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Not A Nano Problem
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Too many things had gone wrong with Ratan Tata's dream project. The idea that a really low-priced car would provide a viable alternative to two-wheeler users, and go on to sell a million units a year eventually (India sold 2.52 million passenger vehicles in 2010-11), was crumbling. The car was ready. The company had put behind the Singur experience and the new plant in Sanand in Gujarat was ready to crank out around 10,000 cars a month (it has the capacity to build more than 20,000 a month). But buyers were staying away from Nano, even as they be lapped up every other car in the market.
A million units a year would mean selling around 83,300 plus cars a month. But since launch, the highest number of Nanos that the company had managed to sell in a single month was around 9,000 — in July 2010. Since then, sales had been falling steadily.
Something had to be done to turn around the project in which Rs 3,000 crore had already been sunk and which had been hyped as the product for the bottom of the pyramid in India.
|• Rs 3,000 crore has been invested into the project, but volumes are still sub-par|
• Petrol Nano volumes are yet to hit the break-even point; suppliers are worried
• Diesel car can bring volume, but company wants to be doubly sure about the car
• Turnaround time with the rural consumer is three or four times higher than the urban
• Selling at 10,000 per month requires at least 2,000 sales people; ramp up takes time
Six months since that famous meeting, Forster and his colleagues are engaged in a gigantic rescue effort. They are tinkering with the petrol engine to improve fuel efficiency (from the already phenomenal 28 km per litre), tweaking its looks, adding new features, developing a diesel engine — but above all, they are engaged in reworking the distribution model in a frantic bid to improve demand for the car.
Sales have improved — Tata Motors is selling an average of 7,000 Nanos a month currently — not great, but not lousy either. The question is: will all these efforts actually propel Nano sales to somewhere close to its original targets. Or are these efforts just a way to create some face saving volumes that will at least justify keeping the Nano alive?
On the day BW meets him, Forster clears three new exclusive dealerships for Nano — these will sell no other cars, not even the Tata Indica or the Tata Indigo. These three are for Kotma in Madhya Pradesh, Gangavathi in Karnataka and Naihati in West Bengal. Most Indians would not be familiar with these towns. The UK-born, Germany-educated and General Motors-trained Forster finds it difficult to pronounce the names. But he is banking on towns similar to these — and even smaller ones — to boost the sales of Nano. All the other changes that the team is making are meant to improve the product — somewhat incrementally. But the rush to create tier-3 and tier-4 specific dealerships that sell nothing but the Nano is the most important initiative in the entire revival effort. It is these towns that will finally decide whether the Nano goes down in history as India's own people's car or as a gigantic automotive failure.
To understand why these towns are so important to the rescue effort, you need to first knew the company's own analysis of what went wrong. Telang says that because of the Singur episode, the momentum was lost — and all the hype that had been built up around the product backfired on the company because it was simply unable to meet the initial demand. "There was a mismatch vis-a-vis the hype. The gestation was too long. It kind of broke the momentum," says Hormazd Sorabjee, editor of Autocar India.
After the stormy protest by some of the farmers in Singur in West Bengal, Tata Motors was forced to find a new manufacturing destination for the Nano. It finally settled on Sanand in Gujarat, but by the time the factory was ready, the project had been delayed by 16 months. Until it could get the factory ready, Tata Motors kept sending back buyers — it accepted 100,000 bookings initially, and then stopped the process until supplies could be stabilised. The company says taking money and keeping people waiting endlessly for the cars would have upset customers. Introducing the Nano with such great fanfare and then refusing to accept bookings for a year turned the people, who had rushed to buy the car for its novelty factor, to other purchases. "Sometimes the market also takes times to accept a product. You don't see market acceptance overnight," says Aditya Makharia, auto analyst at JP Morgan.
|WHY NANO DID NOT DO WELL|
|WHAT TATA MOTORS SAYS|
• First 100,000 car buyers were not the target audience
• Did not penetrate the rural and semi-urban markets
• Incidents of fire brought negative publicity, hit sales
• Delay in shifting plant from Singur put off consumers in waiting
• Two-wheeler owners get intimidated by large showrooms
|WHAT ANALYSTS SAY|
• Mass market is no longer the bottom of the pyramid
• Company did not advertise till it was too late
• The company brushed aside initial fire incidents
• It is no longer Rs 1-lakh: base model is Rs 1.63 lakh
• Introducing the petrol version first was a mistake
Then, there were a couple of other mishaps. First, the initial lot of buyers for the car turned out to be a completely different set of people from the ones the company had banked on. Tata Motors' calculation was that Nano would convert the two-wheeler market because of its low cost. But the initial lot of Nanos were booked almost entirely by people who already owned cars. The first-time buyer stayed away due to a range of reasons: the fuel efficiency didn't compare with that of two wheelers; it was a stylish car but looked rather fragile, etc. "Of the first 50,000-60,000 Nano buyers, 80 per cent already owned cars. That meant that we had probably not reached out to the two-wheeler user," says Telang.
