India: The New 'People's Car' as a Step Forward

7 MINS READJan 10, 2008 | 22:17 GMT
India took a step toward becoming a "manufacturing workshop of the world" for the automotive industry Jan. 10 when Tata Motors launched its new car, the Nano, in New Delhi. India is working to grow its automotive industry by building on its current prospects and working to export small cars.
In 2006, during the opening ceremony for India's Global Automotive Research Center in Oragadam, Prime Minister Manmohan Singh pledged to make India a "manufacturing workshop of the world" for the automobile industry. India took a step in that direction Jan. 10, when Tata Motors unveiled its new lightweight, low-cost car, the Tata Nano, to 1,000 spectators in New Delhi. The Nano, also known as the "People's Car," will be launched in India by year's end. According to its Automotive Mission Plan, India's government expects sales of Indian cars to grow 16 percent annually throughout the next 10 years (from $36 billion to $145 billion within the next 10 years). India's extended auto industry — including tractor, motorcycle and car manufacturing as well as service-related employment — currently employs approximately 10 million; the government is anticipating that number to grow to 25 million by 2016. To achieve this, India is attempting to steer its technological sector toward innovation that caters to the auto industry's needs while encouraging its information technology (IT), steel, plastics, general manufacturing and auto components sectors to work together to advance the auto industry. India also will build on its strong prospects for becoming a global hub for auto parts — Japan's largest auto safety equipment company plans to build its first factory in India in 2009, and automakers are expected to spend around $40 billion there in the next 10 years. Mitsubishi, Ford and Hyundai have been building plants in India over the past couple of years and are still growing there — Ford, which has already invested almost $400 million in India, announced Jan. 8 that it will invest $500 million to expand operations there. The Indian government is banking on exporting small, cheap cars and auto components to sustain much of its auto industry's planned growth. Initially, India will look to its domestic market (there are roughly seven cars per 1,000 people in India) to fuel its small-car growth. The Nano, which will sell for approximately $2,500, has no power steering, power windows, radio or air conditioning. Its engineers focused on cutting corners in every possible way to make a car cheap enough for the average low-income family in India; such families rely primarily on buses and scooters for transportation. Tata does not plan to market the Nano for export for another three years. The car's lifetime performance is in question, and it would not comply with safety standards in many nations. But in the near future any possible export plan by Tata or other Indian car makers will target nations with safety and environmental standards similar to India's. When Tata does seek a greater global market share in small and cheap cars, it likely will look to developing nations in Southeast Asia, Central Asia and Africa, where it will face competition from Korean and Japanese automakers (Suzuki's Maruti will be one of the Nano's main rivals) and an array of Western manufacturers such as Ford and Volkswagen that are increasing research and development on cheap cars. While India's government focuses on a low-cost car strategy, Tata could be looking to the future to develop cars that appeal to customers besides low-income families. The vanguard for India's aspirations for a global auto brand, Tata has formidable manufacturing, steel, service and IT resources it will use to develop and refine its cars. Its likely acquisition of Land Rover and Jaguar will give it extra technological skills if it seeks to develop higher-quality cars. Tata Motors already has diversified its market segment. Just six years ago, it mostly produced heavy duty trucks. However, Tata suffered a major multimillion dollar loss based on the cyclical nature of heavy truck demand (trucks last longer than cars, and demand for manufacturing depends on large contracts from companies or governments). Tata then embarked on a new strategy to include passenger vehicles and slowly built its revenue growth with cars such as the Indica and Indigo and now the Nano. It also worked out deals with other global car manufacturers such as Daewoo and Fiat and a Brazilian bus company. The Land Rover and Jaguar discussions make it clear that Tata is positioning itself as a global transportation company rather than a truck or cheap car company. Still, it will face competition from several sources, including firms setting up shop in India. For example, cost-competitive carmaker Fiat plans to introduce five new models in India in 2008 and produce two of those models in India. Additionally, possible global climate regulations could eventually pose a serious threat to Indian carmakers, along with companies in other nations that are already coming under carbon regulations and investing heavily in efficiency research (the Nano would fail emissions standards in most Western nations). If Tata does not meet expectations, India can still attract significant investment from these foreign auto firms drawn by India's low-cost labor and relatively robust backward and forward industrial linkages. Also, compared to China, India's largest rival — and Thailand to some extent — investors will be attracted to India's relative respect for intellectual property rights. To maintain this interest among foreign investors and domestic consumers, the government will have to maintain its infrastructure and improve its highways. Two-wheelers and motorcycles can more easily manage India's transport network, and consumers might be wary of buying large vehicles that could increase congestion. India is likely to talk of highway projects over the next several years, but significantly improving its road infrastructure is an almost insurmountable task for the government. Road and highway construction occurs at a snail's pace and is plagued by bureaucracy, corruption and inferior-quality materials. Furthermore, India's famed IT sector and service economy, which has bolstered the country's middle class, has not depended particularly on a world-class transport infrastructure for the export of its goods and services, so India will need to invest in increasing port capabilities for larger volumes of physical goods. Perhaps India's biggest challenge will be overcoming its population's hostility to new industrial and infrastructure projects and their encroachment on the farmland and Indian way of life. This is less of a problem in less democratic and more business-appeasing China. In general, global investors are becoming increasingly skeptical of doing business in India because of its unabatedly bureaucratic and often corrupt government practices, not to mention increasing militant attacks against foreign investments. Tata, which has led many of India's industries, including steel (Tata is responsible for India's success in becoming one of the largest steel producers in the world) and IT, would likely not invest in such a major project if it did not anticipate some room for infrastructure improvements. Nevertheless Tata's likely efforts to apply more pressure on the central and state governments for such improvements probably will be as daunting a challenge as competing against the world's major carmakers for market share in low-cost vehicles. India must address investors' growing wariness of doing business in the country if it is to lead its car industry, and the rest of its economy, to a brighter future.

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