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Tata Nano’s Execution Failure: How the People’s Car Failed to Reshape the Auto Industry and Create New Growth

01/2017-6275

This case was written by Dr Robert Bong and Dr Mi Ji, under the supervision of W. Chan Kim and Renée Mauborgne, Professors of Strategy at INSEAD. It is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Special thanks go to Oh Young Koo for her research on this topic.

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For the exclusive use of H. Li, 2020.

This document is authorized for use only by Huiru Li in Summer 2020 Strategic Management-1 taught by Matt Fisher, San Francisco State University from Jun 2020 to Nov 2020.

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On January 13, 2008, Ratan Tata, Chairman of the Tata Group, unveiled the Tata Nano: “the People’s Car”, at the Auto Expo in New Delhi. According to Mr Tata, the Nano was built to meet all safety standards, designed to meet and exceed emissions norms, be low in pollution and high in fuel efficiency. Moreover, the car was within everyone’s reach, the price of its base model being only 1 lakh1 (US$1,984).2

The Nano and its creators received rock-star greetings at the event. The cheers and whistles from the crowd drowned the polite applause from the front row VIP guests. Ratan Tata had to pause several times for the crowd to calm down. In the next ten days of the Expo, hundreds of thousands of people visited the Tata Motors pavilion to catch a glimpse of the Nano.

On March 23, 2009, the Tata Nano was officially and commercially launched at the Taj Mahal Palace in Mumbai. As there were only 1,000 cars on display across India, most people had to place an order without having seen, let alone test drive, the Nano. Within two weeks, the Tata Nano official website received 20,000,000 hits. Order applications reached 200,000 – the biggest sales uptake in the history of global automobile industry.

Tata Nano: The People’s Car that Promised to Reshape the Auto Industry

The Tata Nano changed the dynamics of the Indian automobile industry. Socioeconomic development in recent years led to fast growth of the automobile industry in India. As people in the emerging middle-income class aspired to greater mobility, the small and compact car segment had grown phenomenally. Of a total of 1,551,880 passenger cars sold in India in 2009, about half were small and compact cars. The growth of the segment attracted competition from local as well as foreign players. Renowned makes such as Suzuki, Ford, Hyundai, Toyota, Renault-Nissan, Chery (Dodge) and Mercedes all jumped into the competition with their respective economy models. The average price was at first in the Rs 200,000 ($3,968) range. As the market got crowded, automakers tried to differentiate themselves by offering new models with more advanced technology, design and styling, features and functions. With each new model, prices moved up into the Rs 450,000 ($8,928) range.

While engaged in fierce competition, auto manufacturers had actually missed the low-end mass market that small and compact cars normally targeted in more developed economies. India’s GDP per capita remained low – nominal GDP per capita was only US$1,127 in 2009.3 Middle-income consumers who could afford to buy passenger cars represented only a very small percentage of the total population. Even in urban areas, the majority of people either used public transport or two-wheeled vehicles for their daily transportation needs. In 2009, of total motor vehicle sales in India, only about 7% were small and compact passenger cars, and 76% were two-wheeled vehicles. In fact, only 10% of Indian households owned a motorcycle. As economic development boosted demand for personal mobility, for the majority of Indian families two-wheelers were the entry-level choice to the world of motor vehicles.

1 A lakh is a numbering system in India equal to 100,000. Rs 1 lakh=Rs 100,000. 2 To provide readers with a consistent reference, the currency conversions here and below all use the

historical exchange rate at the commercial launch of the Tata Nano (March 23, 2009). At the time of the Tata Nano unveil in 2008, Rs 1 lakh was equal to US$ 2,556.

3 World Bank, http://data.worldbank.org/indicator/NY.GDP.PCAP.CD . Accessed November 24, 2012.

For the exclusive use of H. Li, 2020.

This document is authorized for use only by Huiru Li in Summer 2020 Strategic Management-1 taught by Matt Fisher, San Francisco State University from Jun 2020 to Nov 2020.

Copyright © INSEAD 2

The Tata Nano was conceived to appeal to this vast population of people neglected by the automobile industry. Tata Motors, a subsidiary of the Tata Group, one of the largest conglomerates in India, is the country’s largest automobile company by sales, with consolidated revenues of US$14 billion in 2009. Tata Motors was the leading manufacturer in commercial vehicles and among the top three in passenger vehicles, with products in the compact, midsize and utility vehicle segments.

In 2002, travelling in his car on a rainy afternoon in Bangalore, Ratan Tata had spotted a family of four on a scooter at an intersection: “The father was riding on the scooter, his young kid standing in front of him between his legs, and his wife seated behind him holding on a little baby.” This was a typical scene on Indian roads. Due to the lack of decent means of transportation, people across the country were risking their lives every day to get to work or to send their children to school.

This encounter prompted Ratan Tata to think about conceiving “a safe, affordable all-weather form of transport for such a family”. The idea of building a four-wheel vehicle from scooter parts came to his mind. At the Geneva Motor Show in March 2003, Ratan Tata revealed the idea to a reporter from the Financial Times: it would look like a real car and have proper seating, not stretch canvas as in the case of an auto rickshaw. The car might be a little noisier than an ordinary car but it would have to be both simple and safe. When asked about the cost, Tata said it would ideally be around one lakh ($1,984)4, which was the price of the most expensive two-wheelers at the time. The next day, March 10, 2003, the Financial Times ran the headline “Tatas plan Rs 1 lakh car.”

Creating the Nano: Achieving Distinctive Value at Low Cost

Ratan Tata’s ambitious plan was greeted with disbelief by the auto industry, as the cheapest existing car was priced at Rs 2.5 lakh ($ 4,960) in India. Even in 2006, two years before the unveiling of the Tata Nano, Osamu Suzuki, founder of Suzuki, made a public statement that it was impossible to make a reliable car for Rs 1 lakh.

Yet from day one, Tata Motors was committed to turning the dream of a people’s car into reality. In 2003, a dedicated team was set up to undertake this ‘mission impossible’. It was mainly composed of young engineers under 35, who were highly motivated and ready to take on new challenges. The initial two years of explorations followed a trial-and-error process. The team tried using different platforms, chassis, engines, transmission, power trains and materials to build a rock-bottom low-cost car to meet the 1-lakh price point. After various experiments, they concluded that all those technological innovations, albeit great, could not be applied to building a Rs 1 lakh car on an scalable basis.