On March 23, the day Tata Motors launched the Nano — its long-awaited small car priced at US$2,000 — the company’s web site crashed. It had received more than 40 million hits in a short span of time and was unable to cope with the traffic. Visitors had come to the site to learn more about what is probably the world’s most economical car and to join the queue to buy it.

A crash is not good news for any automobile company, but this one — a barometer of the heightened interest in the Nano among Indian consumers — evidently was. After several months of problems, including violent protests which caused Tata to leave its original manufacturing site in Singur (see “West Bengal’s Nano Impasse: A Roadblock for Tata — and for Investment“), the Nano was finally ready to roll. For Tata Motors, which has been facing difficulties on several fronts, there was reason to celebrate. “We had no idea [the Nano] would attract so much attention,” company chairman Ratan Tata told a meeting of journalists just before the formal launch.

“[The Nano] is in sync with these recessionary times — low cost, low budgets and lower spending,” says Amit Mookerjee, associate professor of marketing and chairman of the Working Managers Program at the Indian Institute of Management Lucknow (IIML). The launch “has captured people’s imagination, not just their attention.”

The Nano’s introduction comes at a time when things are not going very smoothly for the Tata Group, and Tata Motors in particular. A few days before the launch, Kotak Institutional Equities Research, the domestic brokerage arm of the Kotak Group, reported that the Tatas would end the current financial year Rs. 1 trillion (US$20 billion) in debt. That’s a worrisome number, but it is manageable given the cash flow and the resources of the group.

Additionally, Tata Motors needs to refinance US$2 billion of its US$3 billion bridge loan for the 2008 acquisition of Jaguar Land Rover (JLR) — and money is both expensive and difficult to find in these risk-averse times. Two days after the launch, rating agency Standard & Poor’s (S&P) downgraded the company, citing a material deterioration in cash flow, a difficult operating environment and high debt. Tata Motors, like other companies in the global auto sector, is feeling the pinch of the slowdown.

Ratan Tata is aware that there are short-term hurdles facing the conglomerate. In an email to his group’s top executives late last year, he warned that “some of our companies with substantial foreign operations or those which have made substantial acquisitions are already facing major problems in raising capital….” He suggested, among other safeguards, that all of the group companies “expeditiously finalize pending loan and funding agreements, even if they involve accepting higher interest rates.”

“The Tatas overreached themselves with [the acquisition of] JLR,” says Sumit Bali, CEO of Kotak Mahindra Prime, the auto finance arm of the Kotak Group. “The timing was wrong and the price was inflated.” Adds Rakesh Batra, partner and national automotive leader, Ernst & Young India: “They have extended themselves financially. But in terms of the Tatas becoming a global player, it was a key strategic acquisition. It just happened that the timing was all wrong, something that no one could have predicted.”

Nano to the Rescue?

Is the Nano going to be the chariot that drives Tata out of its troubles? At US$2,000 — the reason why it is making both domestic and international waves — the answer is clearly no. “The current price is due to vanity and ego,” says Amit Azad, director of Azad Financial Services (AFS), a financial consultancy. “It will be difficult for the Tatas to hold this price and not compromise on quality.” There are many who share his view. Ratan Tata addressed that notion during his pre-launch meeting with journalists. “The Nano is not an ego trip,” he said. “We made a promise [to deliver a car at US$2,000] and we are keeping it.”

The Nano’s actual retail price ranges from US$2,400 to US$3,600, depending on the model you buy (there are three) and where in the country you pick it up (state levies and transportation charges vary). “The Tatas have said that the pricing is valid only for the first 100,000 cars,” says Batra. “Beyond that, it would probably go upwards. How much depends on various factors like their profitability levels, volumes and so on. If they are able to get good volumes and absorb a lot of the fixed costs, it will give them more pricing power. If I were Tata, I wouldn’t want to price it too low, because there is nothing below me. The next car is the Alto [from Maruti Suzuki, a subsidiary of Suzuki in Japan] priced at US$4,400. So, having proved that they can produce a car at US$2,000, they now have a lot of room to play with. I think one may see their pricing strategy closer to US$4,000 than US$2,000. They’ve already said that 75% of the [purchases] are going to be for the deluxe version.”

In terms of the company’s financials, it will take some time for the Nano to have any impact, Batra notes. “In the first year, they are [predicting] sales of about 50,000 units; that’s only around US$120 million. As they scale up to a level of 250,000 cars annually, there will be some impact.” In the December quarter, Tata Motors recorded a loss of US$52 million, its highest ever. “I don’t think the Nano will change the financial landscape for Tata Motors,” Bali says. “But it certainly gets them a lot of publicity, visibility and media coverage.”

