Tata's Rs 1 lakh car
Business Today — October 9, 2005

Circa March, 2008
Venue: The Geneva Motor Show. Like every year, the 78-year old automotive show is a big draw. More than 5,400 journalists, 750,000 visitors and 300-odd exhibitors have descended on the 114,000-sq.mt-exhibition ground. As usual, the automotive drool fest is spectacular; there a super luxury cars on display that are bigger, shinier and faster than the ones year before; hybrid cars promise to become cheaper and even more environmentally-friendly, and a slew of nifty concept cars from the big manufacturers gives a peek into the automotive future — the small cars will rule. Yet, the biggest buzz is not about any of these cars. The talk of the show is the unveiling of the world's cheapest car, with a sticker price of $3,000 (Rs 1,32,00 at the current exchange rate). The manufacturer isn't Toyota, Suzuki or the French Citroen. It is a Pune-based company called Tata Motors, and the 6-feet-plus man standing next to it just can't stop beaming at the flashing cameras. Five years after he promised (incidentally, at the same show) to build the world's cheapest family car, Ratan Tata has delivered. Beating incredible odds once again, the Chairman of the Tata Group has built car that could do to India what Henry Ford's mass production did to America in the first half of the 20th century. He's built everyman's car.

Sounds far fetched? Possibly not. Even as this article is being written, engineers at Tata Motors' Engineering Research Centre (ERC) in Pune are putting a handful of Tata's "dream car" prototypes through its paces. Simultaneously, they are gearing up to productionise the car — that is, figuring out how to mass-produce the successful prototype. Their target: Put India's cheapest car on the road by 2008. Says Tata, 67, who's personally overseeing not just the progress, but the making of the 1-lakh car: "Yes, the prototypes of the car are running… (and) we have developed now what would be the structure of the car. My best estimate would be that in the next two-and-a-half to three years — by 2008 — the car would be out."

Before we get into what the Tata engineers are up against, it's important to clarify a couple of things. First, the Rs 1-lakh price tag. Tata's actual statement, he says, was about building a car for "Rs 100,000 or so". The media, however, quickly dubbed it the Rs 1-lakh car and the figure stuck. "Rather than getting distressed (about it), I took it up as a challenge," says Tata, who did something similar when he led a truckmaker into the passenger car business with the Indica. What it means is that by the time the Tata small car hits the road, its price tag, bloated by inflation, maybe between Rs 1.30 lakh and Rs 1.40 lakh, and may come in two or three variants, with the base model priced closer to the Rs 1-lakh target. (We'll see later in the story why Tata Motors can't price it any higher.)

Building a car for Rs 1 lakh, or even about, is much harder than it is romantic. For, everything about the car must be worked backwards from the self-set price target. To spell out the challenge that Tata engineers face, they must build a small car that's almost half the price of the world's cheapest car (the Maruti 800) but at least as good if not better, and yet meet all the safety and emission norms. In fact, if there's any manufacturer in the world who could have built a car for Rs 1 lakh, it is the Suzuki-owned Maruti Udyog. Its small car already sells for Rs 2 lakh, which, minus the effective tax component of 40% and profit margins (say, of 5%), costs Rs 1.30 lakh or so to build. But according to K Kumar, advisor (engineering), Maruti Udyog, and the man who helped build the company's vendor base from scratch, "the 800 and the Alto have already been pared to the bone". Therefore, no amount of value engineering, can shave another 25% off the production cost.

If India's largest passenger car manufacturer — the 800 alone still sells more than 1 lakh units a year — is saying a Rs 1-lakh car isn't possible, why is Tata Motors (which must produce the car at Rs 70,000 to be able to sell its at Rs 1 lakh) confident that it can make one? The company refused to share details of the project, but Business Today (BT) has been able to piece together at the least the broad strokes of Tata's small car strategy by speaking to several vendors, rival carmakers, automotive designers and engineers, and industry watchers. As the picture that emerges is of one company braving peer ridicule, cynicism and perhaps, subterfuge to push the limits of automotive engineering. The guiding mantra: think out-of-the-box, and question some or all of the industry's long-held beliefs.

A car for India
In a car, there are five big areas of cost. Engine and transmission, the skin, electricals, suspension and wheels, and the interiors (seats and trims). The first accounts for roughly 26% of the cost; the second and the third about 8% each; suspension and wheels (with brakes) account for another 9%; and the interiors about 6%. So there's little room for cost cutting. But the fact that the car must be priced at Rs 1 lakh or so, settles a lot of issues for the Tata engineers. For one, the size and the weight of the car. It must be smaller than the cheapest car available currently (although Tata says it will be slightly bigger, but lighter, than the 800), and must sport an engine that's smaller than the 800's but powerful enough to lug the weight of the car (700-800 kgs) and the four occupants (say, 300 kgs).

