are wondering how Tata Motors can earn a profit on the Nano.

Supplier:
One obvious answer is to look at suppliers. But suppliers, already scrambling to make parts as cheaply as possible, can only be squeezed so far. So, this option will not going to yield more.

Volume:
Other option would be to look at volume, as per one analyst, until production volumes hit 500,000 units, it's difficult to be optimistic about any profits.

Passing rising costs on to car buyers through higher prices looks to be more difficult. With the 100,000-rupee price not up for negotiation, one option is to sell a larger proportion of higher-specification Nanos, which come with electric windows, air conditioning, and central locking. But while luxury Nanos will be more profitable per vehicle, higher prices risk edging out many customers who until now could only afford two-wheelers. One difficulty is that as the price edges closer to the Maruti 800, the Nano becomes less of bargain.

Business is all about such catch-22 situations!