Is the Tata Nano running out of gas?
|On Dec. 17, almost two years after the Nano was launched, Tata Motors aired the car’s first television commercial. Set in small-town India, it shows a young girl repeatedly asking her grandmother, “When will it arrive?” Finally, after narrow lanes, rocky terrain and compliments from passers-by, the sunshine-yellow Nano arrives. The little girl excitedly hugs the car. Then she notices a gathering of admiring neighbors, and dabs a little dot of kohl on the car to ward off the evil eye.
It may not be that easy for Tata Motors, the manufacturers of the Nano, to wish away the evil eye. When it was launched in March of 2009, the Nano was regarded as the hottest thing on four wheels. “The design language is in the same space as the Mercedes Smart,” said BusinessWeek. Reported the Financial Times: “If ever there were a symbol of India’s ambitions to become a modern nation, it would surely be the Nano.” Cut to the end of 2010. “India’s Nano becomes a no-no for car buyers,” says The Washington Post.
Even before the first car hit the roads, the Nano brought controversy. In October 2008, work at Tata Motors’ Singur plant in West Bengal came to an abrupt close because of political pressures. The company announced plans to move the factory across the country to Sanand, Gujarat. (This started operations in June 2010). In the interim, it rolled out only 50,000 units (as opposed to 300,000 units at Singur) from its Pantnagar plant, in Uttarakhand. “As a result, instead of an open sales launch, we had to launch the car through the booking route in April 2009 and could begin deliveries only in July 2009 — that, too, in a staggered manner,” says Tata Motors spokesperson Debasis Ray. (The company’s executives and channel partners have been instructed not to interact with the media.)
Big Boom for Bookings
Nonetheless, the Nano remained a modern-day symbol of India’s ingenuity. The public euphoria secured Tata Motors more than 200,000 bookings, from which a computerized program shortlisted 100,000 “lucky” customers for deliveries through 2010. Of the remaining, 55,000 chose to retain their bookings for the second lot of deliveries. The rest were refunded their entire booking amount ($1,800 for the Nano base model; $2,400 for the Nano CX; and U$2,800 for the Nano LX).
By the end of the year, it was a different picture. As of December 2010, there were about 77,000 Nanos sold — a far cry from the one million units group chairman Ratan Tata had been talking about in 2005. This figure includes open sales (that started in August 2010) and some deliveries to the second batch of applicants. That would imply that at least 78,000 (23,000 from the first batch plus 55,000 from the second) have cancelled or “delayed delivery” (where customers opted to take delivery later).
“We’ve always said that whenever there is a product launch through a booking route, there are cancellations,” Ray notes. “There are also people waiting to take delivery at a time of their own volition. But we are not disclosing the numbers in the public domain.” Ray also denies that the declining deliveries are related to diminishing demand. “In fact, demand has been picking up with open sales,” he says. “Also, we were nearing the end of the year, so you have to look at your stocks in a manner that they match what you’re supposed to deliver during the year. You do not carry a lot of stock into the new year, because people will want to purchase cars that are produced in the new year.”
“Overconfidence and Arrogance”
According to Gautam Sen, editor of Auto India, the real problem behind the declining sales is “a total marketing failure. Even during the bookings, it was the banks (giving auto loans) who were advertising (and not the company). In 2009, the Nano won the ‘Indian Car of the Year’ award, but the Tatas did not leverage this at all. They have not leveraged anything. I think there has been a sense of overconfidence and arrogance on the part of the company. They thought the car would sell itself because it was ‘the Nano’ and (because of) the kind of coverage it received around the world. They just took their eyes off the ball.”
A case in point: the incidents of fires in a few cars in mid-2010. It is not uncommon for cars, especially in the hot weather conditions in India, to have initial safety concerns. But in the case of the high-profile Nano, these concerns made waves. Instead of using this as an opportunity (see opinion piece by Wharton’s John Paul MacDuffie), the Tatas went into denial. “They should have taken strong measures to convince people the car was safe. They could have handled it much better,” says Sen.
