[Reader-list] The Nano - small car, big responsibilities

[Sujata & Samantak]

Dr Dipankar Dey, associate dean. ICFAI Business School, wrote this piece for
sanhati.com, a shorter version appeared in Hong Kong-based online daily
www.asiasentinel.com. Here is the Sanhati piece, which I found
thought-provoking.


Understanding the Nano: small car, big responsibilities

By Dipankar Dey (http://sanhati.com/articles/1484/)

On 23rd March 2009, Tata Motors Company (TMC) launched its much publicized
small car Nano in Mumbai. As the Sanand plant at Gujarat is at its inception
now, a makeshift arrangement has been made to produce 50,000 units at their
Pantnagar plant. Limited numbers of prospective buyers will receive their
cars after three months, in June 2009. It is reported that the basic model
priced at Rs one lakh ($2500, ex-factory without transportation cost)
without air conditioning will contribute only 20 per cent of the Nano sales
and rest 80 per cent will be contributed by the premium models priced at
around Rs 1.6 lakh.
The TMC's strategy on the Nano draws a striking similarity with the General
Motors (the US auto major currently struggling for its survival) global
production strategy in the late 1980s that was based on simple and flexible
manufacturing plants; global sourcing of automobile parts; rapid
introduction of new models; and a lean dealer network. This strategy had
shown success in Europe and it was introduced in Brazil in the early 1990s,
with a goal of applying it in Asia, Eastern Europe and ultimately in the
United States. Later Ford and other major automobile companies also followed
the same model.

In 1997 GM made the Blue Macaw Project the centipede of its Brazilian
strategy. GM chose the state of Rio Grande do Sul as the site. The project
revolved around a new automobile assembly plant with an annual capacity of
150,000. The plant produced a stripped-down version of the Opel Corsa, a
subcompact car, with an under $10,000 price tag. Among the advantages of
locating in Rio Grande do Sul were geographical proximity to the Southern
cones major markets in southern Brazil, the Buenos Aires region of Argentina
and Uruguay. In return for agreeing to build the $600 million plant in a
lightly industrialized area, GM received a package of subsidies from the
state government of Rio Grande do Sul.

The subsidies amounted reportedly to $250 million, and the tax breaks
appeared to have the potential to equal $1.5 billion over a 15-year period.
GM executives maintained that in the absence of these subsidies, the firm
would have located the plant in a more developed part of Brazil. In 2000,
the GM plant employed 1,300 workers, and locally based suppliers employed
another 1,300 workers. The plant housed 20 suppliers, the most important of
which were US, French and Japanese companies. GM outsourced all components
except power trains, body welding, body panels, paint, and final assembly.
Similar activities were planned in the TMC's mother plant at Singur.. The
main thrusts were on body welding, body panels, paint, and final assembly.
Major components were to be supplied by other ancillary companies.

\In May 2006, Tata Motors had announced its decision to start an automobile
factory at Singur (West Bengal) to roll out the world's cheapest car Nano.
The launch of the car in Mumbai in March 2009 was an important phase in the
automobile history of the world. This brief history of Nano has taught us
how a large corporate house could (i) use, to its advantage, the unhealthy
competition among different states to attract large capital; (ii)
effectively use parliamentary politics as a business strategy to convert an
internal crisis into an advantage. Politics has played an equally important
role, if not more than business economics, in shaping the future of Nano.

The supportive role of the State in the expansion of large capital is a
controversial and much discussed topic. This symbiotic relationship between
the state and large capital had worked successfully throughout the 19th and
most decades of the 20th century. In India, the Tatas did not rely much on
the nascent State. They constructed their own power plants to supply
electricity to their factories, managed schools, research centers,
municipalities etc. To ensure steady supply of management staff, they
created Tata Administrative Service (TAS) in line with the Indian
Administrative Service.