The perception of fragility was reinforced by the news of Nanos catching fire while on road (the company prefers to term them "thermal incidents"). While the company records show that there were 10 such incidents in all, the wide publicity each event received in the press resulted in worried customers who played safe and looked at other alternatives. Of the initial 100,000 bookings, 30,000 buyers cancelled, with most cancellations coming after the fires.
Industry analysts, however, have a slightly different assessment of why Nano's sales have not met the target. For one, the initial fire incidents were brushed aside by the company though Tata Motors says it took them very seriously, even inviting a JLR team to do a quality audit of the design and the material used. Second, the company did not advertise till it was too late. The first ad hit the television screens on 10 December, days after the shocking November dispatch numbers. "There's no point in creating demand (through advertising) when there were pending bookings still to be fulfilled. Open sales began only in January," says R. Ramakrishnan, vice-president (commercial), passenger cars.
Importantly, it is not a Rs 1 lakh car any more. The base model costs the consumer Rs 1.63 lakh. Analysts also believe that Tata Motors, which is better known for its diesel engines, should have either launched with its diesel variant or brought it in simultaneously. Tata Motors' Wagh, however, says that the Rs 1-lakh price target was only possible with a petrol engine, because diesel technology is costlier.
|"I have never seen such a ramp-up (in rural distribution setup for Nano) anywhere in the world" (Carl-Peter Forster, Managing Director and Group CEO, Tata Motors)|
Now, Forster and his team are working on fixing all these issues at one go. They plan to refresh its looks. They are tweaking the petrol engine for better fuel efficiency and developing a diesel engine as well. A micro-hybrid may come soon. Finally, they are planning to aim for the real bottom of the pyramid — by opening 300-plus exclusive dealerships and another 350-odd SNAP (special Nano access points) by the year-end. It may also use some of the 1,000-odd commercial vehicles outlets to sell Nano.
Even before the rural strategy for exclusive dealerships was worked out, Tata Motors had put in place some interim measures. It asked its 254 passenger car dealers (who have 619 outlets), to open SNAPs. About 210 of these have already been set up; the company hopes to close the year with 350 SNAPs.
The difference being that while the exclusive dealerships will be low-cost (Rs 10-30 lakh) sales, service and repair facilities, SNAPs are just sales (and finance) outlets (cars are serviced only through weekly visits by service vans). "Many (two-wheeler) customers feel shy in a swank showroom," says Ramakrishnan.
Between the 300-350 Nano Exclusive Dealers and the 350-odd SNAPs, Tata Motors would be creating a parallel distribution organisation as big as its current network. The urgency of doing this in a short span is palpable. "Such an infrastructure needs to be put in place in a year or so. I've never seen such a ramp up anywhere in the world," says Forster. Effectively, Tata Motors aims to close 2011 with over 1,200 sales points. India's car market leader Maruti Udyog, which is also expanding its network rapidly, had 802 sales outlets in 555 cities and towns while service outlets numbered 2,740 as of March 2010. Hyundai has 320 dealers.
But creating a parallel organisation for Nano is not easy. While the Nano piggy-riding the existing infrastructure could have fattened the topline and bottom line of the existing dealerships, lack of sales didn't affect their viability. The new dealerships, however, will have to be viable on their own count — with just one product, the basic Nano, and its three variants. While an optically refreshed Nano with a more fuel-efficient petrol engine is expected any time soon, the most awaited Nano in diesel will not hit the markets before early 2012.
The New Nano
Tata Motors is fully aware that volumes for diesel vehicles is over 70 per cent for all products that have both diesel and petrol variants (for the Indica/Indigo family it is nearly 90 per cent). But the company is approaching the launch extremely cautiously to avoid taking any flak similar to the fire incidents. "Thermal incidents put us in a bit of a tizzy," says Ramakrishnan. Company insiders say that the management would like to be doubly sure of the product before launched. "While the diesel engine is under development we are first focusing on leveraging the entire potential of gasoline engine to strengthen the fuel efficiency and performance," says Wagh.
|"Saar countries are where the Nano can go easily. Then, perhaps, Asean countries and Latin America" (Prakash Telang, Managing Director, India operations, Tata Motors)|
Ramakrishnan says the new outlets will be low-cost dealerships. "Smaller exclusive dealers will earn a return on capital employed of 25-30 per cent. In two-and-a-half to three years, all will break even and make profits," says Ramakrishnan. His calculations are based on volumes of 18-20 Nanos per month from smaller outlets, 30 from medium-sized outlets and 50 from relatively larger outlets. "Tier-3 and 4 locations will be the largest markets," he says. Current volumes, of course, are far from those numbers.
