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Economic Analysis Of Tata Nano

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ECONOMIC ANALYSIS OF TATA NANO

Index
1. Company Overview of TATA motors
2. Market Demand
3. Total Sales Estimation
4. Producers Behaviour
5. Cost Structure & Pricing Strategy

1. Company Overview of Tata Motors Ltd. Tata Motors Limited is India’s largest automobile company, with revenues of Rs. 35651. 48 crores (USD 8. 8 billion) in 2007-08. It is the leader in commercial vehicles in each segment, and among the top three in passenger vehicles with winning products in the compact, midsize car and utility vehicle segments.

The company is the world’s fourth largest truck manufacturer, and the world’s second largest bus manufacturer. The company’s 23,000 employees are guided by the vision to be “best in the manner in which we operate best in the products we deliver and best in our value system and ethics. ” Established in 1945, Tata Motors’ presence indeed cuts across the length and breadth of India. Over 4 million Tata vehicles ply on Indian roads, since the first rolled out in 1954. The company’s manufacturing base in India is spread across Jamshedpur (Jharkhand), Pune (Maharashtra), Lucknow (Uttar Pradesh) and Pantnagar (Uttarakhand).

Following a strategic alliance with Fiat in 2005, it has set up an industrial joint venture with Fiat Group Automobiles at Ranjangaon (Maharashtra) to produce both Fiat and Tata cars and Fiat powertrains. The company is establishing two new plants at Dharwad (Karnataka) and Sanand (Gujarat). The company’s dealership, sales, services and spare parts network comprises over 3500 touch points; Tata Motors also distributes and markets Fiat branded cars in India. PRODUCT OVERVIEW Tata Nano is the cheapest car in the world. It is sold in home country India at around Rs 1lakh i. . approximately USD 2000. It is manufactured by Tata Motors Limited, the largest automobile company in India. It’s Chairman, Mr. Ratan Tata envisions that Tata Nano to become a “People’s car“ which is affordable by almost everybody. Tata Nano was first launched in India on 1st April 2009 and expected to be in Indian market by July 2009. Since launching, it has created a huge buzz all over India. Within the first two days of lunching, it has received 5500 booking. The figures kept increasing every day since the launching. What makes Tata Nano so cheap?

Basically, by making things smaller, lighter, do away with superficial parts and change the materials wherever possible without compromising the safety and environmental compliance. There are three models of Tata Nano car available i. e. Tata Nano, Tata Nano CX and Tata Nano LX. Nano has got to do something for the people of India and transport. Unavailability and poor quality of mass transport is a common problem in India. In a two wheeler, father driving with elder child standing in front and wife behind holding a baby is norm in this country. Thus, this is a relatively an unsafe mode of transporting a family.

Thus, with this in mind Tata Nano was created as a safer form of transport.

2. MARKET DEMAND The Tata Motors has finalized 1. 55 lakh customers for its small-car Nano. The Nano is the world's Cheapest Car. The company will start delivering from next month. Tata Motors, would deliver the first one lakh cars by March 2010, while the handing over of the Nano’s in the next phase to 55,021 customers would start thereafter. There were 2,06,703 applicants out of which first 1,00,000 had been selected. The company has also completed the selection process for the second phase by allotting slots to 55,021 customers.

The entire selection process was done through a computerised lottery. Consider the NANO's low purchase and running cost, the more its demand will be for the markets into which it will be introduced, the more it will be bought. By this paradigm, it is also assumed that with nearly 25 km/l of fuel efficiency, lesser the fuel consumed by the car, more the number of NANOs will be purchased by the people. Seen from this perspective, the important phenomenon the success of Nano will bring in is that it is most likely to choke the demand for products from the developed countries. The ripple effect this could create is that the eveloped countries will have to look for markets in their own backyard, since their success will most likely be stunted by the Nano. Once these companies find that their growth in developing economies is restricted, they will go deeper down the path of decline. All these give the Nano the best chance to become the master of the roads of developing countries. With more people opting for this brand (assuming its technological finesse), the demand for sophisticated, albeit oil-guzzling cars from the developed countries is sure to decline. This will drive the car majors deeper into their woes.

Experiencing this, they may take the cue from the Nano and come out with smaller and more fuel-efficient cars that will tailored their conditions. But given the economic condition they are in, this kind of massive restructuring is difficult to contemplate. So, assuming that in the worst scenario, the major car manufacturers will shut out of business, who is likely to take their place? Undoubtedly, the Japanese and Korean cars (we are not talking about German cars here because they are mostly well set in the luxury car market) are miles ahead of the Nano, and have been in American shores for decades.