Till the early 1980s, the government role was considered as regulator only.
One of the major changes that Mr Ratan Tata brought about in the Tata House
after he succeeded JRD Tata in the mid 1980s was the group's attitude
towards government. In the changed situation, the Tatas decided to involve
the government as their business partner. The group's involvement in the
Karnal refinery project with Indian Oil Corporation (which did not take
off), Ratan Tata's acceptance of the Chairmanship of Air India and his close
advisory relationship with Rajiv Gandhi could be cited as indications of
change in attitude towards the government.

The relationship between the state and the group improved over the years and
during last two decades; the Tatas have succeeded in extracting substantial
benefits from the state. Allocation of vast agricultural lands by various
state governments to the Tata companies, say for shrimp cultivation at
Chilka (1991); steel plants at Gopalpur on Sea (1995) and Kalinga Nagar
(2004); automobile plants at Singur (2006) and Sanand (2008), are few such
examples. There was resistance against all the above projects; many
protesters were killed and none of the projects have been put into operation
till date. But except in Chilka, the Tatas have not returned a single acre
of land to the government/cultivators. With the passage of time, when the
protest movements dwindled, the Tatas increased their grip (as seen in
Gopalpur) on the land.

Singur is not an exception to this trend. Though Tata Motors has abandoned
the Singur project in October 2008, till date it has not retuned the land to
the farmers. Instead, recently it expressed its willingness to renew the
lease agreement for another year. The Chief Minister Buddhadeb
Bhattacherjee's reported comment in an election rally on 11 April (ABP,
April 12, 2009), expressing his desire to return to Singur to build the Nano
factory adds to the speculation that the Tata's decision to abandon the
project midway was nothing but a well planned strategic retreat. They will
return back to Singur at the most appropriate time.

The decision to abandon the Singur project has benefited both Tata Motors
and the ruling Left Front government of West Bengal. It was a win-win
situation for both the parties. In a twosome game, no one recognizes the
third or fourth parties which remain beyond the fence, as silent spectators.
However, in Singur, the third and the fourth parties namely local peasants
and civil society organizations did not remain quiet. They have made their
voices heard across the country.

Gains for Tata Motors:
The most crucial gain for TMC was to get five extra months between November
2008, when the launch was initially scheduled, and March 2009, when Nano was
actually launched. These additional five months have benefited the company
in two ways.

First, the production cost could be reduced. Now, the cost of production is
much less compared to last year. Since January 2008, the prices of two major
inputs namely cold rolled steel and rubber have decreased by 28 p.c. and 19
p.c. In addition to this, the government has slashed the excise duty from 16
p.c. to 8 p.c.. Moreover the price of crude oil has also decreased by over
51 p.c. in the said period.

Second, TMC has an opportunity to mobilize funds, at a negligible cost, by
asking the prospective buyers of Nano to place deposits in advance. This has
been made possible at a time when the company has been facing severe
financial crisis. The Economist (March 26, 2009), has estimated that
prospective Nano customers are expected to place deposits worth up to $1
billion with Tata Motors at the time of placing order for the car. The
company will retain that amount, without paying any interest, for at least
three months before the first phase allocation of limited numbers of cars
are complete. And those willing to be considered for the second batch will
be paid interest, below the market rate, after one year. Had TMCs launched
Nano, as scheduled before, in the month of November 2008 at a time when the
economy was worst hit, the Tatas could not have been successful in
mobilizing such a huge sum of money at a negligible cost.

By July-August last year, Tata management could realise that the impact of
the global recession would be severe. It may be recalled that the crude
price per barrel went up to $147 in July 2008.Certainly that was not a
conducive situation to launch a motor car targeting price sensitive
middle-class clients. They were just looking for an excuse to delay the
project and buy some time- till the economy showed some signs of recovery.

Like other steel and automobile companies across the world, the Tata
companies have also been affected adversely by the super recession the
global economy had been passing through for the past one year. For them, the
problem got more harsh due to some expensive acquisitions in the overseas
market. After the takeover of European steel major Chorus by Tata Steel,
Tata Motors acquired the British auto firm Jaguar Land Rover (JLR) in June
2008, paying a hefty sum of $2.3 billion. Since then, sales has fallen 22
p.c. production has been slashed by 60 p.c. 1800 jobs have been cut and Tata
Motors have pumped in $1.2 billion of working capital into JLR. As the
condition did not improve, in March the company has approached the British
government for a loan guarantee of $730 million. Added to this, back home,
the sales of the Tata Motors heavy vehicles have fallen by 60 p.c. (may be
to utilize the excess capacity, Nano is being assembled in their Pantnagar
plant).

