Main Reasons for Tata Motors Entering the Ultra-low-Cost Car Market - Essay Example

?Case Analysis Tata Motors Table of Contents Introduction 3 Main Reasons for Tata Motors entering the ultra-low-cost car market 3 Competitive Advantages of Nano in developing Markets 5 Screening criteria for IMS process of Tata Nano 8 Regions and countries where Nano should enter 10 Conclusion 10 References 12 Introduction Indian automobile giant Tata Motors is one of the most important companies among the 98 companies that comprise the famous Tata group. Tata Motors has been pretty desperate to make a strong presence in the global low-cost as well as ultra-low-cost car market for many years. In order to make its objective achieved the company, in 2008, launched one of its most ambitious product, Tata Nano. It was a very conscious effort considering the situation of global car market and the company’s competitive advantages. Nano has been marketed as the “World’s Cheapest Car” and the company has adopted a very unique development and business model for this special child of it. One of the most important advantages that the company enjoys is that it has more than enough knowledge about its home market i.e. India, its competitors and its suppliers. Tata Motors and its chairman Ratan Tata want Nano to create same magic that Mini did in Britain and Beetle did in Germany. Furthermore, the company and its visionary management could foresee the future of global car market which is expected to be very much dominated by the low-cost as well as ultra-low-cost cars. This paper includes the answers of four questions that are based on a case of Tata Motors and its Nano. The paper aims to discuss the reasons behind the Tata Motors’ decision to enter the market of ultra-low-cost cars, competitive advantages of Tata Motors as well as Nano, probable screening criteria for the Nano’s IMS process and the potential market for Nano beyond India and China. Main Reasons for Tata Motors entering the ultra-low-cost car market Global car industry and its competitive landscape have been experiencing significant alterations which are permanent and dramatic. One of the main reasons behind this is the change in nature of demand of the end users across the globe. A completely new and unique class of car buyers has been emerging in the industrializing countries like China and India. Such incident has created a huge potential for cars which can be found in the price range of $2500 - $5000. Such cars are popular among the manufacturers and buyers as ultra-low-cost cars. A report of A. T. Kearney says that till 2020, almost 16 million cars from this category will be sold every year. India and other Southeast Asian countries will be the key market for such type of cars (A. T. Kearney, 2008). Chinese and Russian consumers are expected to look beyond ultra-low-cost cars as they have moved ahead of their Indian counterparts in terms of income level. This new category of cars is likely to experience tremendous demand especially from India. In 2005, almost 208 million Indian had an income that theoretically allows them to buy a car that costs in between $2500 - $5000. It is expected that by the end of 2020 there will be around 439 million people who will be looking for these ULCCs. It is important to mention that most of these people will be ‘first time buyer’ of car. Research shows that if the car is priced at around $4000 then almost 270 million Indians will be in a position to buy it, whereas if the starting price is set at around $2500 then the number moves up to 530 million (A. T. Kearney, 2008). Tata Motors, being an India based car maker knows the market more than any other company. The company is very much aware of the above mentioned facts and figures; hence this huge potential of ULCCs has definitely influenced Tata Motors to make an entry in ULCC market. Tata Motors did its own research before coming up with the plan of Nano. The company targeted the market that no other auto maker in the country has done it. It has targeted the two wheeler owners. India is such a country where people use two-wheelers as their ‘family car’. They are capable of buying a motorcycle worth $1000, but can’t arrange enough money to buy a car that costs $5000. Tata Motors did research and found out that these end buyers can afford a car if it can give that at a sticker price of $2500 or at lesser than that. The company simply adopted ‘Blue Ocean Strategy’ where the companies indentify the market space that is till date unknown to all. In Blue Ocean Strategy opportunity of growth is ample and market is fresh and untainted by rivalries (Kim and Mauborgne, 2004). Tata Motors decided to make two-wheeler market a Blue Ocean and gave Nano as an alternative of two-wheelers to capitalize on the huge potential of the market. Competitive Advantages of Nano in developing Markets Competitive advantage may be defined as an advantage that is gained over rivals by means of providing greater value in the form of price and benefits (Ehmke, n.d.). In case of Nano, competitive advantage lies mainly in price. The car is given birth in such a country where price matters in case of all the products. Population of India has always been dominated by the middle class and lower middle class people who have always dreamt of a personal