Moreover, there are serious doubts about the suitability of the Nano or any Tata car to these conditions. However, the financial health of these Asian companies is not pink, either. Given these variables, one possibility that arises is that if these Asian giants too, go the American way, the field will be left open for the Nano in the developed countries. But this is a long way off. One thing is certain for now - the Nano is sure to cut into bigger car companies' sales in India and other developing markets. When the requiem is sung for these relatively more expensive cars, the coffin bearer will be the Nano.

It has ended up justifying its place in Time magazine's list of dozen most important cars from 1908 till date. 3. TOTAL SALES ESTIMATION * It was estimated that the demand for the people’s car shall be at least twicethe demand for Maruti 800, the lowest end car. * Initial projections were atabout 500,000 cars peryear. * The price decision of Rs 1 lakh is definitely going to make a lot many people transit to 4-wheeler fold and that shall explode the demand. * If only 10% customers of 9 Million two wheeler market transit to 4-wheelers it shall amount to 50% of the passenger car market share. Domestic Market Share CV’s| 5 |

Total Passenger Vehicles | 14| Total Two Wheelers | 77| Three Wheelers | 4 | The demand for any product, including vehicles, is driven by two main factors – its price and the income of the buyer. The responsiveness of demand to each of these is known as price- and income-elasticity respectively. For most goods as incomes go up, demand goes up. Vehicles certainly come under this category. Therefore, it is inevitable as incomes go up households move up the vehicle ladder graduating from bicycles to two-wheelers and from two-wheelers to motor cars. This happens, ceteris paribus, (that is, other things being equal such as the price of vehicles).

In addition, however, if the price were to decrease, demand undoubtedly would get a further fillip. But for an expensive product like a car, the strength of income-elasticity far outweighs that of price-elasticity, especially for marginal changes in price. The impact of the Nano on automobile demand can be viewed within this analytical framework. It has been argued that the low price of the Nano will galvanise demand. Is this true? One must bear in mind that the real price of any vehicle is its capital cost plus running costs, namely, fuel, insurance, service and maintenance.

These are examined below, respectively, for the Nano. First, it is evident that the actual sale price of Nano will certainly exceed Rs125000 or Rs150000 depending on the variant purchased. The reason is simple: demand will outstrip supply (at best 15-20,000 units per month) and the car will be sold at a premium officially or in the black market. When the first ‘people’s car’ the Maruti Suzuki 800 was launched in India in the early 1980s, a similar phenomenon was observed. The car was sold against bookings made and a lottery determined who could buy it. Thus, while the rice of the car was around Rs60000, letters of allotment were sold at a premium of up to Rs30000. This, in effect, validates another fundamental principle of economics: given the demand curve for a product one can either fix the quantity or the price, but not both. Given that production capacity is fixed, at least in the short- to medium-term, price has to give way since we cannot operate off the demand curve. In the case of the Nano, a likely scenario is that the car will be sold at an (unofficial) price of well over Rs125000 and is likely to command a premium of at least Rs30000.

The ‘choke price’, that is, the price at which demand is choked off will be set by the next most expensive option available, such as the Maruti 800 (now wholly owned by Japan’s Suzuki) which costs about Rs215,000 on-the-road for a basic model. Thus, the premium for the Nano is likely to be bounded upward by this price and will perhaps stabilise at around Rs30-40,000. What this means in effect is that we are looking at a price in the range of Rs155000 to Rs165000. Two other factors that are likely to cause an upward drift in the price of the Nano are cost escalation and production uncertainties. The latter has already been mentioned.

With regard to the former, in a general inflationary scenario with a rise in the price of inputs such as steel, it is moot to what extent Tata Motors will be able to hold the ex-factory price at Rs100000, despite the appeal of this round figure. More important, however, are the running costs of the car. For an active commuter driving a small car, expenditure on petrol is about Rs3000 a month and insurance and other expenses are a minimum of Rs1000 a month. Also, the typical monthly payment for a loan of Rs150000 (for a Nano) will be about Rs2700 whereas that for a Rs200000 Maruti is about Rs3,400.