All these factors have put the company into a severe crisis and their credit
rating in March 2009 has fallen to B3 from B1. Moreover, for the first time
in recent past, Tata Motors incurred a loss of $54 million (approximately Rs
270 crore) in the quarter ending in December 2008. It has been reported that
this year Tata Motors faces a funding gap of at least $3.4 billion. Out of
this, $2 billion has to be repaid by June 2009. During such a financial
crisis, Nano has emerged as a savior.

Decision to abandon the Singur project has helped TMC extract huge
concessions from the Gujarat government also. To understand the strategic
move of the company, we shall have to reexamine closely some of the major
political events those occurred immediately before the move. The official
Left had withdrawn support from the UPA government in the center; signs of a
prolonged global recession were getting prominent in every passing day and
in West Bengal, the LF government, the main sponsor of the project was under
severe political pressure due to pathetic performance in every aspects-
political, economic and social. Civil society organizations were on the
street seeking justice against atrocities of the ruling party. Competent
managers of Tata Motors, through their accurate assessment of political
environment and timely intervention had turned a threat into a huge
advantage. Under the changed situation, keeping in mind the future plan of
their dream car, they realised that Gujarat could be the only other state
which could be made to compete against West Bengal. The Gujarat chief
minister Narendra Modi was contacted secretly and he fell victim to the ploy
immediately. Thus, Tatas succeeded in extracting huge concessions from the
Gujarat government also. Probably the benefits were much higher than the
prohibitively large concessions, details of which are yet to be revealed,
they had obtained from the West Bengal government.

This strategy to extract maximum benefit from the competing states was not
new. As observed elsewhere above in this article, in the 1990s, the US auto
giants General Motors and Ford had successfully implemented this strategy to
obtain maximum concessions from the provincial governments of Brazil.
Analyzing the impact of such investments on local economy, G.H Hanson (2001)
in his paper, Should Countries Promote Foreign Direct Investment?, had
raised a very important question. He asked, if it was true that the benefits
of FDI for host countries were insufficient to justify FDI promotion
policies, then why did host-country governments continued to offer
multinationals special treatment? According to him, there were two main
reasons. One, the governments felt compelled to offer concessions given that
multinationals subjected their location decisions to bidding by potential
host-country governments. Second, promoting such investment, served the
interests of host-country politicians. Attracting multinationals either had
benefited specific constituencies, from whom politicians derived support, or
fitted into the political strategies of empire-building.

The second reason cited in Hanson's analysis aptly explains the political
motives of the government of West Bengal and Gujarat in siding with the
Tatas in this controversial project. Tata Motors have understood accurately
the political interests and compulsions of the state governments. They
simply exploited such weakness to their advantage. In 2006 also they
successfully implemented the same strategy before selecting the Singur site.
At that time, they projected Uttaranchal as another likely contender for the
Nano project. The West Bengal government out of desperation, walked into
that trap and ended up offering huge economic concessions to the company.

The political compulsion of the LF government becomes more clear when one
analyzes the state government's enthusiasm to attract large business houses,
including foreign firms, to the state in which over 55,000 small and medium
firms have been closed during last three decades. Contrary to the general
expectation that the LF government would extend all kind of support to the
small and medium entrepreneurs of the state, in reality, they did the
reverse. The political logic is obvious. Financially strong local
entrepreneurs would aspire for political power which the ruling parties in
West Bengal are not willing to share with . As entrepreneurs from other
states/overseas countries would remain focussed on business activities only,
political risk is much lower in such cases. Maybe, due to same political
reason, the number of local entrepreneurs in China is very limited. Foreign
capital and transnational corporations are welcome there.

