Posted by: qmaxim | December 9, 2010

Can Nano replace motor bikes?

Rs 1 lakh (US$ 2500) people’s car the Nano has been in the news in the last few months  but for the wrong reasons.  For one sales have gone on a free fall on month to month basis as well as compared same time last year. Compared to this all the other car companies continue to report stellar growth with most companies reporting  double  digit growth. Maruti Suzuki, the volume leader’s sales crossed 1 lakh units / month in the domestic market second month in a row.  Other models from Tata motors  (who  are  the producers of Nano) continued to sell well.
Considering this, sharp fall in sales is perplexing. Some of the  reasons seem to be  obvious. Few  cars (6-7 reported in the press) caught fire, few  brand new ones burned down  completely. Another probable reason is that distribution network is not yet completely ramped up. Though new factory in Sanand in Gujarat state is now ready to deliver to full capacity, the part manufacturers are not. Part suppliers have been unable (probably  unwilling) to ramp up production fast enough. Customer satisfaction survey done by J D Power has shown Nano being fairly low on the satisfaction index. Though car is the world’s cheapest still customers  expect the car to be of very high quality.

Tata Motors (TM ) at first tried to  brush aside initial reports of smoke and fire as freak occurrences assuring public that there is nothing particularly wrong with the  design so on. Cars catching fire is not an unknown  occurrence in the industry. For instance, Lamborghini -the car of the rich and famous (which costs upwards of US$ 150 k)  had similar problem with several cars burning down completely. Now the company is scrambling to save the situation – it is recalling the cars already on the road for inspection  and apparently  making some design changes. It is hoping that people will feel reassured about the safety of the car. It is acting on war footing on the other aspects mentioned above as well. To begin with,  it has increased  performance warranty to four years even for existing customers.

Assuming that these problems are sorted out, sales have to  go up sharply to make this venture profitable for TM. To enable this  some inspired thinking is called for. TM  have been trying out various strategies to generate excitement about the product particularly among  population who are not traditional car buyers. One  idea  which is seriously being considered is – Nano as an  upgrade option for two wheeler owners. During the launch ceremony of Nano,  Mr Ratan Tata had said that  seeing family of four travelling in a two wheeler  was the inspiration for him for the development of Nano. But, is it a viable proposition?

Some background first. Indian two wheeler industry is the second largest in the world after  that of China. Even if  5% of two wheeler owners are targeted it constitutes a huge market. This year they are likely to churn out over nine and half  million two wheelers, and like the car industry has been growing at healthy pace over the years.  The industry produces motorbikes, scooters, mopeds and auto rickshaws. Unlike in the advanced countries where bikes are mainly used for  pleasure, in India most of bikes sold are so called commuter bikes which are used for daily travel. The industry has a come a long way. At the time of opening up of Indian economy during the 90s, 4 -5 models of 2 wheelers were available and there used to be waiting list of  year or two for many of the models. Most of the two wheelers were  shoddy, gave lousy performance, ancient  looking, unreliable, and gave  poor mileage in the range of  15-22 km/litre. Last 10-15 years has seen  great transformation in the industry. Industry  has 7-8 major producers  and is  producing 50-100 variants of 2 wheelers now. Most of output is slick, is highly reliable, commuter bikes give excellent fuel economy (50-120 km/l). Sales and service centres  cover   most of the urban and semi urban areas of India.

Largest  among the lot is Hero Honda Motors which is the affiliate of  Honda Motor company  having market share close to 50%. Though it is the largest 2 wheeler manufacturer in the world,  it is still reliant on Honda for technology and R &D. Honda Motor Co. also has a wholly owned subsidiary which produces mainly scooters but also has started producing bikes in direct competition with Hero Honda. Both the companies are mulling augmenting capacity again.  

Second largest producer is Bajaj Auto. Bajaj Auto is a strong independent player and has improved quality and volumes dramatically in the last few years. From being producer of   scooters, it has morphed into producer of  only motorbikes. It has successfully  productionised its own patented innovations related to engine technology. It has partnership with entities like Kawasaki for technology and marketing in some regions. Third large player is TVS motors which started producing bikes in collaboration with Suzuki but is self reliant now for technology development. It has gone through several ups and downs and has improved greatly in the last few years. Both  the players  export large numbers to developing countries, whereas Hero Honda does not export much. TVS is in the process of setting up a manufacturing plant in Indonesia which is the 3rd largest two wheeler market in the world. Indonesian market is dominated by Japanese companies. There are other niche players like Yamaha, Suzuki,  Royal Enfield, Harley Davidson.

Now to answer the primary question- is Nano likely to become upgrade option  for significant number of  two wheeler owners? Most buyers of bikes are youngsters in their twenties. In  the  absence of reliable public transportation in most places, they offer reliable and economical mode of transportation. Well spread out sales and service setup of the leaders and easy availability of loans are positives as well. As I said  most of the two wheelers deliver 50-120 km/ litre whereas Nano gives only 23 km/ litre. However, two wheelers  are relatively unsafe as a mode of transportation for a family as compared to Nano  which is safer  and probably as reliable. The family does not get exposed to elements while travelling as well. Bikes cost about INR 40,000 whereas cheapest Nano sells for INR 1.1 lakh.

Apparently, many buyers of the bikes don’t take loan and many  may not even  qualify for loans anyway. To coax some of   them to buy Nano some kind of easy loan facility seems to be the imperative. More spread out and  less intimidating low cost dealer network may also help.  However, even if they can afford  the instalments, significant difference in running costs is going to be the issue. If the fuel economy of Nano is improved significantly it might make a dent. What will be the tipping point is difficult to say as of now.

 Improving fuel economy will depend mainly on reducing weights by using  lighter materials and using newer technologies  like Hybrid gas electric motors. But the hybrid engines are pretty expensive as of now.However,  the two wheel player players  are not  going to keep still. In most of the commuter bikes only engine block is made of Aluminium rest is mostly  made of Steel or Plastic. There is plenty of scope for weight reduction, cost and technology is of course the hindrance. In view of the potentially  huge market for such bikes  in populous countries and continued  high price of Gasoline, weight reduction is one obvious  area all  big players are working on.  Low cost hybrid engine technology is another area they are said to be working on.

Will Nano succeed?  By TM’s track record in innovative thinking and risk taking ability perhaps they will. Well, only time will tell.

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