In sum, it would cost a total of Rs6,700 a month for owning and operating a Nano and Rs7,400 a month for a Maruti 800, a saving of about 10 % per month which is not enormous. We may conclude, “A middle class family generally cannot spend more than 15 % of its income on transport. To spend about Rs 6,000 a month on the Nano, your income should be more than Rs40,000 a month. In Delhi, the richest city of India, only 30 % families earn more than about Rs25,000 a month. Clearly, even with cheap cars available, less than 20 % of the families can own a car in Delhi and much fewer in other cities.

That is why the motorcycle with its low maintenance and running costs will not get displaced by cheap cars. ” Another point this statement substantiates is that it is growing incomes rather than lower prices that more strongly impact on the demand Finally, another point against the price-elasticity view is that used cars in good condition are even now available for less than Rs100000. It does not appear, therefore, that breaching this symbolic barrier is the key to increasing car ownership and in getting people off scooters and into cars (even if that were a desirable policy objective).

In sum, it does not appear that the Nano will lead to a spurt in car ownership in India. The symbolic price tag of Rs100000 is just that. The real cost of owning and operating it is likely to remain high enough for it to not be a ‘people’s car’ in the true sense of the term in a country where two-thirds of the population still lives on US$2 a day or less. 4. PRODUCER’S BEHAVIOUR In this section we will come to know about the behaviour of the producer related to the particular product. According to the supply quantity of the product we can see how the producer is behaving.

The producer’s behaviour is basically seen from the quantity supplied against the price of the product. According to the law of supply i. e. “when the price of the commodity increases the quantity supplied is also increased” So according to the law of supply, generally for the high price of the product the quantity supplied is also high and vice versa. The scale of the quantity supplies thus mainly changes due to the change in the price. But there are several other factors which are responsible for the change in supply. These can be demand for the product, cost of raw materials, issues related to internal industry and other social factors.

PRODUCER’S BEHAVIOUR FOR TATA NANO According to the data, we see that there is change in supply but still the price has not changed from the actual price. This is mainly because the earlier projected price of the TATA NANO. Here we observe there is no change in the price though the demand is varying i. e. the price is at its actual price of Rs. 100000 since start to end. But however, there is change in supply due to some other factors like demand and social barriers. The variation in demand for different periods is thus shown below. Month and Year| Quantity supplied|

July 2009| 2475| August 2009| 2501| September 2009| 2524| October 2009| 3018| November 2009| 3406| December 2009| 3610| January 2010| 4001| February 2010| 4105| March 2010| 4710| April 2010| 3525| May 2010| 3550| June 2010| 7704| July 2010| 9000| August 2010| 8103| The table above shows the supply of the TATA NANO according to the months since the launch of it. Figure 2 sales against months X axis – Months Y axis – sales Here we observe the change in the quantity supplied according to the different months since the launch of TATA NANO. 5. COST STRUCTURE AND PRICING STRATEGY

COST STRUCTURE The cost structure basically is the cost required for the manufacturing of the product includes the cost of the raw material and the inputs. According to the technical and general specifications the cost of raw material can be known. * Dimensions: 3. 1 meters (10. 23 feet) long, 1. 5 meters wide and 1. 6 meters high. Can seat four to five people * Engine: A two cylinder 623 cc, 35 horsepower rear mounted, all aluminium, multi-point fuel injection petrol engine can power the car to top speeds of 105 kilometres per hour (65 miles per hour). Fuel Efficiency: 20 kilometres per litre, or 50 miles per gallon is claimed. * Body-Shell (steel, frame, welding) – Rs 25,000 * Engine and Transmission (Aluminium engine block, gearbox, drive-train, steering) – Rs 30,000 * Electricals (lights, battery, starter motor) – Rs 10,000 * Interior elements (floor mats, seats, plastics, roof trim) – Rs 20,000 * Tires and suspension – Rs 10,000 * Profit – Approx. Rs 5,000 The raw material for Tata Nano is being procured from Reliance Industries and Haldia petrochemicals, currently. Polymer demand is expected to soar in India from 5. million metric ton per year in 2007, to 12. 5 million metric ton per year in 2012 PRICING STRATEGY The pricing strategy of TATA NANO is related to the price of the product i. e. TATA NANO car. TATA NANO is launched aiming the middle class people of India. So the price of TATA NANO is been decided according to them only. The less accessory in the TATA NANO car is another reason for the price to be set low as compared to the other passenger cars in the market. Small size and small weight requires lesser material for manufacturing and hence reducing the price further.