The Nano will help out in the short term in one way. According to an analysis in business daily Mint, “Tata Motors looks set to harness massive demand for its Nano, the world’s cheapest car, helping it raise funds to cover bridge loans for last year’s purchase of the JLR brands.” The down payment to order the Nano is US$1,890 (for the basic version). That is almost the entire cost of the car and therefore unusual, but company sources and banks (which have lined up attractive finance packages) feel that the demand is huge and there will be no shortage of applicants. The conservative estimate is 500,000 orders. Mint notes that the application money will likely generate a free-float of US$1 billion for the company for several months. (Meanwhile, the Tatas will be paying 8.5% interest to the applicants who are on waiting lists for future deliveries.)

Reinvigorating the Auto Sector

It is not just for Tata Motors that the Nano matters; it is likely to have an impact on the entire auto sector. “The Nano could surprise everybody by reinvigorating the sector,” says Azad of AFS. Consumers may be tempted to purchase a car because of the Nano launch and the attendant publicity, “but they could migrate to other manufacturers because of issues like the long waiting period, attractive offers from competitors and the launch of [other lower] priced, no-frills [autos].”

Shekar Viswanathan, deputy managing director (commercial) of Toyota Kirloskar Motor, agrees. “[The Nano] will open a new market segment. However, how that market segment will do is difficult to predict at this point in time. If the Nano can sustain the promises made at the time of its launch, we believe it will be very, very good for the auto sector, [and] many more players will introduce vehicles in that segment. Other players may not be forced to introduce small cars, as each segment has its own demand and supply dynamics. They will introduce small cars provided they remain profitable and fuel efficient.”

That mixed response is already evident. A few hours after the Nano launch, Skoda Auto India, a Volkswagen group company, announced that it was advancing its launch date for its planned small cars to 2011. Bajaj Auto — principally a manufacturer of two- and three-wheelers — has, however, gone back to the drawing board for its proposed ultra-low-cost car, which it is collaborating on with Renault and Nissan.

How will the Nano affect the current fortunes of other small-car players in the auto industry? “The Nano and Maruti Suzuki’s small cars fall in two different segments,” says R.C. Bhargava, chairman of Maruti Suzuki. “There is no direct competition. The Nano may impact the sale of our entry-level model — the Maruti 800. This is natural whenever a new car is launched in the market. The Nano will also expand the market.” Meanwhile, the Maruti 800 has other concerns: It is not Euro 4 emission standards compliant, and is being phased out beginning next year.

There could, however, be some impact on the two- and three-wheeler space. Ratan Tata has repeatedly said that his inspiration for the Nano came from seeing an entire family — father, mother and two kids — perched on a two-wheeler, navigating crowded and dangerous city roads because they couldn’t afford anything better. In his view, the Nano is a family car.

But makers of two- and three-wheelers do not seem particularly worried. “I am not saying there will be no impact at all,” says Pawan Munjal, managing director and CEO of two-wheeler manufacturer Hero Honda Motors. “Some [consumers] will definitely move to a car. But there will be no major impact. There is no change in the market.” Bajaj Auto, too, sees limited impact on its two-wheelers, because the price difference is too much. In three-wheelers, which function mainly as passenger-carrying auto-rickshaws, the company has sufficient cushion to reduce prices.

Meanwhile, the Tatas are already working on the Tata Europa, a jazzed-up version of the Nano for the export market. According to Ratan Tata, “It will have a larger engine, better interiors with leather trim, a superior exterior finish…. Our plan is to have it ready by 2011.”

“I’m not sure how [the Nano] will do in the U.S. market because the consumer desire there is more for large cars and SUVs than small cars,” says Batra of Ernst & Young. “The U.S. market is sensitive about gas pricing. When gas prices went up, there was huge demand for hybrids. But the moment gas prices came down, hybrid sales fell off.” According to Viswanathan, “The major driver of change in the U.S. will be cheaper transportation needs. There will be a decisive shift in the U.S. over the next 20 to 30 years towards use of public transport and the development of the public transportation system. However, Americans will not scale down to the Nano segment.” Azad is slightly more optimistic. “US$150-a-barrel crude [prices] certainly woke up the U.S. consumer,” he says. “The financial turmoil came as another rude shock and has shaken the confidence of consumers in key markets. This has changed sentiments for the better for cheap/economy cars. Though buying patterns may not drastically change overnight, even a small percentage change is enough to guarantee a big market.”

