Wharton’s John Paul MacDuffie on the Nano and Tata Motors’ ‘Real Test’

Tata Motors could have learned several lessons about the launch of its small car, the Nano, from the experiences of automobile manufacturers in the West. The problems with the US$2,700 Nano, which was introduced in 2009, were many, although they principally centered on marketing. According to Wharton professor of management John Paul MacDuffie, the Tatas appear to have woken up now. There is no reason why the Nano should not be a success in India, although exporting the model could still be problematic, he says in this opinion piece.

The introduction of a new product in a new product category that will potentially reach a new market of consumers is a tremendous challenge, and it is not unusual to encounter launch problems. The real test of a firm’s capabilities comes in how it responds to these problems. I am reminded of Toyota’s experience when it launched the Lexus product line and brand in the U.S. in 1990. The LS 400 product, designed to compete with Mercedes-Benz, Audi and BMW vehicles, but priced much below them, had a (non-safety-related) quality problem soon after release. Toyota took this potential disaster as an opportunity to demonstrate the extraordinary level of service that the new Lexus dealerships would be providing. Dealer personnel picked up the vehicles at the owner’s home at a prearranged time, did the repair, washed and waxed the car, and returned it in the same day with a full tank of gas. Toyota and Lexus received a huge amount of positive publicity from this, more than was received by the quality problem, and this launched the brand/product splendidly.

So, Tata has a chance to do the same thing with Nano. The issue is how well they absorb the lessons from the early experiences, how quickly they can respond, and how skillfully they design and execute their response.

From what I see, they are well on their way to doing just that — the extended warranty, the greater availability of financing, the new Nano Access Points (customer touch points where potential buyers can test-drive and experience the car) and new training for salespeople, and the new advertising campaign should all help tremendously.

Complex Problems

That said, the array of problems that beset the Nano are so many and so interrelated that it won’t be a quick or easy process to restore the positive buzz that the Nano enjoyed after it was announced. The safety problems, even if they affected relatively few vehicles and were due to unauthorized modifications, are a very big obstacle to overcome, since the dramatic story of Nanos catching fire will be in the public memory for a long time. The warranty extension appeals to the rational consumer’s mind but may not dispel the more visceral response to the news.

Note that Toyota recently announced a massive investment in a research center of automotive safety to be based in the U.S., as a way to deal with the damage to its quality reputation. Anything that Tata can do to demonstrate a commitment to helping to improve conditions for drivers of vehicles — not just the first-time buyer (transitioning from a two-wheeler), but everyone, through special attention to safety or congestion or infrastructure development – will help. The quality of future Tata products, particularly in the Nano product line, will also be watched with even greater attention in the future, so it is important that those launches be impeccable where quality is concerned.

The marketing and financing challenges are of a very different sort. These have to do with a new product category — the low-cost car — that will attract consumers who are new to cars, but will also possibly lure other consumers, like young people looking for inexpensive transport with a cool vibe. It will take the use of multiple marketing channels to exploit the full market potential of the Nano, as Tata is learning. But I would certainly think that the primary efforts should go to attracting the first-time buyer, since that is where the volume potential of the Nano is so great, and it is also where the entire concept of a low-cost car will be either validated or invalidated. I see every reason for Tata to observe the sales techniques of Maruti Suzuki and Hero Honda in the rural areas and to attempt innovations based upon those approaches, rather than being lured into emphasizing social and online media.

I am less clear on the implications of the Nano exceeding the US$2,700 price. This was such a big part of the pre-launch buzz that an increased price might have dampened the enthusiasm of those who were early to put their name on a waiting list, even more than having to wait. The experience of Renault’s Logan, one of the first low-cost cars aimed initially at the East European market, is that higher-priced variants with more features can sell very well in the more developed economies (such as Western Europe). But I think it is still important to the product’s image that the entry-level/base model conforms to low-cost car expectations.

Exporting Pitfalls

As for exporting the Nano, I understand that the current design would not meet regulatory requirements in most other countries. I would think that the Tatas should focus their attention on India for now. Once the Nano is well-established and has succeeded both in volume sales and in product/brand reputation, the Tatas could bring out a high-end Nano and make that the basis for future export plans. There is definitely peril for a low-cost car that enters a developed country market with a dubious reputation for quality. Look at not only the Yugo in the U.S., which never got off the ground (and became the butt of many jokes) but also the early experience of Hyundai. Hyundai had a staggering success with the introduction of its Pony model in Canada in the early 1980s. It gained 10% market share within a couple of years. The similar Excel model did very well in the U.S. soon afterwards. But after three-four years, owners began to have big quality problems. Hyundai became saddled with a reputation for poor quality that lingered up to the 2002-2005 timeframe, when the results of its massive top-down quality improvement campaign became evident across its product line. (Interestingly, Hyundai began by offering an extraordinary warranty on its products in the U.S. — 10 years, 100,000 miles — and the potentially high costs of having to pay these warranty repair costs were a stimulus to the quality improvement efforts that followed.)

Finally, I think the jury is still out on how much demand there will be for ultra low-cost cars. It may be that once a consumer is approaching the income level to be able to purchase a vehicle for the first time, he or she will prefer to buy a product that doesn’t signal “bottom of the pyramid” but something higher in terms of status. (Cars are certainly a status-signifying purchase.) And young people who want a cheap car may still expect a level of features (for example, a good audio system) that are beyond what the ultra-low-cost category can provide.

Another variable is the regulatory regime. If India and other developing countries strengthen their regulations around safety, this will add cost to vehicle design, and it may no longer make as much sense to have designs that differ by regulatory regime. In that case, the standard Nano of the future may be more expensive, with more features, meeting a higher safety standard. It may do very well in India and elsewhere — but it may no longer really fit anyone’s idea of an ultra-low-cost car.

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