The price varies for different TATA NANO models from Rs 1,15,361 to Rs 1,79,254. The three different models are as follows: Tata Nano std - Rs, 1,15,361, Tata Nano CX – Rs. 1,27,064, Tata Nano LX – Rs. 1,79,254. MARKET OVERVIEW The passenger vehicle market, which constitutes around 80% of automobile sales, has immense growth potential as passenger car stock stood at around 11 per 1,000 people in 2008. Anticipating the future market potential, the production of passenger vehicle is forecasted to grow at a CAGR of around 11% from 2009-10 to 2012-13.

The recent launch of Tata Nano has brought about a new revolution in the country’s small car segment. Our research foresees a CAGR growth of around 12% in domestic volume sales of passenger vehicles during the forecast period. Other segments, such as two-wheelers, multi- purpose vehicle and light commercial vehicle, are also expected to witness fast growth in coming years. COMPETITIEVE FACTORS OF AUTOMOBILE INDUSTRY OF INDIA The automotive sector is one of India’s largest and fastest growing manufacturing sectors. It is ranked the 11th largest passenger car producer in the world.

In the category of motorcycles and scooters, India is ranked 1st and 2nd respectively. With India increasingly liberalizing its market place, many new joint ventures evolved, resulting in close to 24 global auto manufacturers setting up their shop in India. Competition in India As a result, competition in India’s automobile had been heating up in the recent years. In the absence of strong competition in the past, the local car manufacturer Maruti Udyog Ltd (MUL) has virtually dominated the Indian automotive market in the passenger segments since the 1980s.

As the automotive manufacturing sector rapidly evolved through the dynamics of open market and deregulation, many new joint ventures (both technical and financial) were formed between local players with leading global manufacturers. In 1982, MUL, then a wholly government-owned company, signed up a collaboration agreement with Suzuki of Japan to establish the volume production of contemporary models. Subsequently, the licensing regime was scrapped in 1993 paving way for 17 new ventures, of which 16 are now manufacturing cars.

Since then; there has also been an emergence of new competition for higher value segments of the passenger car market. Hence, local players like MUL also began to face competition from new foreign car makers. Ford entered the mid-range market with the Ikon model in April 1998, a move which was followed by Honda, Mitsubishi, Hyundai, and Daewoo. Other players, Hyundai and Daewoo, have since improved their share of the passenger car market with new models For the 4-wheelers segment, MUL/Suzuki ominates the automotive landscape holding a 33% share of the passenger car market in 2004/05. In the second place is Tata Motors, a local company, commanding 26% share, while Hyundai Motor ranked third with 15% share and the rest split amongst close to 2 dozen other manufacturers. Competition in the International Market Besides on the competition observed amongst all global players in the domestic Indian market, India as an automotive manufacturing country is also pitting against other competitors in the international market.

In terms of exports of automobile, India is ranked 29th, while China, the other huge automotive factory ranked 17th. For exports of auto parts, India was 26th, while China came in 11th. The top country for exports of automobile and auto parts was Germany. For the 4-wheelers segment, MUL/Suzuki dominates the automotive landscape holding a 33% share of the passenger car market in 2004/05. In the second place is Tata Motors, a local company, commanding 26% share, while Hyundai Motor ranked third with 15% share and the rest split amongst close to 2 dozen other manufacturers. Monopoly of NANO

If there is a single seller in a certain industry and there are no close substitutes for the goods being produced, then the market structure is that of a "pure monopoly". A monopoly should be distinguished from a cartel in which several providers act together to coordinate services, prices or sale of goods. Although there are innumerable small car manufacturers, currently Tata Motors Ltd. long-awaited Nano the “people’s car” stands out as the only car manufactured long-awaited Nano the “people’s car” stands out as the only car manufactured around the globe with the cheapest price.

Tata says it has filed 34 global patents for the vehicle’s platform. A monopoly is said to be coercive when the monopoly firm actively prohibits competitors from entering the field. Economic barriers include economies of scale, capital requirements, cost advantages and technological superiority. Monopoly is the result of access to key resources, which may be either natural resources or some patented process or special knowledge. New firms cannot enter the industry without access to those resources. The Nano technology which includes the above factors will make it difficult for new entrants.

