Why Is Nobody Buying The World’s Cheapest Car?

“Are you sure you can make it here in 15 minutes?”, she asked.

“Watch me!” I proclaimed jumping into my Nano knowing fully well the journey from Malabar Hill to Lower Parel [Mumbai, India] at peak evening traffic could potentially take around 30 minutes for the average Joe. But I was no average Joe, I had in my possession the only device that could allow me to make such bold statements. I had The Tata Nano, the World’s Cheapest Car, or as I like to see it, the World’s Best City Car.

The cockpit

The cockpit

Its an odd conundrum, when behavioral economics conflicts with fundamental economics. To dumb it down, fundamental economics states, if a certain item [The Nano] by a certain company [Tata Motors] giving the same quantifiable results as a similar item by any other company, but priced cheaper, there would be no reason for a rational person not to buy the former item. Effectively, The Tata Motor’s Nano does fulfill the need for a good economical car with all required features as other cars of the same segment, then why should rational persons not purchase it? Here is where behavioral economics comes into play: The non quantifiable people’s perceptions and emotions cause even the most rational one to think again and eventually stray away from buying this item.

This is the story of how wrongly created perceptions in the minds of people, causes a breakthrough product to tank. First, a related opinion from the geniuses at Bloomberg Business Week.

Taken from: Business Week [http://www.businessweek.com/articles/2013-04-11/tatas-nano-the-worlds-cheapest-car-is-sputtering]

The old adage says a person can’t be too rich or too thin. Given Tata Motors’ (TTM) disappointing experience with the Nano, the $2,000 compact it introduced with great fanfare in 2008, it’s clear a car can be too cheap—at least for consumers who don’t want to be associated with a low-end ride. Ratan Tata, then chairman of parent Tata Group, made headlines a decade ago when he ordered up a “people’s car” that would appeal to Indian families who previously could only afford to travel by scooter. But Tata Motors has sold just 229,157 Nanos since deliveries began in 2009, and sales in March were off by 86 percent from a year earlier.

Tata Managing Director Karl Slym insists the company won’t kill the tiny, egg-shaped car. It will soon add improvements to breathe new life into the model, a move that would ultimately bring its price closer to those of rivals. The Nano’s marketing “didn’t jell with anybody,” Slym says. Scooter drivers weren’t attracted because others “don’t think I’m buying a car, they think I’m buying something between a two-wheeler and a car. Anyone who had a car didn’t want to buy it, because it was supposed to be a two-wheeler replacement.”

Slym points to the Pixel, a Nano-based concept vehicle Tata first showed in 2011, as an example of how the brand could evolve. The two-door hatchback takes the skeleton of the Nano and adds innovative doors that rotate up rather than open out, automatic transmission, and a diesel engine. Yet Haritha Saranga, an associate professor at the Indian Institute of Management in Bangalore, says in an e-mail that “just creating variations is not going to help increase sales. It is important to change the current image of Nano as a cheap car.”

With Nano sales in free fall, Tata’s passenger vehicle sales dropped 15 percent in the year ended March 31, even as industrywide sales rose 2.2 percent, according to the Society for Indian Automobile Manufacturers. For the year through March, Nano sales were off by 28 percent, to 53,848 cars.

When Ratan Tata conceived the people’s car in 2003, after seeing an entire family precariously riding a scooter, he established a target price of 100,000 rupees, a bit more than $2,000 at the time. The price has crept up to about 142,000 rupees ($2,600) for a stripped-down model and as much as 200,000 rupees for a version with air conditioning and power windows. These days, Nano buyers are more likely to be wealthy Indians rather than families upgrading from a two-wheeler. “People are buying the Nano for their mothers, fathers, children, second cars,” says Slym, a General Motors (GM) veteran who took charge at Tata in October. “That’s actually a good thing, because it allows us to do a lot more with the car than just make it at a low price.”

Tata will have to change the exterior and interior of the Nano and add features such as power steering to compete with cars from Maruti and Hyundai Motor, says Umesh Karne, an analyst at Brics Securities in Mumbai. That would require raising the sticker to about 250,000 rupees, says Karne, about the level of rival hatchbacks. Instead of selling solely on price, he says, the Nano must be “more aspirational.” Yet the automaker is still playing to financial concerns: In a bid to woo consumers unwilling to take out bank loans, Tata in March started accepting credit cards for Nano payments.

The bottom line: Tata Motors’ über-cheap Nano, now about $2,600, hasn’t caught on. So Tata may add features that would raise its price and profile.

Perceptions play a large role in causing a product like this which is looked upon as a “Engineering Masterpiece, Marketing Failure“. Personally I’ve had the car for trial for a month and have simply loved it. It makes the most economic sense to use the car, yes no frills, but very good as a city car for short distances. With a mileage of close to 25 kilometers per liter, excellent air conditioner, very small turning radius, no parking problems, zipping through small gaps in large trafficjams and surprisingly large seating for 5 passengers; it should have been an easy sell.

Why does it seem that not experienced marketers, but economists were hired to promote this? How can you expect this to become a cash cow by telling the world that its a cheap product? Who wants to be seen driving around in the cheapest car possible? But yes, many a person wants to be seen driving around the coolest urban city car in the world! And yes showing that Company A’s product is cheaper than that of Company B might work for FMCG, food products and other industries; but not for a luxurious segment like cars, which, let’s face it, is a mark of showing one’s wealth and income. I can be cheap and getaway with buying the least expensive microwave, socks, aerated drink, heck even fake watches; but am I going to show that I am ‘not so financially well off’ to the world by buying the cheapest car? That’s a rhetoric question, by the way. 

Alas. Marketing has undone the genius engineers at Tata Motors and I hope there is a shift in perceptions in coming years.