India's push for world's cheapest car means low profits

[Cheetah786]

MUMBAI - Nearly 50 years ago, France's Renault and India's Mahindra & Mahindra planned to make a 7,000 rupee ($NZ225) car for India, but were frustrated by local rules restricting foreign investment.

A lot has changed in the past half century, and more than a dozen car makers are now circling the global auto industry's new battleground - to make cheap, small cars for the world's big emerging economies.

India's market for cars alone should nearly double to 2 million by 2010.

Rising incomes and new model launches are boosting sales of bigger sedans and premium cars, but manufacturers' focus is on the lower end of the market that accounts for about two-thirds of annual unit sales.

Stirred by Tata Motors Ltd.'s plans to launch the world's cheapest car, at just 100,000 rupees, next year, Renault/Nissan and Mahindra are mulling a $NZ3,925 model.

Toyota, Honda, Fiat and Volkswagen are also looking to build low-cost cars to compete in fast-growth emerging markets from India and China to Russia.


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AdvertisementBut, despite technology advances, cost savings and shared platforms, there is precious little margin in cheap, no-frills models, so carmakers need volume sales.

Analysts say Tata Motors will have an edge, but warn that making it a viable model will be a tough challenge.

"It was an idea the Tatas had that is close to becoming a reality, whereas for the others it is still only a concept," said Asit Bhandarkar, fund manager at brokerage JM Financial.

"But whether they can also make a profit is anyone's guess."

New market

Indian roads were revolutionised more than two decades ago by the arrival of a small car, the mini Maruti 800 from Suzuki Motor Corp.'s unit Maruti Udyog Ltd., that was both affordable and appealing compared to the boxy, utilitarian Fiats and Hindustan Motors' Ambassador cars available then.


Maruti, which has more than half the local car market, has since launched new entry-level models such as the Alto, but still sold over 79,000 mini 800s in the year to March.

The 800 sells for about $6,280. Some analysts believe Maruti will cut prices of the 800 or reposition it, and rival Hyundai Motor Co., India's second-biggest car maker, will also take on Tata Motors.

Jim Press, a senior managing director at Toyota, has said a smarter option may be to buy a used Toyota for around $2,000.

There is a tax benefit to small car makers: India cut a tax on small cars to 16 percent from 24 percent last year, helping sales of models up to 4 metres long and with up to a 1.2 litre petrol or 1.5 litre diesel engine.

Tata Motors chairman, Ratan Tata, reckons the Indian market for his car alone could be 1 million units a year at a "mature stage" and could be extended to the rest of Asia and Africa.

Only 8 in every 1,000 Indians has a car, compared with 300-500 in many Western nations.

Tata has said its low-cost car will be a 4-door model with a 600cc rear engine for both petrol and diesel versions. Venture partner Fiat will advise on engineering and development, and Tata may use satellite units owned by local entrepreneurs for assembly. Analysts expect initial output of 100,000-250,000 units.

Some analysts expect a car priced as low as the Tata model could target up to a fifth of India's traditional two-wheeler market that hit more than 7 million units last year.

"There's an overwhelming desire to own a car, and upgrades from two-wheelers will be quicker if there are more small car offerings," said Mohit Arora at J.D. Power Asia Pacific.

The research firm estimates upgraders make up 27 percent of car buyers in India, with repurchasers accounting for two-thirds.

Indian motorbike maker Bajaj Auto Ltd. is also experimenting with a small car, though it says this won't be aimed at the cheaper end of that market.


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AdvertisementThin margins

Tata would have to sell more than 41,000 cars a month to give it an operating margin of 8 percent at a retail price of at least 125,000 rupees, estimates Enam Securities - versus margins of 9-14 percent on small cars priced at least double that.

Tata Motors sold 144,690 Indica cars in the year to March.

"They are looking to develop an entirely new market and even if margins are thin, you can make money on volumes and by selling a package of finance, servicing, spares, etc," said Pradeep Saxena, vice president of research firm TNS Automotive.

In addition to volatile fuel and component costs, there are concerns about meeting safety and environment standards.

Tata Motors has said it is exploring the use of re-engineered plastic from General Electric and modern adhesives instead of welding, prompting questions from rivals including the Suzuki chief.

Toyota has said it would be difficult to offer a cheap enough car that would satisfy its level of quality and reliability.

But analysts insist a low-cost car has its place in India.

"A cheap car will sell well," said JM Financial's Bhandarkar.

"Whether it's a Tata or a Maruti or any other brand is what remains to be seen."

- REUTERS

Adux you were right they will build a car for Indian rupees.question is will you buy 1 knowing its glued together.
9 to 14% margins ouch they want to work with that much more power to them.what do they pay there workers.

 

[Adux]

I wont buy that car, i wont get the quality i expect out of a car. But will a family which has 3 children, a husband and a wife, and Rs.60,000 2 seater motor bike wanna buy this car, i see a definite Yes!!!!!!
This car is not to challenge the present car market rather challenge that bike market, Look at the number of bikes sold in a year, and that is their market

Its a matter of economy of scale.

 

[Bushroda]

Its very much obvious that you cannot get a high quality at a dirt cheap price. But the age of 1940s is over now when a car was supposed to last atleast a generation. Around the late 1970s, most of the western electronic companies, especially in Germany laid more emphasis on quality whereas Japanese companies pioneered in cheap imitations. This is the reason why Philips, Braun, GE were considered as high-end quality products where the minimum warranty on each of their products was atleast 3-5 years. But Japanese otoh didnot lay so much thrust on the quality as they did forsee a highly dynamic electronics market. So, in late 80s when technology started evolving & changing rapidly Japanese ranover western electronic companies. Nobody wanted an expensive product that would last for 10 years when there was something better available in less than a year's time. This is why even western companies had to compromise on quality inorder to bring down the cost of electronic items & help them stay afloat in the mrkt. One canonly imagine how dynamically the electronic mkt changed that VCRs/VCPs didnot even get enough time to lay foothold in asian countries before they were ousted by VCDs/DVDs. Maybe we might forsee something similar in the automobile mrkt aswell.

 

[ahussains]

I wont buy that car, i wont get the quality i expect out of a car. But will a family which has 3 children, a husband and a wife, and 60,000 2 seater motor bike wanna buy this car, i see a definite Yes!!!!!!
This car is not to challenge the present car market rather challenge that bike market, Look at the number of bikes sold in a year, and that is their market

Its a matter of economy of scale.

Nice growing car industry