A monopoly is a price maker as it holds a large amount of power over the price it charges. Tata Nano is the only car in the world which has been priced with a starting rate of Rs. 134000. 00 for the Base model and Rs. 160000. 00 & Rs. 185000. 00 for the CX & LX model respectively. An existing competitor is the Maruti 800 which is trusted and consumed by a big share of Indian market. Although Nano is cheaper than the Maruti 800, its main competitor which is next cheapest Indian car priced at 1,84,600. 00 Rupees, Maruti 800 is the car which is around for many years and is still going strong.

Maruti Suzuki will most probably bring down the price further to attract the customers. There are also rumors of Maruti Suzuki introducing a lower priced version of Alto to counter Tata Nano. Customer votes say this car is much more reliable than Nano as it is the best one can say for the city rides and easy to maintain in traffic. But still Nano proves to be better. Nano is 8 percent smaller in exterior size and has 23 percent larger interior space in comparison to Maruti 800. Now news is spread about the RENAULT YENI.

RENAULT YENI will be launching in India in collaboration with Mahindra. This Car is launching in India only for Rs 1, 30,000. Now how far this car proves to be a truth or a myth depends. But if it is a truth than the competition for Nano from RENAULT YENI will be much more than the Maruti 800. Besides rival car makers including Bajaj Auto, Fiat, General Motors, Ford Motor, Hyundai and Toyota Motor have all expressed interest in building a small car that is affordable to more middle-class consumers in emerging markets. 6. ECONOMIC EFFECT OF NANO ON COMPETITORS

According to CRISIL with the coming of TATA Nano the Indian car market has grown up by 65%. The USP of the TATA NANO is its price and also that it has 21% more interior space and 8% smaller exterior. What this means is that a new market has opened to the competitors and players like Bajaj, Fiat, GM, Ford, Hyundai and Toyota have expressed their interests in getting into this affordable car segment. This will result in intense competition and hence will result in lower prices and as price decreases the demand increases, according to law of demand.

Substitution Effect: Also TATA Nano is a substitute to both the two wheelers and the lower car market segment. Hence this is affecting the sales of the competitors by the substitution effect. As cheaper alternatives are available with the same utility, a rational consumer will always buy the cheaper goods and therefore demand for other goods will fall. So TATA Nano has forced the consumers to change their demand requirements by substituting other cars or goods to satisfy their wants. TATA NANO as an item of gift instead of LCD’s, expensive foreign trips.

So here also TATA Nano has resulted in less demand of consumer durables and hospitality industry by the way of substitution effect. As the demand for these go down the price will fall to counter the decrease in demand. Used Cars Market: Due to the low price of Nano people are not buying the used cars and are instead are interested in buying TATA Nano and are ready to wait for a month(waiting period for delivery) to get the car as they are more interested in the new car at the same price.

This has led to decrease in demand of the used cars and hence prices have fallen further to increase the lowering demand so that the equilibrium is maintained. Also if we see that in this market the demand is high and supply is less. Therefore, even if TATA NANO increases its price to a certain level, due to its high demand it will still be able to get increasing sale. But it has to keep in mind that the price should not reach the next car segment price. There are also negative effects of the low price of TATA NANO.

As we all know that India is a growing economy and hence the per capita income is increasing. This will encourage the consumers to go in for a higher segment car as they will be able to afford it now. Snob Effect: One more reason although not that strong which can result in lower demand of Nano is the snob effect. As more and more people are buying Nano, there would be a certain segment of the population who would not want to follow the crowd and therefore would not buy Tata Nano car, which eventually will lead to increase in sales of competitors. 7. CONCLUSION

Due to the controversies regarding Tata Nano plant start up in West Bengal and subsequent decision of the management to move out and start operations in Gujarat, the company had to incur additional expenses which could have affected the price of Nano adversely. However, the company decided not to increase the costs further as the next Car segment i. e. the Small Car segment starts at a price of around Rs. 2. 25 lacks. If the price of Nano increases by around Rs. 50,000, considering the overall features and price, the consumer could get indifferent between Tata Nano and other small cars with more facilities thus reducing Nano’s sales.

Nano’s consumer base includes prospective buyers for small-car segment, sale of Nano actually eats into the share of other small-car producers. Thus, competitors also have to launch their own variants which cater to the same segment as Nano does. Low price of Nano, coupled with increasing purchasing power will lead to increase in sale of Nano, which in effect will lead to more load over the currently loaded infrastructure. Thus, there is a need to upgrade infrastructure

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