Carmaking in India
A different route
Dec 13th 2006 | KOLKATA
From The Economist print edition
While China's carmakers copy, India's are inventing
THE idea is not new. Making low-cost cars played a huge part in Europe's economic surge during the 1960s—and created classic designs such as the Mini to boot. Now a new generation of ultra-low-cost cars could have an equally dramatic impact in Asia. For years, industry experts believed that such vehicles would emerge first in China, which is already the third-largest car market and the source of low-cost-everything-else. Yet the focus has now shifted to India, a country with terrible roads and a tenth of the inward manufacturing investment.
Last week the government of West Bengal approved the construction of a new factory at Singur, near Kolkata (Calcutta). In less than 18 months, if everything runs to plan, the first examples of a new low-cost car will leave the production line. The firm behind the project, Tata Motors—part of the Tata group, which is fighting with CSN of Brazil over Corus, an Anglo-Dutch steelmaker—has been in the car business for less than a decade. But the Tata group is revered in India for its ability to overcome seemingly impossible hurdles and it has formidable financial resources. Expectations are so high that other Indian states are bidding for future factories and international carmakers are lining up to co-operate with the venture.
The first trials of the new car took place last month at a test track in Pune, near Mumbai. It is not a cut-down version of an existing car, but is an entirely new design. With a rear-mounted 30bhp engine, four seats and a choice of four- and five-door models, it is a “good-looking car which is comfortable to drive,” according to Ravi Kant, the boss of Tata Motors. Most ambitious of all is the price. The car is known as the “one lakh” car—one lakh is 100,000 rupees, equivalent to around $2,100 when the car was first conceived four years ago. Material costs have since increased, but Tata still hopes the price will be less than $3,000 before tax.
Such a price is roughly half that of the cheapest car today, the Romanian-built Renault Logan. Is it possible? Tata executives point to the Ace, a small lorry launched last year that costs around 1.1 lakh, or about $2,500, before tax. It is modern-looking if slightly rudimentary, and sales were limited to three states for months. But manufacturing capacity is now being increased more than eight-fold to meet demand. The Ace is not just popular, but profitable too: despite rising raw-materials costs and limited scale, it recouped its development costs within a year.
Tata's biggest local rival, Maruti, doubts that Tata's one-lakh car can possibly meet safety and emissions regulations. And that is indeed why the Ace is not exported to developed countries. Although it emits very little carbon dioxide thanks to its tiny engine, meeting other emissions standards and crash regulations would be much harder and would make the Ace much more expensive. Road deaths and poor air quality are both growing problems in India.
Even so, Tata Motors is pushing ahead with its one-lakh car and other firms may well follow. Bajaj, a company known for its two- and three-wheelers, has considered making a low-cost car based on a motorcycle engine. The Munjal family behind Hero Honda, a local motorcycle-maker, is also exploring the possibility of low-cost cars. And in Pakistan the Transmission Motor Company, based in Karachi, already sells a range of very basic four-wheelers for as little as $2,200, and has started exporting them to countries including Sudan, Qatar and Chile.
The contrast with China's carmakers is striking. Until very recently, many domestic Chinese cars were copies of the models made by big international producers. Some even combined the front end of one brand's design with the back of another, creating something like a pantomime horse. Such knock-offs were cheap to produce, but manufacturers are fast discovering the limits of this approach.
The lack of underlying engineering skills makes it hard to build reliable cars, and problems typically emerge within a few months. Now that China's carmakers have started to build their own cars from scratch, their difficulties have multiplied. That is why the oft-reported plans of firms such as Chery and Geely to export cars to America and Europe in 2007 have now been postponed for several years.
For the Indians, though, perhaps the biggest concern should be neither foreign competition, nor emissions, nor safety, but congestion. The country's poor-quality road network is slowly improving, but it is heavily over-used. With India's transport arteries already so badly clogged, a boom in sales of low-cost cars could bring about a seizure.