The low price of the car and its unique production strategy that was based
on simple and flexible manufacturing plants; global sourcing of automobile
parts and rapid introduction of new models have compelled the management to
follow an innovative promotional strategy to establish the Nano brand within
a very short time , across the country, at a limited budget. Seven months
delay in the launch of the car and the associated controversy the project
has generated due to the abandonment of the Singur plant, has helped Tata
Motors achieve that objective. The production model remains an area of
concern for them. Tata motors dream car has a striking similarity with
another product, the IBM PC, launched by IBM in 1981. Except for its name,
IBM had contributed nothing in that product which had brought in a
revolutionary change in the economic and social activities across the world.
In that PC, all critical components were supplied by other companies like
Microsoft, Intel and Seagate . But clone makers realised trick quickly. They
purchased the critical components from the original suppliers, assembled the
same as per the standard set by IBM and flooded the market with low priced
IBM Compatible PCs. Thus IBM failed to retain its control on the PC market.

Most of the critical components of Nano will be supplied by other
companies.. For example, BOSCH will supply the engine, alternators, brakes
etc. LUCAS-TVS;TACO;RICO;Sundaram Clayton;Rasandik et al will provide
various other critical components.(Hindu Business Line March 23,2009). In
future any expert mechanic may assemble a Nano Compatible small car
procuring the critical components from the market.

Apprehending this, Tata Motors has reportedly applied for patent protection
for over 37 inventions and innovations linked to its Nano. Industry watchers
have interpreted this as an aggressive move to protect the low-cost car
against imitation.4 But mere patent protection may not be sufficient to stop
imitation at the local level. So the Tatas have opted for an aggressive
strategy and tied up with 15 national banks to market their dream car. And
to establish the brand with a limited budget, from day one they have
consciously relied more on fuelling controversies than spending millions of
rupees on advertisements. During last one year, the attention Nano has
received from the press and political parties was unbelievable. Thousands of
tons of news prints and hundreds of hours of prime television and radio time
in all the national and regional languages have been used for Nano related
news and stories. The more the controversies, the more the mileage for the
Nano brand. The timing of the launch on 23 March, just before the election,
was also meticulously thought of. Nano has emerged as a major election issue
in Gujarat and West Bengal- more in case of the latter. The sarcastic
remarks by Mr Ratan Tata, an urbane gentleman , during the launching
ceremony of Nano should be analysed as an tactical move to fuel and sustain
the Nano controversy.

Gains for the ruling left front The ruling LF has made Nano as one of its
main election issues. As it has no other catchy issue to sell , Nano is
eloquently in use in election speeches, slogans, posters ; graffitis et al.
All its major failures during the last three decades- be it health care;
education; industrialization or agriculture- have become secondary. The
opposition political parties , to be precise, the leader of the opposition
Ms Mamata Banerjee has been made the scapegoat for all the failures of the
government and she has been identified as the main culprit for the non
fulfillment of the Chief Minister's dream project at Singur. To exploit the
general weakness of Bengali middle class towards the losers ( a la Debdas),
Mr Buddhadeb Bhattacharjee is being projected as a "tragic hero“ a victim of
grand conspiracy . How far this strategy would be successful is not known
but Nano and Singur, rather abandonment of Singur by Nano, has given some
talking points for the ruling parties to speak in the election rallies.

Future of Singur Plant

Most probably, Tata Motors will be back to Singur. It was abandoned only to
be back again. If the LF emerges politically stronger after the election, it
will return early and will insist on granting SEZ status to the project. If
the election result indicates Mamata Banerjee coming to power in the next
assembly election scheduled within a year, Tata Motors will agree to
restrict the plant size to 600 acres. Rest 400 acres will be returned to the
farmers. It should be remembered that Nano's next destination is Europe and
then to Southeast Asia via Thailand. In it's expansion plan Singur has an
important role to play.

While Ratan Tata is banking on his dream car to bail out Tata Motors from an
unprecedented financial crisis, The WB CM is also relying heavily on his
unfulfilled ˜dream project" at Singur to sail through the political
challenges his government is facing at present. It seems that the small Nano
is overloaded with large responsibilities. Will it be able to bear the load?