How do you make a small fortune building budget cars? Start with a large fortune. That’s a lesson that Indian company Tata may learn the hard way.
It’s partly an ego thing; businessmen in countries that were once colonies of the West want to build multi-billion dollar car empires and become like Henry Ford: thus the servant shows the world that he has now become the master.
Then there’s the Model T myth, much beloved by Eastern carmakers; Henry Ford built his empire off cheap, affordable cars for the masses. Why shouldn’t Tata do the same with its super-cheap Nano?
Those who seek to emulate Henry Ford should never forget that he had a dream run: when he started building cars, the world’s roads were largely empty of cars and America was awash in cheap land, cheap raw materials & cheap labour. Couple this with millions of eager car buyers and gasoline so low-priced that many oil companies simply poured it into rivers, and you have an easy recipe for success.
The harsh reality of today’s car industry however, is an oversupply of cars, coupled with an undersupply of cheap materials coupled with a crippling shortage of energy.
That’s a hard environment to make money in. Iron ore and oil cost much the same whether you’re a long-established Japanese carmaker or an Indian entrepreneur. Unless you cut corners with either safety, quality or pollution controls, it’s very hard to make cars cheaper than they’re already being made. Cheap labour combined with massive economies of scale certainly help, but only up to a point.
You can make cars smaller and lighter, of course, but one should never forget that the Japanese home market already has some of the smallest and lightest practical cars in the world – the Kei cars. It’s a market the Japanese know well; any Chinese or Indian company that seeks to flood the world with cheap small cars that pass pollution controls and crash tests is going to find themselves up against a nation that’s been successfully building tiny city cars for over sixty years.
Even in India, Tata’s dreams of mass-producing the Nano for the masses are likely to run foul of some formidable obstacles:
1) India’s roads are already overloaded with vehicles. Tata’s target market is those who currently ride motorcycles, but a motorcycle takes up far less space than a Nano and is far more manoeuvrable in traffic jams. If Tata sold a Nano to everyone who’s currently riding a motorcycle, then the already crowded streets of India’s cities would simply grind to a halt.
Doubtless there will be the usual attempt to solve the problem by building more roads, but that’s not so easy when there’s little space around the cities in which to build them. Unlike China, India is a democracy; slum dwellers can’t be simply evicted from their homes to build another motorway. Also, historically, building motorways buys you nothing but a little time: in a few months the new motorway that was supposed to solve the traffic problem becomes as overloaded as the roads it replaced.
2) The world is heading into depression, and in a global economy problems are shared between nations. India has had a dream run in the last few years, but there’s no guarantee that the good times will survive a severe global meltdown. Already, several major Indian share floats have been shelved after nervous investors declined to buy the stocks. In economic bad times, the people who are Nano’s target market are likely to think long and hard before signing on the dotted line.
3) Building cheap cars requires a consistent supply of cheap materials, cheap labour and cheap energy. The slightest increase in costs can suddenly upset the apple cart. If you’re Toyota and your energy costs go up by 4%, you can shrug it off. If you’re the Nano factory owner, you’re suddenly losing money.
Making cheap cars can easily become like taking heroin: you know it’s not doing you any good and it’s costing you a fortune, but you can’t stop because you’ve set up your life around it. Once Tata sets up the enormous assembly plants it will need to make the Nano, it will be committed to production even if the car doesn’t make any money for a long time. If it closes down the plants due to unprofitable sales, Tata will lose billions; if it keeps the factories rolling, it will lose billions. Either way it’s not a pretty picture if things go bad.
4) Tata looks dreamily at the high prices that cars fetch in the West, and wants to sell vehicles into this market. However, the standards that the Westerners demand from manufacturers are far higher than Tata is used to in India. As professor Garel Rhys of Cardiff Business School put it: “To add anti-lock braking and airbags [to the Nano] doubles the price. Double it again if the car has to meet stringent European safety tests.”
Moreover, makers like Kia are already there at the bargain basement end of the Western market. Not only would a new carmaker have to sell in competition with the likes of Kia, but it would have to sell its cars at a super cheap price in order to attract buyers: why buy a cheap car from India when you can buy a one year old Kia or a five year old Toyota for the same price, with little of the risk?
5) The Japanese grew to dominate the world’s car industry because they had a strong quality ethic, absolute determination, long-term finance, and investors who were prepared to wait decades for a return on their investments.
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You can’t just walk onto the world stage and start selling cars. Getting the product right, building credibility, setting up successful dealer networks and winning market share may take decades; newcomers who believe otherwise are dooming themselves to great suffering.
6) The Nano may force rival carmakers to enter the market with a similar product. This would trigger a price war. While Tata fumbles around trying to get the Nano right, Suzuki will probably bring in a stripped out Kei car that works well from day one. Neither side will make any money in the short term, but Suzuki can probably hold its breath longer than Tata.
7) India and China are both rising superpowers who must inevitably clash, and their car industries may be one such battleground. Globally, they’ll both be chasing the same customers. They can’t compete on quality at present, so price is their only option. Like so many wars, there may be no ultimate winner.
Clive Matthew-Wilson
Clive Matthew-Wilson is editor of The Dog & Lemon Guide, a pugnacious car buyer’s guide based in New Zealand and Australia. At over 880 pages, it is claimed to be the largest car buyer’s guide on the planet. Website: dogandlemon.com
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