Tata´s Nano car and India´s arrival

19.01.08 Publication:

Lakes full of ink have been spilled about the unveiling in India on January 10th by Tata Motors of its new, super-cheap car. Many have pondered whether the $2,500 (Y270,000) car, called the Tata Nano, will worsen global warming and cause chaos on India’s already congested and inadequate roads. Others have looked back at previous small cars, such as the Ford Model T, the Fiat 500, the British Leyland Mini and the many Japanese “kei” minicars, and have compared the innovations in those cars with those achieved by Tata. Still more of the commentators have wondered what it would be like to drive a car in which there is only enough luggage space for a briefcase or back-pack.

Yet almost all the commentary has missed what is surely the most significant point about Tata Motors’ new car. This is that it marks the arrival of India as a manufacturing superpower, to rival China and of course Japan and the West. It will do so in cars and other vehicles, which is the quintessential global industry. But if it can do so in cars, it is likely to be able to do so in other areas of manufacturing too—perhaps not immediately, but during the next few years.

            Since the turn of the century, analysis of the economic rise of China and India has been based on a simple paradigm: that China is growing by emphasising manufacturing while India is doing so by emphasising services. The western view of India is dominated by the cyber-cities of Bangalore and Hyderabad, and by the new giant Indian outsourcing companies of Wipro, Infosys and another Tata firm, Tata Consulting Services.

            What the Tata Nano shows, however, is that this is out of date. It is history. India has lower wages than China and so cheaper labour costs. It has also been much slower to build roads and to modernise airports and seaports, so transport costs for its manufacturers have been much higher than in China. That, along with restrictive labour laws, is why manufacturing has been held back in India, while it was rocketing ahead in China. In India, only about one-third of GDP comes from industry, and more than half from services; in China, the proportions are the other way around.

            But that is now changing. Roads are at last being built. Sea-ports have been modernised, using private management and investment. Airports are being privatised and rebuilt. Domestic consumption, and so local demand for manufactures, is growing rapidly. As a result, Indian manufacturing output has been growing faster than services in each of the past two years. Services, especially information technology and outsourcing, remain strong, although rising wages for technology graduates have reduced profit margins. The biggest opportunities now lie in manufacturing.

            The car industry will be at the heart of Indian manufacturing growth during the next decade. Global auto firms are investing there: last week, Ford announced a $500m investment in car-making in India, joining other firms such as General Motors, Renault, Suzuki and Hyundai. Bajaj Auto, another Indian company, has unveiled a prototype for a small car to be produced from 2010 in a joint venture with Nissan at a projected cost of $3,000. Firms are also investing heavily in China, where the car market has grown faster and sooner than in India. But while in China the local firms are still well short of world class, in India there are now first-rate car makers emerging.

            Tata Motors is top of that list. The design and manufacturing achievement represented by the Tata Nano should not be underestimated. The project resulted in 34 patent applications, including notably one for the light-aluminium 624cc engine. Tata says that 500 designers and engineers have spent the past four years developing the car. The fact that they did so apparently without sacrificing safety standards or even exploiting currently low Indian emissions rules suggests that it is the result of genuinely innovative design and process-engineering.

            The Tata Nano will be half the price of its closest existing rival in the Indian market, which is made by a joint venture between Maruti of India and Suzuki of Japan. Like the Ford Model T and the Fiat 500, the Tata Nano will make sense only if it is produced in very large quantities, as a mass-market car, which will also mean that Tata will need to export in order to build up its scale of production. Tata is already talking about an eventual annual production of one million cars per year. That may be premature. But the potential is certainly there, given the growth in demand for cars in many fast-growing emerging markets, in Africa, Asia and Latin America.

            At the same time, Tata Motors is negotiating to buy two luxury car brands: Land Rover and Jaguar, both of which are famous British names currently owned by Ford. So, all of a sudden, the world will have a new car-maker, competing in all segments of the market, from ultra-cheap to luxury. That will also stimulate Indian and foreign investment in India in all the other industries associated with cars, including components, design, steel and road-building itself.

            Much of the time, 2008 will feel as if it is the year of China, thanks to the Beijing Olympics in August and all the associated hoopla. But the Tata Nano suggests it will also be a year that is significant for India too: the year when it truly arrives in global consciousness as a manufacturing superpower.