Tata Motors released a statement saying that the fires were caused by “additional foreign electrical equipment having been installed or foreign material left on the exhaust system.” They also offered “enhanced features” to all those who had purchased the car, but insisted it was not a “recall.” Tata’s Ray says their customer satisfaction studies with current Nano owners indicate that more than 80% are “satisfied” or “very satisfied” with the car.
The Tatas may well have taken the right approach in the Indian environment. Consumer protection is in its infancy, and to recall a product might well stigmatize it for life. “We came to the conclusion that this car would go into the hinterlands, so we should make a robust car even more robust. That’s (the reason for) the upgrades. A ‘recall’ happens when there is an engineering defect and you want to correct that defect. With the Nano, there is no engineering defect; we are simply adding features,” says Ray. But concerns about the car’s safety persist, and many question whether that effort was aggressive enough to erase the image of a Nano engulfed in flames from consumers’ minds.
Ray, however, defends the Tata’s approach. “(The Nano) was not available off the shelf until we started open sales,” he says. “There is no question of sluggish sales. Until August (2010), we were only delivering pre-booked cars. I was not selling openly because I did not have the capability to. Despite that, had I started advertising, would I not be wasting money? So in classical marketing style, I have brought in advertising only when it was required — initially print and now, television.”
What really happened to the original 200,000 bookings? Industry observers say there are no clear answers. Some orders were cancelled initially. Others were cancelled later. But there is a large percentage that falls under “delayed delivery.” Indian consumers have a lottery mentality: People apply for things they don’t want, expecting to sell them at a premium when they get delivery. “Dealers expect early-bird owners (of the Nano) to command a hefty premium of Rs. 30,000 (nearly one-third the price of the car) because of the initial shortage in supply,” reported economic daily Business Standard, a few days before the launch. “We cannot comment on speculative buying. There is no way for me to know what the intentions of people buying the Nano are,” says Tata’s Ray.
Experts concede that part of the problem was not of the Tata’s making. Because the Nano plant had to move from West Bengal to Gujarat, production timelines were difficult to maintain. With not enough cars being made, the company felt it didn’t have to advertise or even set up efficient distribution channels. Butthe hype about the car died down, and the stories about the fires gained prominence.
Trouble with the Mother Plant
In fact, Abdul Majeed, leader (automotive practice) PricewaterhouseCoopers (PwC) India, believes the core problem was the initial lack of a mother plant. “The root of all (of Tata Motors’) problems is that they didn’t have the capacity right to go all over the country from day one. With such an initiative, the most important thing is to have the mother plant up and running. They probably had a plan in place that they couldn’t execute, because they just weren’t ready for a whole roll out.”
Sumit Bali, CEO of Kotak Mahindra Prime (which makes auto loans), cites yet another reason. “Since the exit of Rajeev Dube (president, Tata Motors, passenger car division), the whole passenger car division was restructured. Hence, most of the team responsible for the marketing was no longer involved. The new team, with diverse backgrounds, took time to understand the issues.”
One of those issues was the product’s positioning, believes ISB’s Roy. “The positioning of the car was entirely wrong. There was a great disconnect in the kind of people they were reaching out to and the kind of people they wanted to sell to,” he says. That the target segment for the Nano was two-wheeler owners and first-time buyers from small towns and rural areas was evident from the oft-chronicled story of Ratan Tata’s inspiration for the Nano: On a rainy day, Tata saw a family of four on a scooter — the father driving it, the son in front of him, and the wife behind him holding a baby. Tata intended the Nano to be bought by those graduating from two-wheelers.
