In response to a recent article we wrote on the Tata Nano (and the rather disappointing recent sales figures after what appeared to be a highly successful launch), a reader from Mumbai sent in a reply which we felt was so interesting it deserved to be posted as a guest piece:
“My opening position is that contrary to popular opinion the Nano is not aimed at the poor, or to be more correct not aimed at the poor in the Indian context. In a place like Mumbai, most people are buying Nanos new for something like Rs 1.6 lakh, including local duties. That’s about $3500 as of writing, putting the Nano well out of reach of anyone poor by Indian standards (even in Mumbai). When Ratan Tata talks about building a car for the slum-dwellers, he’s really talking about building a car for the guys in the slums who own all the little scrap metal recycling shops in which many of the slum dwellers work, i.e. the few slum dweller entrepreneurs at the top of the tree..
One idea I’d like to add to your list of causes of the car’s less-than-spectacular sales is a fact of life in urban India that frustrates everyone: there’s simply no place to park. As you mention in your article, Tata hopes to entice India’s motorbike riders, both urban and rural, into swapping the bike for a Nano. In the urban environment, you’re right to suggest that making this swap is a no-brainer when it comes to travel through steamy, crowded cities. Unfortunately, the question of what to do with your car when it’s not moving presents a very real problem in cities with extremely limited public parking, particularly if you can’t afford to pay a driver to idle the car while you shop for groceries. In Mumbai, a decent driver costs between Rs 12-15,000 per month ($270-330/m), so that’s out of the question for the kinds of people for whom a Nano is the best they can afford. Also, while urban buyers of higher-end cars typically live in the kinds of buildings that provide parking, the motorbike riders’ buildings usually don’t and the “informal housing segment” (slums and such) never does. The urban railway runs quickly and often, and a ride on an auto-rickshaw is cheap for the places that public transport doesn’t touch.
In rural areas, the case for replacing a motorbike becomes slightly weaker as the riding environment in rural regions generally seems to be more hospitable than that of the cities, with less dangerous traffic being the major difference. More importantly, however, is the absence of vehicle financing that you mention in your article, as this absence is especially evident in rural regions. Since rural customers usually lack formal documentation of income/assets (to a far greater degree than those in urban spaces), banks generally won’t touch them and non-bank financing companies who do are cautious about lending and charge relatively high interest rates (rates vary widely as the line between bank loan and loan shark blur in the provinces but 20% annually for a car loan is not unusual).
A potentially important story for the Nano, in my opinion, is the suburbanization of big Indian cities. A Barclays report last month on India as a “commodity powerhouse” compares India’s per capita demand for a few products (aluminum, coal, and sugar) to China’s as they relate to each country’s urbanization ratio. On a related note, I’ll bet that the construction of suburban housing (with home values around Rs 5 lakh) in big city outskirts has a major impact on Indian demand for autos in the coming years, as these developments work by pulling people out of the ultra-high density housing in city centers and shifting them to nicer houses further from town. These developments are happening right now, with something like 50,000 new homes of this type slated to be built in FY11.
Importantly, moving out to the suburbs makes a cheap car like the Nano an even more compelling purchase from a practical standpoint AND puts the buyers “in the system” with regard to the lending industry. Once people at the Nano income level get home loans (which the people moving to the suburbs frequently get since the development companies have a huge incentive to facilitate home loans for their customers), it becomes exponentially easier for those people to get car loans.
In all, I think the geographical arrangement of inhabitants of India’s big cities could have a significant impact on the major products they consume (and, at least locally, the materials that form those products).”
(The guest commenter asked that their name be withheld due to their current professional position.)