Disruptive Technology or Marketing?

Even if the Nano itself doesn’t make it to the U.S., the concept could. According to BusinessWeek, “No one disputes that the Nano is innovative on multiple levels — from its engineering to its marketing to its manufacturing. So it’s hard to avoid the question: What can a humbled Detroit learn from the Tata Nano?”

“The Nano is a disruptive technology and will have an impact on the auto industry both in India and the world over,” says Bali. “It has the potential to reshape the automotive world.” Azad notes that the Nano should teach Detroit auto manufacturers not to be complacent. “It is the lack of desire to challenge the so-called impossible and the inability to think the unthinkable which is responsible for the Nano coming from a place like India.” It is not about to change the world, however, he adds. “This is certainly not disruptive technology. At best, it is disruptive pricing.”

Viswanathan agrees. “Nano is not a disruptive technology, in the sense that it does not bring in a new method of transportation using breakthrough technology. It is a project that attempted to create a separate and distinct market segment at a price point that was not available [before it].” Says Batra: “I don’t think [the Nano] is going to radically change car design globally. The drivers are more around emission technology and safely norms rather than an ultra low cost car.”

“The Nano is a kind of a disruptive innovation, bringing non-users into the category, offering a superior value at the entry level as compared to existing offerings,” says S. Ramesh Kumar, professor of marketing at the Indian Institute of Management, Bangalore (IIMB). “It is a fine example of the creation of customer value,” as opposed to mere cost reduction.

But cost reduction is what consumers tend to associate with the Nano, despite the best efforts of the Tata marketing team to project it as a “family” car rather than a “cheap” one. (Ratan Tata reportedly dislikes the latter term.) So, is the Nano another example of the frugal engineering that saw the Chandrayaan mooncraft being launched at a small fraction of what it would have cost NASA? (See: “Moonstruck: What Will India’s Lunar Mission Achieve?“) No, says Viswanathan. “As used by Carlos Ghosn [of Renault and Nissan], frugal engineering is a concept which involves outsourcing of design work, etc., to less expensive countries, which will also be able to bring about innovations, keeping developed countries’ road conditions in mind. The Nano is not really an example of frugal engineering. It is an example of how clever engineering can create a new market segment.”

But according to Azad, the answer is yes. “This is certainly the best showcase for Indian manufacturing and frugal engineering. The best thing the Nano has done is to awaken the world to the fact that Indian engineers have the potential to break price barriers without compromising on the quality of the product.”

A less debatable notion is that the Nano represents a prime example of frugal marketing. Tata Motors has limited funds to spend on advertising and promotion. But the Nano is everywhere — in front-page lead stories in newspapers, in prime-time shows on TV, and on the Internet. Nano ads are all over the media, too, but the banks offering finance packages for the car are paying for them. Meanwhile, “nano” has entered the general vocabulary as a term designating something as much smaller, shorter in duration or cheaper than the norm. You have “nano shopping,” “nano holidays” and even “nano apartments” (the only ones that are selling in the real estate downturn).

“Low-cost options, whether they be cars, airline seats, retail offerings or anything at all, cannot afford to advertise through the traditional media,” says Harish Bijoor, brand strategy specialist and CEO of Harish Bijoor Consults, and visiting professor at the Hyderabad-based Indian School of Business. “Such options need to depend heavily on editorial publicity, which in any case is the most robust of all publicity mechanisms. Word-of-mouth is a great tool as well. The Nano benefits from all of this.

“‘Nano’ is a great adjective, and it is a very relevant word in the current context,” he continues. “It is a recession-word — all about small being beautiful.” Adds Kumar: “The company has chosen an appropriate brand name, as this association of ‘smallness’ has not been made use of in any other category. It is also simple to pronounce in a multilingual country.”

The Nano has made the waves it needed to. Now, all eyes are on the company to see whether it can maintain its production schedules. A new plant in Gujarat is still under construction. Meanwhile, there is talk of the Tatas returning to Singur in West Bengal. Customers have started to pay, because orders for the Nano began in early April. Now, they are waiting. Ratan Tata knows that delays in delivery will be damaging. “We don’t really want customers to wait for the car,” he told the press recently. “As my friend [Fiat chairman Luca Cordero] di Montezemolo said in Paris, waiting to buy a car is like waiting for a pretty woman. If you wait too long, she might get old and fat.” Apparently, everyone wants a Nano; no one wants a Nani.