The Trouble with India's People Car

Ratan Tata, head of the 143-year-old Indian conglomerate that bears his family name, is known as a passionate innovator so committed to risk-taking in his $83 billion empire that he gives an annual award for the “best failed idea.” But that prize could go to Tata himself for one of his own dream projects: the Nano car.

The launch of Tata Nano in 2009 was hailed as a milestone in automotive history. At 123,000 rupees, or $2,400, the Nano was dubbed “the world’s cheapest car” and called a flagship example of Tata’s idea of frugal innovation. It illustrated how engineering could be used to open markets in a country where per capita income is around $1,000 a year.

At first, Tata’s “people’s car” looked as if it could be India’s Model T. Where Ford had used assembly-line innovations to create the first mass-market car, the Nano would push affordability to an extreme. Tata’s engineering team introduced a lightweight hollow steering column and tore up plans for the car’s floor 10 times. Smaller tires were designed using less rubber and the wheels have three lug nuts instead of four. According to the market research firm Frost and Sullivan, the German auto supplier Bosch stripped out as many as 700 of the 1,000 functions of its electronic fuel injection and engine controls to develop cheaper versions for the Nano. All told, Tata filed around 35 patents on the technology that went in to the car’s design.

When the Nano was unveiled, accolades rolled in, including the Frost and Sullivan Innovation Award. Analysts predicted that the vehicle would increase by a staggering 65 percent the number of Indian families able to own a car.

Instead, the Nano has become a hard lesson in marketing to the bottom of the economic pyramid. Just 70,432 of the cars were sold during the fiscal year ending in March. At first, some target customers were intimidated by Tata’s glittering showrooms (about half of Nano buyers had never owned a car before). Others apparently just didn’t like the idea of purchasing the world’s cheapest car. In a country where incomes have doubled in the past five years, the Nano is seen as a glorified version of a tuk-tuk, the three-wheeled motorized rickshaw often seen on the streets of developing nations. Many consumers stretched their budgets to buy the Maruti-Suzuki Alto, which has a bigger 800cc engine.

Tata may have misjudged the market by offering too little with its people’s car. “If you start with a very basic product, soon the customer wants more,” says David Cole, chairman emeritus of the Center for Automotive Research, a nonprofit automotive-industry research group. “To precisely hit the market when you are pioneering a segment is difficult.”

Tata says it is “confident” in the Nano but has been revamping its marketing plans. Ratan Tata himself went out to meet with dealers and executives even struck a deal to display cars at Big Bazaar, a chain of retail discount stores where one can buy plastic buckets and curry powder. So far, sales continue to be choppy and are falling well short of Tata’s ambition of selling 20,000 cars per month.

One answer could be more technology. Tata has diesel and electric versions of the Nano on the drawing board, although Cole wonders if such strategies will work. “If the market is soft, you cannot solve market problems by adding technology features,” he says. “Hybrid or diesel versions can potentially double the costs of Nano–a very risky step.”

Tata continues to push ahead with frugal innovation, including a $700 prefabricated home and a low-cost water filter called Swach. One idea that didn’t make it was an inexpensive all-plastic door designed for the Nano. But it was a good effort. The door was a nominee for the “Dare to Try” award, the one for the best failed idea.

Mahendra Ramsinghani is the author of The Business of Venture Capital (John Wiley, 2011) and manages Invest Detroit’s First Step Fund.