From such constraints flow a number of innovations that are said to be going into the making of Tata's small car. Let's start with the engine. BT learns that Tata Motors plans to build an engine that'll cost two-thirds the 800's. It may be a three-cylinder like the 800's (a two-cylinder option is also being talked about) and possibly have a capacity of 600 cc, and churn out 25 to 30 bhp. According to Tata, Delphi will be supplying the engine management system, since there is no indigenous supplier. In any case, the engine will be rear-mounted — for two reasons: One, to save primarily on the constant velocity joints (they cost about Rs 1,500) that are required for front wheel-driven vehicles and, two, to obviate the need for a steering / frontal crash test (the Maruti van, for example, isn't required to go through one). The flipside: Cooling the engine will be harder, since there will be no air blowing directly onto the radiator fan. Tata also says that the car will be gearless (like gearless scooters), and a feature that may have been incorporated more to increase ease of driving on congested city roads than to save cost.

The hardest part, something that the Tata engineers are still grappling with, is building the car skin. Should it be metal like in the case of conventional cars or can it make do with plastic and still meet safety norms? If the Tatas go in for steel, the car will cost more, but will be more readily accepted by the consumers, since plastic-bodied vehicles are perceived to be unsafe (anybody remembers Sipani Automobiles' Badal or Dolphin). Even with a metal skin, the company is likely to go in for some innovations. For instance, instead of spot-welding the sheets, industrial adhesives may be used. This may seem like a simple innovation, but it has profound implications for the carmaker. According to Degussa, a German company that supplies structural adhesives, a medium-sized car requires welding at 5,000 points, each of which costs around 5 cents (Rs 2.20). Use of adhesives can halve the welding points, besides which 1 kg of adhesive can reduce the car weight by 25 kg. In addition to that, says a Degussa report, adhesive-bonded car bodies are more rigid, allowing the manufacturer to use thinner sheet metal, thereby reducing weight and cost of the car. A plastic body, of course, will not require either spot-welding or adhesives.

But here's the most interesting bit about the car: It may not have doors at all — at least in the base model — and instead have some sort of curtains. The higher end versions, however, will have proper doors and glass windows that move up and down. No doors on a car may seem strange, but Indian consumers have long driven the Willys Jeep, which had no doors; three-wheelers don't have any doors either. (The Tatas had better watch out though: new safety norms under draft may require all passenger cars, starting 2008, to have doors.)

How will the inside of the car look? Contrary to what some people expected, the Tata small car will not be a two-seater but a four-seater, and the dials on the dashboard maybe as simple and functional as what you have on some two-wheelers. Not suprisingly, then, most vendors who have been approached currently supply to two-wheeler manufacturers. Says AK Taneja, president of Shriram Pistons & Rings: "What foreign car makers like Suzuki did to manufacturing volumes and quality, the Tata small car project could do to the R&D capabilities of ancillary manufacturers."

Tata Motors' small car-making paradigm goes beyond product development though. To ensure that vendors are able to keep their costs low, the company is looking at ways to increase sales and volumes. According to Tata, the potential market for such a small car is about 1 million a year, but not all cars will be sold by the Tatas. In fact, the company doesn't plan to sell more than 5 to 7 lakh of this car a year. Who'll cater to the rest of the market? Independent assemblers, who'll be trained and equipped with assembly lines and car kits by the Tatas. However, they may not be allowed to use the Tata marque, and nor will Tata Motors assume any responsibility for warranty and liabilities arising from the sale of the vendor-assembled cars. So, contrary to what is believed, Tata Motors is not going to outsource manufacturing of the 1-lakh car.

The coming small car wars
A car priced between a high-end two-wheeler and a low-end four-wheeler has the potential to explode the small car segment. At present, some 6 million two-wheelers and a million passenger vehicles (including cars and utility vehicles) are sold in India annually. That apart, an estimated 6 lakh second-hand cars (which is as many as new cars sold) are bought every year. While the existing car buyers, who are willing to fork out at least Rs 2 lakh for a four-wheeler, may not be Tata's potential market, the six million two-wheeler buyers are.

As mentioned earlier, it's unlikely that the Tata small car will meet the Rs 1-lakh target. But it will certainly be close to that price, especially if the government decides to lend a helping hand. At SIAM's annual general meeting in Delhi on September 1, finance minister P Chidambaram delighted small car manufacturers by saying that "the government is fully aware that companies intending to manufacture small cars are looking at India as a base for such manufacturing. We have to revisit the issue of taxation earlier than we thought". (A panel has been set up to look into it.) Currently, cars attract an excise duty of 24%, besides other state taxes. Carmakers want the excise to be cut to 16% to make the small cars (below 1,200 cc) cheaper. Says Jagdish Khattar, immediate past-president of SIAM and managing director of Maruti Udyog: "India can become the small car hub in 5 to 7 years, and the government can easily recover the initial loss in revenues through the additional sales and jobs that such a move will generate."

