The launch of Tata Nano, the world's cheapest car, has enhanced India's position as a small car manufacturing hub and can potentially expand the domestic car market, according to CRISIL Research.
Nevertheless, scaling up challenges is expected to be humungous. With the on-road price to the customer estimated at Rs1.2 lakh (approximately $2,300), the Tata Nano will enhance India's position as a highly cost competitive manufacturing hub for small cars.
Alternative low cost car models launched worldwide in the past two years have been priced at least 50-per cent higher than the price of the Nano.
According to CRISIL Research estimates, the new price point reduces the cost of ownership of an entry level car in India by 30 per cent, and to below three times the cost of owning a motorcycle. This will make the car affordable to an additional 14 million families, including a section of the 58 million two-wheeler owners.
India has been gaining significance as a small car manufacturing hub with small car exports of 0.3million in 2008-09. Small car exports have grown at a CAGR of 21 per cent during the last five years and are expected to more than double by 2013-14.
This growth has been enabled by increasing manufacturing competitiveness across the board, driven by continuous improvement in quality andproductivity. For instance, the time required to manufacture a vehicle at Maruti Suzuki has halved between 2001-02 to 2007-08.
The Nano initiative, entailing significant product design innovation andcost optimisation, further adds to the competitive edge of automotive manufacturing in India.
According to Sachin Mathur, head, CRISIL Research, "The launch of Nano has further highlighted the capabilities of a low-cost automotive manufacturing ecosystem in India.
It will encourage continued emphasis on product developments in the low-cost cars category by other manufacturers across the world, with India as a focal point."
Lower middle-income countriesincluding India, account for around 53 per cent of global population, but only 13 per cent of global car sales, and the launch of ultra-low cost cars is expected to be a key driver for increasing the car ownership in these countries.
The Indian market would become the first testing ground for the manufacturing as well as marketing success for an ultra-low cost car. The huge market opportunity notwithstanding, CRISIL Research expects that the scaling up would be extremely challenging.
To support the viability of the Nano project, large volumes of between 0.2-0.5million have to be targeted in the medium term. At these levels, market expansion is imperative, asthe total sales of cars below $6,000 in India is itself estimated to be around 0.3 million units in2008-09.
Achieving such large volumes will imply managing highly cost-effective operations, while enabling access to efficient finance and quality service to a highly dispersed and largely first-timebuyer market.