Tata’s low-cost car for India is facing some stiff competition even before the prototype has been unveiled. Mark Bursa evaluates the difficult birth of a new market segment.
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A three-way battle is shaping up in India for the motor industry’s final unconquered frontier – really cheap cars.
The news that Renault is teaming up with scooter and three-wheeler maker Bajaj will resonate with Tata, whose “1-lakh car” is being readied for a 2008 launch, and Indian market leader Maruti, which is planning to harness Suzuki’s low-cost technology to enter this new market segment.
Indeed, the segment is so new it hasn’t even got a name. So let’s give it one. Renault, referring to its talks with Bajaj, said the idea was “to jointly understand customer requirements and business potential for very competitive vehicles in India”. So let’s call these cars VCVs. The C could equally stand for cheap.
And therein lies the big question. How is it possible to make money from a car whose dealer list price is less than the factory gate profit margin of a BMW 3-series? The “1 lakh” that Tata refers to is a target list price of 100,000 Rupees – or about US$2,500 at current rates. That’s well under half the original target price Renault set out for the Logan – a target that wasn’t met.
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By GlobalDataNow Renault talks of US$3,000 as the target price for the car it wants to make with Bajaj. This is more like Rs120,000 – or 1.2 lakh – a figure that both Tata and Maruti admit are more realistic target prices. Indeed, many Indian analysts believe the final cars will be closer to 1.5 lakh, which at current exchange rates equates to about US$3,733.
This would still make VCVs substantially cheaper than even the cheapest car currently on the Indian market. The most basic Maruti 800 – based still on the original design that started Maruti production back in 1983 – costs just over 2 lakh (Rs205,000, or US$5,100) while a more modern small car such as the Chevrolet Spark is around 3 lakh (Rs309,000, or US$7,690).
So a clear gap in the market exists between motorcycles – which typically cost between $700 and $2,000 – and the lowest-priced cars. The scooter-based three-wheeler ‘tuk-tuks’ are not really a viable alternative as a private car – they’re noisy, dirty and uncomfortable, and their main function is as a cheap taxi. Even as goods vehicles they are being replaced by small Tata and Maruti 1-tonne pick-ups, which are more expensive to buy, but offer better whole-life costs.
Tata looks like it will be first to the VCV market. Tata chairman Ratan Tata gave some details of the car at the Geneva Motor Show in March, and images purporting to be of finished prototypes have been leaked by the Indian media.
What do we know? It’ll have a rear-mounted 600-700cc gasoline engine, with output expected to be around 30-35bhp. The rear wheels will be driven by a continuously variable transmission (CVT), saving the cost and weight of a traditional gearbox. It may have four doors – though supposedly leaked photos show a two-door model looking something like a cross between a Smart and a Suzuki Swift.
Ratan Tata said the car would seat 4 to 5 adults and have a steel body. There will be a basic entry model with a view to hitting a pre-tax Rs100,000 price tag, but features such as air conditioning, power steering and power windows will be optional. And Tata’s strategic partner Fiat is likely to play a role, harnessing Fiat’s own expertise in emerging markets cars from its Palio and Linea projects, and helping address quality issues.
Tata is likely to have almost instant competition from Maruti, which is also targeting an on-sale date of late 2008 for its VCV. Maruti is the dominant player in the Indian small car sector, so is arguably the manufacturer with most to lose. But Maruti is a different animal now that the Indian government has sold its stake in the company to Suzuki. Maruti is now an integral part of Suzuki’s global manufacturing network, and it now has complete access to Suzuki’s Japanese R&D centre at Hamamatsu in Japan.
Suzuki is already developing a new 50bhp 660cc engine for Japanese domestic consumption, and this will be coupled to a new low-cost small car platform being developed in Japan. The car, which will be built at Maruti’s Gurgaon plant, will be a more conventional vehicle, front-engined with front-wheel drive. It will effectively replace the geriatric 37bhp Maruti 800 as Maruti’s entry model, and seems on paper to offer significant advantages over the Tata VCV – a lot more power, Japanese technology and a less quirky layout.
Add Maruti’s huge distribution network and installed customer base to the mix and you have a potent combination. To counter this, Tata will be relying on Indian nationalism, pushing the fact that its car was developed by Indians in India, rather than in Japan.
The Renault-Bajaj combination is the surprise package. Renault has spoken of wanting to develop an even cheaper car than Logan for some time, while scooter-maker Bajaj Auto announced last year that it planned to move into the car sector. So it makes sense to combine these plans, if somewhat surprising to see Renault getting into bed with a second Indian partner so soon after making a major commitment to Mahindra & Mahindra over Logan and other models.
It’s simply a case of horses for courses: M&M wants to move upmarket, especially in the SUV sector, where M&M CEO Anand Mahindra is targeting global brand recognition as an SUV maker to rival Jeep and Land-Rover. M&M is present in the three-wheeler segment, but only for low-cost pick-ups aimed at rural areas, and the company doesn’t see its future in the volume small car sector.
Bajaj specialises in two- and three-wheeled vehicles based on motorcycle technology. In the 2006-07 Indian fiscal year to March 31, 2007 it sold more than 2.7m units, including exports of 442,000 units. Before the discussions with Renault were confirmed, Bajaj Auto managing director Rajiv Bajaj said his company was looking to build a small concept car – but this would not be a VCV – rather it would be a technology demonstrator.
For Renault, it will be more difficult to hit the US$3,000 target for a VCV than it was to hit the US$5,000 target for Logan. With Logan, it was able to draw extensively on its parts bin, taking sub-systems such as suspensions and transmissions that had already been developed for other cars such as Clio and Modus. This meant R&D costs were substantially reduced.
But Renault will need to look at new technologies for the VCV. Some will be drawn from Bajaj – but Renault knows the car can’t be too crude, as it’s becoming clear that the Tata and Maruti offerings will be relatively sophisticated. Maruti in particular can raid Suzuki’s parts bin in the same way Renault has done for the Logan. Renault president Carlos Ghosn has talked of breaking from traditional production processes and methods – it’ll be interesting to see how that develops.
Furthermore, both Maruti and Tata will beat Renault-Bajaj to market by at least 12 months, if not more. While Bajaj talks of a 2009 on-sale target, that’s a tall order when there’s no formal agreement in August 2007.
All these projects will depend on suppliers being able to provide components at very cheap prices. These new cars won’t offer enormous economies of scale at first. The total market in India could grow quickly to around 400,000 units – but export potential for these cars will be small and the market will be carved up between three or four players.
And you can be sure that if these cars are successful, there will be more entrants – already the Munjal Group, owner of Hero Honda, India’s largest scooter-maker, has declared it plans to enter the four wheeler segment in the future.
Exports will be limited. Demand for really small cars in the developed world is very low, and there are fears over poor safety performance of small, Indian-made cars – see the furore over the Reva electric car, sold in Europe as the G-wiz. There may be exports to other Asian emerging markets such as Indonesia, or even to parts of Africa, but numbers won’t be huge.
The VCV concept seems especially tailored for India, where there are large numbers of relatively affluent potential buyers looking to upgrade from a motorbike, and where small cars already dominate. In China, for example, it’s less likely to appeal as the new car market is less skewed toward small cars – though issues of pollution and congestion may force a change in the future.
The VCVs are expected to break cover at the New Delhi show early next year. Public reaction will be crucial. If Tata and Maruti get it wrong, it could break the projects before they even go on sale.
Mark Bursa