Despite the opposition from manufacturers who don't make small cars, the government will almost certainly offer some kind of sop to small carmakers. And India won't be the only country to do so. Japan, Korea, Brazil, Thailand and now China, all offer tax concessions to small cars. Says Dilip Chenoy, director general, SIAM: "Japan gained global leadership in small cars because its government actually incentivised ownership of K-cars (less than 660 cc). We think India has an opportunity to become a manufacturing hub for such cars."

For Tata Motors, such a move will cut both ways. Here's how the scenario could play out: The moment, or possibly even before, Tata Motors launches its small car, Maruti will move to cut the price of its 800 to bridge the price gap between its own small car and the Tata's. When that happens, the choice for the buyer will be between a new, and hence, untested, car and a tried and tested workhorse (the 800). Can Maruti afford to drop 800 prices? Yes, even today. Its dies and tools are fully depreciated, so it can bleed a competitor if it wanted to.

There's another thing that Maruti could do without resorting to a price cut. It has 185 True Value outlets (for pre-owned cars) across the country, and it can simply step up its focus on this business. If Maruti steps in to offer, say, a four-or five-year warranty on its pre-owned cars, a significant population of potential buyers, would be encouraged to buy a car for Rs 70,000 to Rs 80,000 than spend Rs 1.3 lakh or so on a new car. Says a carmaker: "There's no doubt that Maruti can inflict a lot of damage (on Tata's small car) if it wanted to."

Competition to the small car isn't the only thing Tata Motors will have to worry about. By the end of 2006, Maruti's new diesel plant will be ready and that will coincide with planned capacity expansion at Manesar, nearby to its existing plant in Gurgaon.  Therefore, by 2007, Tata Motors' breadwinner in the passenger car segment, the Indica, which has little competition today, will be under attack from Maruti. In such a scenario, Tatas would not be able to afford to lose money on their new small car too.

Therefore, ironical as it may seem, building the world's cheapest car may be easier than making it the most popular car. But then, a man who had the vision and courage to conceive and put an entire organisation behind a seemingly impossible project, would also have figured out a way to make it a commercial success. Especially now that he has seven more years at the helm of the Tata group.

An interview with RNT

In an e-mail interview, Tata Group chairman Ratan Tata, fielded questions on Rs 1-lakh car. Excerpts:

Is it possible to build a car for Rs 1 lakh? If yes, will it indeed be a car?
Right now, it wouldn't be appropriate to give too much detail on the car. Closer to the time it's in the market, it would be right to talk about it. However, I can explain to you, the concept. Before I do that, I should mention that the 1 lakh did not come from me. It was imprinted in the media by one of the journalists to whom I had talked about the small car in large volumes and he asked me at what price would the car sell. I said it would be about Rs 1,00,000 rupees or so. This was blown out of proportions. So rather than getting distressed, It took it up as a challenge. There is nothing sacrosanct about the 1 lakh figure. In my opinion, it is a ballpark figure that we hope to address, but undoubtedly we need to bear in mind inflation and other market conditions. The car would be positioned between the motorcycle and the small car.

Conceptually, we are looking at catering to the Indian market. The intention is that today you see a family of three or four all crowded on a scooter where you see the kid standing in front and the mother holding her baby in her arms. It should give a family a more weatherproof means of transport. Thus, we are looking at a product to position it somewhere in between that market and the lower end of the four-wheeler market. The route that we looked at is something that would not be a stripped-down four-wheeler or an upgrade of a two-wheeler motorcycle, but something that would be on its own, bearing the costs targets we had in mind.

How far has Tata Motors progressed with its product for the Rs 1-lakh car? I believe a prototype is ready. Does it meet your expectations?
We are now at a point where we are going to start productionising the car. Yes, the prototypes of the car are running. The issues that we are looking at today are to do with the costs of steel, and whether it should be a steel version or made of engineering plastics. If it is steel, it could be spot-welded like any other vehicle or it could use modern-day adhesives. We are looking at both. If it is plastic, we don't need any adhesives.

We have developed now what would be the structure of the car. It would be a gearless vehicle powered by a rear-engine that would seat four-five people. On the technology front, we have gone to Delphi for the engine management system, as in India there is no electronic engine management system available. The car would have the continuously variable transmission (CVT) technology. As regards the styling, we have taken help from the Italian design house, IDEA, which earlier worked with Tata Motors on the Indica.

It would be a family car, not a city car with two seats. We are looking at two-three kinds of trim levels. At the fundamental level, it could be a car that might have curtains instead of doors more akin to the kind of use a farmer might have. It will be similar to how a three-wheeler looks today, but being a proper car that's just like today's car. It will meet all the emission requirements. The prototypes are currently doing the test run without the body. Along with the Indica, it would be the growth focus for Tata Motors in the medium term in the automobile sector, in which the group could invest up to Rs 30,000 crore in the next few years.

When does the company hope to commercially launch the Rs 1-lakh car?
My best estimate would be that in the next two-and-half to three years — by 2008 the car would be out.