At Cargo Motors' 450-sq. ft SNAP outlet at Bavla on the Ahmedabad-Rajkot Highway, its vice-president Parthiv Singh Waghela, a former army major, is sweating profusely behind the counter. Not from pressure of sales but from the heat build up because of a power cut. Sales are slowly building up. The four-month-old rented outlet has incurred Rs 30,000 in fixed costs and bears a variable cost of Rs 15,000 per month. It is selling three to four units per month while the break-even is six to seven units a month. The first two months went blank, so Waghela has to move fast. His conversion rate from the three-to-four footfalls per day are lower than urban centres. "We are looking to sell 20 units per month from this outlet," says Waghela.
Selling in the hinterland isn't the same as selling in the cities. As against seven to 10 days to close a Nano deal in cities, rural areas require up to 25 days. While it takes one or two customer contacts in urban areas, rural areas take up to eight meetings in-person to convince a buyer to close the deal. That makes rural selling a fairly manpower-intensive effort. Forster estimates that the company needs about 2,000 trained executives to achieve a monthly sales volume of 10,000 units, which is the first stop from the 5,451 units it sold in June.
|"I don't think 1 million volume (for the Nano) is realistic right now because the market has moved up" (Hormazd Sorabjee, Editor, Autocar India)|
|"The company is getting back on track... I am seeing supply improve month on month" (Surinder Kapur, Chairman, Sona Koyo Steering)|
Tata Motors believes SNAPs are beginning to show results as the company has been averaging 7,600 units a month this year against 2010's average of 4,964. That takes Nano ahead of Indigo in Tata Motors' portfolio. Indica still sells 9,000 a month. India's largest selling car brand, Maruti Suzuki's Alto, has been selling 30,000 units a month of late. "Ideally, you want to upgrade to an Alto or a higher car, but when prices are high it may be better to buy a Nano for fuel efficiency," says JP Morgan's Makharia.
Analysts, however, point out that the sales may be coming at the cost of profitability/margins. The SNAPs, for instance, are getting unprecedented financial and management backing from the company. All Nanos come at a month's credit (there is no credit on fast-selling Tata vehicles such as Indica and Indigo), which saves the dealer Rs 3,000 in holding cost per car per month. The company is paying for 75 per cent of all promotional expenses the dealers are incurring in terms of events, fairs and haats. "I see the real pull from the upcountry markets. New outlets cost nothing. At best, Rs 5,000 to 10,000 per month," says Ashwini Agnimitra, managing director of Delhi-based Autolinks.
In early days, financiers were hesitant to finance the Nano. Some doubted the quality, performance and longevity of the vehicle while others such as HDFC Bank were overawed by the volumes Tata Motors projected. "We debated it intensely. We felt we were not equipped to handle the volumes they were talking about. We would over-burden the branches," says Ashok Khanna, senior executive vice-president and head of auto loans at HDFC Bank. Given that 85 per cent of all cars sold are financed, Tata Motors Finance, a 100 per cent subsidiary of Tata Motors, pitched in with an introductory offer of 8.99 per cent (against the going rate of 13.5 per cent) which continued till recently. "Our business model is to finance the products of Tata Motors," says Shyam Mani, managing director of Tata Motors Finance. Meanwhile, it has tied up with 29 more banks who have been assured that Tata Motors and its dealers will provide manpower support in lieu of competitive rates of financing."Financing in rural areas is a manpower intensive job. We have been assured of any kind of help in case of any problem," says HDFC's Khanna. Most banks have reduced Nano financing rates from 17 per cent earlier (due to higher risk) to 13.5 per cent that they offer in urban areas.
Leaving No Stones Unturned
Meanwhile, the company is going out of its way to allay any fears the prospective customer may have about the car, its quality and its capability. For one, the warranty on the car and its parts has been increased from 18 months to 60 months and from 24,000 km to 60,000 km. "Nano is a proper car. The low price led to a perception of cheapness to the car. We had more than 70,000 cars on the road. We had a lot of data on those cars. The customers being very satisfied with the car, we calculated that we could go ahead with it," says Wagh.
"I bought this car out of curiosity, but find it really good. I have driven it on rough roads with four people. It has good pickup and good speed," says Parthiv Adhyare, former chairman of Nutan Nagrik Sahkari Bank, who owns eight cars. To address concerns of maintenance costs, Tata Motors offers a Rs 99 per month maintenance contract. "The car had many critics asking questions about basic quality and longevity. This maintenance plan was to instil confidence," says Autolinks' Agnimitra.