Tata’s Ray concedes that during the booking phase, the company had no control on who applied. “Eventually, most bookings were from those who were familiar with cars,” he says. The attractive price tag — the cornerstone of the Nano mania — turned out to be a double-edged sword. “There is a great challenge in telling people that this is an economical car, because a car is an aspirational product,” Roy says. “That is something the Tatas have to crack. You can’t say, ‘Here is a car that’s cheap, so buy it.’ That will not work; the car has to connect with the right customer segment emotionally. They have to win the battle of the mind.”
The Way Forward
With the spate of media articles, print, television and even radio advertising, as well as other targeted initiatives, the Nano’s marketing has recently taken off. 2010 ended on an upbeat note, with December sales to dealers bouncing back to 5,784 units (according to SIAM). Tata’s Ray predicts that the numbers will only increase and production schedules are being gradually ramped up. “Now that we have begun open sales (available across the country since early January) for the first time, we are proactively going to those (consumers) for whom the car is meant,” he says.
That is exactly the path forward recommended by Kevin Freiberg, co-author of Nanovation, a book that uses the Nano as an analogy to “teach the world to think big.” “We think the way forward for Nano is to help villagers in rural India and those at the bottom of the pyramid (to) get financing and make the process of buying their first car less intimidating.... Perhaps another way forward for the Nano is to get back to focusing on the people for whom the car was originally intended,” Freiberg said.
The channels are being scaled up and tailored to the customers. Ray says that most of the Nano’s targeted customers felt intimidated by flashy showrooms. So in addition to the 874 regular sales outlets, 289 Special Nano Access Points have been set up for customers to test-drive or test-ride the car. Some 1,200 salespersons have been recruited and trained to work out of these dealerships. As a further purchase incentive and a confidence-boosting measure, Tata Motors has more than doubled the Nano’s warranty to four-years or 60,000 km (whichever comes earlier) at no extra cost. Customers can also purchase a maintenance contract at $2 per month.
The company has undertaken a massive outdoor campaign across 104 towns in five states. The message to Sanjay Pareek, president of marketing services firm Percept Out-Of-Home, was clear. “They want to get two-wheeler owners who wish to upgrade to a four-wheeler in tier two and tier three towns,” says Pareek. Accordingly, the communication that went out clearly stated that the Nano is now easily available with an easy-payment scheme. “The dealers have said the selection of sites is correct. And the proof of the pudding lies in the fact that they (Tata Motors) have just indicated that they will roll over the campaign for another month-and-a-half or two,” he adds.
Financing Is Critical
The financing might prove vital, especially since the car is now more expensive. The base model is now $2,700 and the top variant as much as $4,000 (Mumbai prices). PwC’s Majeed warns that “from $2,000, you can’t go to a $4,000 car, because if the price differential between the Nano and the next best alternative — the Maruti Suzuki Alto (starting at $4,000) — comes down, (the Nano) won’t be very attractive to people. The segment they’re targeting is very cost competitive; they need to keep their cost structure very tight.”
To soften the blow, Tata Motors has set up financing arrangements with 29 banks and non-banking finance companies, with almost 90% assistance at “easy rates.” Additionally, Tata Motors Finance, a subsidiary of Tata Motors that helps finance their vehicles, will process the loan of applicants with unclear documentation (a rampant problem with customers in that segment) in just 48 hours.
But the Nano now seems to be well poised to overcome its early setbacks, experts say. PwC’s Majeed expects increased competition in the small car segment. “But as long as the Nano gets its act together, it will be able to get good market share and create a new segment.”
There will be new challenges and fresh competition. Auto India’s Sen points to the Alto with the twin cylinder engine that Maruti Suzuki is planning to introduce in 2012. It will be priced close to the Nano. And there is another positioning problem coming up as the Tatas add bells and whistles — a more powerful engine, power steering, power windows, five-speed gearbox and even an airbag.
Power, in all its forms, will come at a price. Will the new strategies — some still on the drawing board — work? “We don’t know,” says author Freiberg. “But we do know this: Tata Motors is a great company with a deep culture of commitment to the needs of the customer. We can’t wait to see how they handle this situation.”