The World's Cheapest Car Debuts in India

By JYOTI THOTTAM / PUNE

In New Delhi in the early 1970s, my family traveled by scooter in the classic, death-defying Indian fashion. My father would drive, with me, a toddler, standing in front gripping the handlebars and my mother seated pillion, my infant sister in her arms. My father was a civil engineer and my mother a nurse, and in India at that time, cars for a young family were far out of reach.

More than 30 years later, I recently listened to Ratan Tata, chairman of one of India's largest companies, describe a family just like mine as the inspiration for the Nano, the ultra-cheap "people's car" that Tata Motors officially launches today. "What sparked it off was riding in a car and looking at them and saying, 'surely there's a safer way that these people can be transported,'" Tata recalls. (See the dozen most important cars of all time.)

That incident was the beginning of a six-year quest by Tata Motors, India's largest automaker, to develop a car for the common man costing less than Rs 100,000 (about $2,000), roughly the same price as a motorcycle. Many thought Tata was bound to fail, that a car so cheap wouldn't be much of a car at all. The Maruti 800, India's best-selling sub-compact, costs almost twice as much. The chairman of Suzuki Motor, Osaka Suzuki, once said: "Tata will not be able to make a one-lakh car." (Lakh is an Indian word for 100,000.)

The company has proven the doubters wrong. The Nano is going on sale at Tata's 470 outlets in India; the base model does indeed carry a sticker price of Rs 100,000. Now, with global car sales in the worst slump in decades — Tata Motors itself is experiencing financial difficulties — the battered automotive industry is looking to the debut of the world's cheapest car for clues to a future that could revolve around smaller, more fuel-efficient and more cheaply produced vehicles. (See the 50 worst cars of all time.)

In an exclusive March 5 interview with TIME, Tata downplayed the tough market conditions and the impact that sagging consumer demand could have on Nano sales. Although car loans are harder to come by in India due to the credit crisis, the country's economy is still growing. "If I had conceived a million-dollar supercar today, I think you'd have every reason to question whether that's the right product at the right time in the planet that we are living in today," Tata says. The Nano, he argues, is the right car for this difficult time. "What has happened in the changing economic situation globally reinforces, if nothing else, the fact that a low-cost car has a place."

Tata Motors engineers developed the Nano by redesigning every component to minimize cost and weight, while trying to maintain performance and comfort. To see how well they accomplished their mission, I was offered the chance to drive a Nano on a test track at Tata Motors' main plant in the western Indian city of Pune. (See pictures of the Nano.)

The first thing you notice is that the dashboard holds just two gauges: speedometer and fuel level. This is the basic model, and it's stripped down to the bare essentials. But driving the car is surprisingly easy. The gearshift is smooth, the car accelerates adequately and you never feel cramped or low to the ground. The Nano doesn't feel like a cheap, lightweight car that's going to tip over with the first sudden turn.

Outside the Tata Motors facility, our photographer got to drive a fully equipped, bright yellow Nano along the highways, cobbled avenues and side streets of Pune. This car had air conditioning, worth the extra money in India (optional-equipment costs had not been released at the time this was written), but running the aircon sapped some of the power of the tiny, two-cylinder engine. Other drawbacks of the car: The storage space is hard to access because the hatchback doesn't open, the brakes aren't progressive, and the car we drove pulled slightly to the left even though there were just 40 km on its odometer. (See pictures of muscle cars.)

Those quibbles are unlikely to make a difference to potential buyers. The Nano's target customers are people riding two-wheelers, and for most of them, this is the only car they could hope to buy. Even without spending anything on marketing so far, Tata executives expect demand to far exceed their initial annual production capacity of 45,000 Nanos. Tata Motors had planned to build about 250,000 cars a year, but the company was forced to shut down its original Nano factory last fall after protests by people displaced by its construction turned violent. That disruption forced Tata Motors to relocate its main Nano production line and delayed the launch. Because plants in Pune and Pantnagar are now producing the car in reduced numbers, the company is bracing for long waiting lists and disappointed customers.

The lower volume means the Nano will do little for Tata Motors' revenue and profits, at least initially. Vaishali Jajoo, a senior automotive research analyst at Angel Broking, an investment firm in Mumbai, says that even at projected output of about 250,000 cars a year, she expects the Nano will add just 3% to annual sales. Because the profit margin on Nano sales is small, "It will take at least four to five years to break even" by recouping development costs, Jajoo says. Fully equipped Nanos have higher margins, but the company has not yet decided how many of those it will produce. A company spokesman declined to comment on analyst reports regarding the Nano's launch, calling them "speculative."

Initially, the Nano will be sold only in India. The company plans to begin selling a European version in 2011. It has no plans yet to export the Nano to the U.S., although that has not been ruled out.

The Nano's slow start comes at a time when Tata Motors is struggling financially due to slumping demand. The company in the quarter ending Dec. 31 reported a $58.5 million loss, its first loss in seven years. Loans for Tata Motor's $2.3 billion purchase of loss-making luxury car brands Jaguar and Land Rover from Ford Motor are coming due. "That's a major cash-flow crunch for them," Jajoo says. Jaguar and Land Rover sales have tanked. The company is pursuing several options to meet its obligations, including getting a bailout from the British government. (Vote for the 2009 TIME 100 Finalists.)

The Nano certainly won't solve Tata Motors' immediate problems. But Tata says he hopes the groundbreaking vehicle will in the long run help redefine not only how much cars cost, but also how they are made. The future of the car industry, he says, lies in design and marketing — not manufacturing, which involves high costs and increasingly can be farmed out to other companies. If the Nano really takes off, Tata Motors may try "distributed manufacturing" — selling Nano kits to be assembled and sold by independent dealers. This, says Tata, would be a step toward fully outsourced manufacturing. "What I tried to describe on the Nano is an attempt to look at that as a business model," Tata says. A new way of doing business may be something the beleaguered auto industry needs even more than a cheap new car.

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