Yet another initiative has been to increase the Nano's visibility; Tata Motors has tied up with Kishore Biyani's Big Bazaar to display Nano.
Taking Nano Abroad
Going international may not add great volumes initially, but it will add to Nano's acceptance. Nano in its current form can only sell in developing markets where drivability expectations are limited, emission and safety norms are not that stringent. Forster has targeted five large developing markets in the next three years. The first stop is the Saarc countries. The car has already been dispatched to Sri Lanka and Nepal. Bangladesh and Pakistan are next in queue.
|EUROPE'S NANO: The Tata Pixel is a city car concept for Europe. The design is based on the Nano. It has a gull-wing door system and is just over three metres in length (Courtesy: Tata Motors)|
Tata Motors hopes to export about 500 units a month initially. "Saarc countries are where the Nano can go easily. Then, perhaps, Asean countries and Latin America where this vehicle can reach out easily because the standards are similar. Only in countries like Brazil will we have to go with flex fuel," says Telang.
"The Nano, as we have it in India today, cannot be sold in certain other international markets because it needs two air bags and an anti-lock braking systems. And thus, we have to adapt the Nano to these specific requirements, which allows you to create a bit of a different animal. One idea of which we showed at Geneva — the Pixel. So, it's not a Nano," says Forster.
"In the developed markets, they will have to go with some strategy. If Tatas does well overseas, the Chinese and others will follow suit," says Makharia.
Tata Motors' stockyard at the Sanand plant, 45 km from Ahmedabad, starts a good 200 metres before the plant. Rows of cars lined up for dispatch run for over half-a-kilometre. The plant produces 300-400 units a day in single shift. It is gearing up to produce 1,000 a day—provided the demand picks up. "Tata Motors has missed several of its own deadlines. We had been asked to ramp up volumes equivalent of 1,000 units a day by last December, but the company is producing 300-400 per month. Crores have been invested. There is no going back on this project," says a vendor.
"Nobody can claim the project has gone absolutely smoothly. A few may have been a little concerned, we were not," says Mohan Kavrie, managing director of Supreme Treves, which supplies carpets, insulation, etc. "The company is getting back on track like any new model would. I am seeing supply improve month on month," says Surinder Kapur, chairman of Sona Koyo Steering.
When will Tata Motors break even on Nano? "It's difficult to say at this stage because there are so many factors involved. The break-even volumes have still not been reached but during this financial they should," says Telang.
Ramakrishnan, who is responsible for volumes, says, "Soon, we should sell 20,000 units a month. A million a year is not beyond imagination. We are targeting 10 per cent of what two-wheelers do." Everybody agreed that the killer product will be the diesel Nano.
|COMPETITION ROUND THE BEND|
Year 2012 will be the litmus test for nano and its pre-eminence in the market, because the competition will finally drive in. The good news for Tata Motors is that its most potent rival is unlikely to be a Chinese company, because the Chinese market has already matured to medium-sized compacts and the Chinese aren't the most competitive small car makers. The bad news is that Tata Motors' larger rivals in India, Maruti Suzuki and Hyundai, have an ace or two up their sleeve.
By the time the diesel Nano hits the roads in early 2012, Maruti Suzuki is said to be readying a redesigned Alto with a two-cylinder petrol engine (Nano also has a two-cylinder engine) which will bring its price close to the Nano. Hyundai, on the other hand, is building another small car to take on the Nano while the Santro is being fitted with an 800-cc engine.
"I would see some European teaming up with local companies. But according to what one hears, not all these projects are going well. So, it is quite obvious it is an engineering challenge," says Forster. If he is referring to the Renault-Bajaj alliance, it appears to have soured with Renault-Nissan planning its own product two-three years down the line, while Bajaj Auto is sticking to its plan of building what is now being called a four-wheeler (not a car) based on the economics of the two/threewheelers the company already produces.
General Motors and Ford, too, are working on their respective ultra lowcost cars for the Indian market.
Yet not everybody is convinced about the volumes. "I don't think one million volume (for the Nano) is realistic because the market has moved up. The bottom of the pyramid is not the largest segment any more. But the car still has phenomenal potential though the volume may happen eventually," says Hormazd Sorabjee, editor and publisher of Autocar India. "It will still cater to a big segment. It is just that that isn't the largest."
Agrees Telang: "Bottom of the pyramid will always remain strong. Nano is solidly entrenched in the bottom of the pyramid." Tata Motors, after all, would not want to prove that Nano is an idea whose time has NOT come.
(This story was published in Businessworld Issue Dated 01-08-2011)