The global auto industry is keenly watching the efforts of two auto giants to redefine what it means to manufacture low-cost vehicles that are affordable to vast sections of the population in India. Renault-Nissan has prior experience in turning out a low-cost Logan, priced at $6000, at its Romanian facility and its CEO, Carlos Ghosn, now wants to build a car that could sell for $3000 in the Indian market, hopefully by 2010. Tata Motors, the second largest passenger car manufacturer in India, is a frontrunner in this game as it has announced its intention to produce an even cheaper car, which is due for release in mid-2008 and will cost $2500.

Potentially huge market

Both manufacturers are convinced that there is huge potential in the low-cost car market at the bottom of India’s income pyramid. First and foremost, the number of cars per 1000 people is a lowly 8.5 in India and exemplifies the fact that car ownership in the country is still aspirational.


Although sales of small cars in particular are booming, accounting for two-thirds of the passenger car market in India, Renault-Nissan and Tata believe that a vast upside potential can be tapped into if they turn out even cheaper vehicles that can be purchased by more and more people in the country.

“If you want to be serious in India, you shouldn’t cross the $3000 figure,” says Mr Ghosn whose company already has a joint venture with domestic SUV major, Mahindra & Mahindra, to turn out the Logan for the Indian market. Although Mahindra engineers pared down the cost of the Logan to $5000, Renault-Nissan’s CEO is clearly looking at more than a stripped-down version of the Logan for his low-cost car project. This entails conceiving anew everything from the basic design to the factory and leveraging the proven Indian capability of frugality in engineering and management.

Discussions under way

To take forward the $3000 car project, Renault began discussions in July with Bajaj Auto Ltd, a leading motorcycle manufacturer, because of its high productivity and the fact that it has one of the highest operating margins in the industry. However, corporate vice-president, global communications at Nissan, Simon Sproule, says: “Currently, we are a long way from any decisions regarding production as it is still under study. We are not ready to indicate launch timing or production base for this car.” Bajaj Auto is developing the engine while adding value across the entire supply chain, right down to distribution, according to managing director Rajiv Bajaj.

Tata, however, is way ahead in its drive to make the cost of the Indian Volkswagen as low as $2500. For a sense of perspective, this is half the cost of India’s cheapest entry-level model of Suzuki’s Maruti-800 at $5093.

Not surprisingly, the latter is highly sceptical about whether such cost reduction is feasible in the Indian context. “Our experience in Japan has told us that it is difficult to make a car at that price… So, we would continue with our existing products that are ideal for the Indian market,” says Jagdish Khattar, managing director of Maruti Suzuki Ltd, the leading carmaker in India.

Cost pressures

Despite such doubts Tata is undeterred in its ambition to make its ‘people’s car’ a reality. Its $2500 vehicle entails cutting “costs on everything – seats, materials, components – the whole package”, to quote chairman Ratan Tata. He has indicated that this vehicle will be a four-door, five-seater car with a 500cc to 600cc rear engine and will be on the road as scheduled in mid-2008. Cutting costs entails slashing expenses on the engine. The company is also seeking volume-based prices from auto parts suppliers in the country to keep a lid on overall costs.

The Tata project, nevertheless, still faces cost pressures that may up the $2500 tag when the car is released for sale in India. “Since the car was announced three years back, the cost of inputs, especially commodities, has gone up substantially, and therefore it is a challenge to maintain the price at $2500. The actual price of the car will be revealed at the time of the launch,” says Ravi Kanth, managing director of Tata Motors. The capacity of the production facility, based in the state of West Bengal, is about 250,000 units a year and will be achieved in phases, he adds.

Renault-Nissan and Tata evidently believe that costs can be kept down when volume growth kicks in, and that the market for their projects will basically take sales away from the two-wheeler industry, especially motorcycles, as the price gap between the costliest bikes narrows with that of their low-cost vehicle offerings.

Currently, there are about 60 million motorcycles on the road in India. Low-cost car manufacturers intend to wean away some these owners to upgrade to cars. Even if, say, 10% to 15% of them migrate to small cars, this is a market that did not exist before.

Anticipated market share

With indications that South Korea’s Hyundai is also keen to join the low-cost vehicle production bandwagon, India is well set to emerge as the world’s largest producer of cheap vehicles, including multi-utility vehicles, according to PricewaterhouseCoopers. The consultancy also forecasts that India will account for 34% of global annual production of 3.4 million low-cost vehicles by 2014, way ahead of China’s share of 11%.