car but never been able to buy it. Millions of them has half-fulfilled this dream of them by purchasing a two-wheeler. However, the significant rise in earning of these people has changed the situation. Now, there is a large chunk of the country’s middle class population who can afford a car that is cheaply priced. When Tata Motors first declared their plan for Nano, the point that they always focused on, is the price. From the very first day, Nano is promoted as a car that is available at a record low price of INR 100,000 (approximately $2500). It is truly made for a country that has more than 1 billion people and which is experiencing an average growth rate of 7-8%. In that sense it is a ‘The People’s Car’ (Hilton, 2008). However, many analysts believe that this advantage of cheap price can be retained only for a limited period as the costs of inputs is always on the rise (David, 2008). Another advantage that Nano can enjoy is the advantage of first-mover. Nano is undoubtedly the ‘first of its kind’ car that is consciously targeted to the two-wheeler users. It is promoted as a family car to those who use scooters and motorcycles that ‘somehow’ manage a ‘four member family’. In India, such a car is capable of making huge difference in the life millions of people who belongs to the middle class society (Jain and Griffith, 2012). Nano has come from Tata group which is one of the oldest and most trusted brands in India. The group has presence in no less than 98 business areas. It is there in every corner of the country. The name Tata is intimately attached with almost all the Indians as they use at least one product of this brand everyday. From Salt to Software, the name Tata can be found everywhere in India. Not only in its home country, but it is also a respected one in the world. According to a recent report Tata has managed to move up to 41st position in the list of world’s most valuable brands. With a new revised brand value of around $15.75 billion, Tata is certainly one of the biggest brands that India has ever offered to the world (Malhotra, 2011). In 2010, with the help of Land Rover and Jaguar, Tata Motors topped the list of India’s top corporate brands (ET Bureau, 2010). Nano is not only a ‘closed to heart’ product of Tata Motors but it is also an important product of the entire Tata group. The brand value of Tata is likely to be a great advantage of Nano. Furthermore, local brands find themselves in a better position to respond to competition from the global brands (Jain and Griffith, 2012). This principle is very much applicable for Nano in India especially when competing with some foreign brand. Suppliers’ network of Nano is another factor that can be considered as a sustainable competitive advantage of it. The initial development process of Nano involved nearly 600 suppliers who were closely integrated to each other. Among them only 100 were finally retained. A special design team was responsible for selecting the vendors as well as suppliers. They were helped by a spend management solutions providing company named Ariba Inc. The 100 suppliers that were chosen were categorized as Tier 1 suppliers (Business Teacher, n.d.). In addition to them, there are tier 2 and tier3 suppliers. Most of them were ready to move with the mother plant of Nano. This is very important for the cheapest car whose price is set at $2500 (Kenneth, 2010). When a car like Nano is made for the people who are from the lower and middle level of the society, it is very important for the company to have a reach in the places where most of them live. In other words, the Tier 2 and Tier 3 cities in the country must be reached effectively so that the desired market is properly targeted. Tata Motors, being the most dominating player in the Indian automobile industry, has been able to create and retain a strong distribution network throughout the country over the years. Such distribution network would definitely help Nano in the process of targeting the right customers across the nation. Nano is the first car that is being offered at price of $2500. Now when a four-wheeler vehicle is made available at such a low price, then it needs no expert to say that there will be ‘margin pressure’ on the manufacturer. Since, Nano’s USP (Unique Selling Proposition) is its price; It will not be that easy for the producer to increase the price overnight. Tata Motors has to consistently fight with the rising prices of resources. However, since the company is Tata Motors, one can expect that Nano will be successful in keeping its price tag intact in near to medium future. Tata Motors’ significant financial strength is most certainly one of the competitive advantages of Nano. The consolidated net profit of Tata Motors in 2011-12 was almost INR 135 billion. The company has spent $2.3 billion for buying Land Rover and Jaguar (Chakravarty and Chua, 2012). Such financial strength of the company is always capable of providing the required to support to a particular product so that it remains competitive over a long period of time. Screening criteria for IMS process of Tata Nano International Market Selection which is commonly known as IMS in the arena of business is one of most crucial processes for a product like Nano which is produced not only for Indian consumers but also for the consumers in other nations. There are number of potential factors that can influence of the company’s decision regarding IMS. Such factors or determinants can be categorized into two classes i.e. environmental and characteristics of the firm. The following model gives a better picture about the IMS of a company (Hollensen, 2009). In case of Tata Nano both the categories of determinants must be taken into account before targeting any particular any international market. Source: Hollensen, 2009. Tata Motors is not new in the world of ‘internationalization’. It has vast knowledge and experience in internationalizing its products. Furthermore, kind of resources a company requires to initiate the process is already there with Tata Motors. As far as the industry is concerned, automobile is truly a global industry which is not confined within the boundary of any particular nation. Like any other automobile giant, Tata motors must also have goals regarding its sales volume, revenue, brand reach etc. which can be achieved through the process of internationalization. The screening criteria for selecting an international market are very much ‘environmental’ by nature. In other words, Tata Motors should gain an insight into the global ultra-low-cost car industry and potential of being more global of the industry. The country or the international market other than India where Nano will be launched and sold can be screened by considering criteria like competition, potential of the market, geographic distance from the home country and market similarity. Potential of the market should be considered as a very important criterion for selecting a market. Market potential can be measured by its potential size and growth in the coming days (Hennessey and Jeannet, 2005). Potential growth of the market should determine the growth of sales of Nano in that particular market. International market can be segmented on the basis of PESTLE approach where a market or nation is measured in terms of its political, social, economical, environmental, legal and technological conditions. A model developed by Hollensen for International Market Segmentation can also be used by Tata Motors for Nano. According to this model criteria for IMS can be divided in two categories which are ‘Specific’ and ‘General’. General criteria include factors like politics, geography, language, economy, demography, society, technology, education, religion and industrial structure. On the other side, specific criteria include culture, attitude, personality and lifestyle (Hollensen, 2009). Regions and countries where Nano should enter Nano should enter all those regions and countries where the economies and societies are dominated by the ‘middle class’. After India and China, countries where middle and lower middle classes are rising rapidly are South American and African countries. South American countries like Mexico, Brazil and African countries like South Africa and Nigeria have been experiencing significant rise in income of level of the middle and lower-middle level of the society. Investment bank Goldman Sachs expects that Nigeria and Mexico have huge potential of becoming economic giants in near future (Collado, 2010). It is expected that Nano will be able to create enough attraction in these countries as the car is capable of fulfilling the dream of owning a personal car of a large section of population in these countries. In countries like Brazil and South Africa, Nano may need some modifications to satisfy the needs regarding safety and overall performances. However, in countries like Mexico, Nigeria and even some Asian countries like Bangladesh, Sri Lanka Nano can experience significant demand just because of its price. The main reason behind such prediction is the average income level of Nano’s target customers in these countries. Conclusion Nano is a much awaited product of Indian automobile giant Tata Motors. It is a conscious effort from the company after considering the potential of the Indian consumers and future of global automobile industry. According to various reports both ultra-low-cost and low-cost car markets are going to see huge growth as the lower-middle class and middle class in the societies of emerging countries like India and China have been managing remarkable growth in their earnings. Initially, Nano is specifically designed keeping in mind the capabilities and choices of Indian consumers. Tata Motors can leverage Nano’s main competitive advantages like its low price, brand identity, financial capabilities of Tata Motors and the network of suppliers and distributors to make the initiative a real success. There are several aspects that Tata Motors should consider prior to IMS process. Such aspects include competition, potential of the market, geographic distance from the home country and market similarity. The company should also analyze the political, technological, economical and social conditions of the target international market. Tata Motors should target emerging markets like Africa, Mexico and Brazil apart from India to make Nano truly a global ultra-low-cost car. References A.T.Kearney, 2008. Mega Market for Ultra-Low-Cost Cars. [pdf] Available at: [Accessed 11 December, 2012]. Business Teacher, No Date. 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