Porter's 5 Forces Model of the NANO car The auto manufacturing industry is considered to be highly capital intensive and

labour intensive. The major costs for producing and selling automobiles includes labour, material and advertising. There are other developments in the automobile industry that you must consider when analyzing an automobile company. Porter's 5 Forces Analysis 1. Threat of New Entrants: Indian compact car market seems to be getting hotter, with not only better car models, but also the intensity of the competition in the segment. The market which is growing at 20-25% annually is attracting international player like Volkswagen, Toyota, Nissan and Ford, all of whom are expected to come up with a number of new launches in this segment of the Indian car market. The new players plan to differentiate their products through competitive pricing and additional features like added space, fuel efficiency and better performance. It seems like competition is set to go to a whole new level for existing players in the market. The way in which Nano is produce such a methods will lead to even more new manufacturing innovations to offer affordable cars to consumers. New entrants in this category need to address various challenges such as inflation, low-price barriers, substantial changes in raw material prices, and government regulations, for example vehicles above 650cc pay excise taxes in India, but with 624cc engine, the Nano is exempt. Achieving a US$2,500 will be difficult for any carmaker, but going forward more automakers will develop low cost cars. It takes 4 to 5

years and a huge investment for a car maker to design and build a low cost car, which itself has low margins. So, there is threat of new entrant to Nano in the long run. 2. Rivalry Among existing Firms: The small car market in India is very competitive with players like Maruti Suzuki, Tata Motors, Huyndai etc. which was pretty much dominated by Maruti. But with launch of Nano the 1 lakh car the whole momentum of the market has shifted. Maruti is planning to first slash the price of its best-selling model 800cc Alto which is priced at Rs2.3 lakh. And the price change would be effective only from 2010 once Tata Motors begins rolling out Nano from its Sanand plant in Gujarat in big number. Earlier, the news was that Maruti may slash the price of its 800 model to compete with Nano. The Nano is alleged to have severely affected the used car market in India, as many Indians opt to wait for the Nano's release rather than buying used cars, such as the Maruti 800, which is considered as the Nano's nearest competitor. Sales of new Maruti 800s have dropped by 20%, and used ones by 30% following the unveiling of the Nano. As one automotive journalist summarises; People are asking themselvesand uswhy they should pay, say, 250,000 Rupees for a Maruti Alto, when they can wait and get a brand new Nano for less in a few months time, a car that is actually bigger The launch of Tata Nano is expected to diminish the sales of the used cars under Rs. 1 Lakh - 2 Lakhs range and also the sales of the other entry level cars like Maruti 800, Alto, Chevrolet Spark etc. Some companies such as Bajaj is working on a much less priced car and

companies such as Maruti will think of reducing the price of their small cars. A source in the automobile industry with direct knowledge of the plans said Alto will have a stripped down version (i.e. basic) to compete with Tata Motors small car Nano. It shows there is threat of rivalry for Nano car. 3. Threat of substitutes: The threat of substitute for Nano car is that of electric car, the new entrant in the small car sector is the Morbi-based world famous clockmaker Ajanta group. The company is planning to manufacture an electric car at its unit at Kutch district and market it at a price lower than Rs 1lakh Nano. The company is already manufacturing electric scooters and bikes under Oreva' brand. Production of electric car is not difficult for them as the technology is almost similar and 70 per cent of its parts can be produced in-house, giving them an edge over the vehicle's pricing. The Ajanta group is serious in its attempt to keep the basic price of the proposed car as low as Rs 85,000. At present, in the electric car segment only Reva car is available in India. Another player in the small car segment, the Rajkot-based Field Marshal group, is in negotiations with Australian company Farnow Technologies for a joint venture for a low cost electric car. Tata itself is believed to be making an electric version of the Nano, called the E-Nano which might well turn out to be the "world's cheapest electric car" which is more eco-friendly. It's supposed to be as cheap as the conventional gasoline version. Economic Times reported that the

"electric Nano" would still make good sense for economic, clean and green personal mobility in countries around the world. Since two-wheeler owners are used to getting 60-70 km per litre, as compared to the Nano's 20+, the cost of ownership of a Nano is likely to be far higher than that of a two-wheeler. One time investment of buying car can be done by the lower income group people but it will be difficult for them to overcome maintenance cost and cost of running i.e. fuel these people would like to remain in bike segment only. So there is a high threat of substitutes for Nano as electric cars trying to keep prices lower, less cost of running as a product differentiation. 4. Threat of bargaining power of buyer: Tata Motors has to work out their strategies to meet the challenges of sales and after-sales. The first is to meet the high demand that is likely to get created. As there would be many first-time customers, the sales force will have to advise them on issues like running and maintenance of the car. Further, the Indian consumer is very discerning and the product and after-sales service quality will need to live up to the consumers' expectations for the Nano to be successful. As the Nano car is made for lower income group people we can say there is no power in the hands of buyer at present as only Nano is available in Indian market but soon there will be cheaper car in the Indian market and buyers will have power to switch to other cars. 5. Threat of bargaining power of supplier:

For Nano about 60 suppliers collectively spent about Rs. 500 crores ($112.7 million) to locate on the Singur complex. Suppliers have said that they have the capacity in existing plants to be part of the Tata Nano launch, if the Tata plant moves to Pantnagar, or even Pune. Other suppliers are willing to stay, put and use their sheds as warehouses to store the components. The company said most of its vendor relationships are covered by a bill marketing system, where Tatas bank makes payments to the vendors, and Tata Motors pays the bank. Tata Motors had set up a so-called suppliers council to address several issues, including delayed payments that were causing friction between the auto maker and its parts suppliers. Rather than a threat to Nano, suppliers were supporting Tata Motors for launch of Nano and there are overall thousands of suppliers to TATA Motors.

Is Nano a Rising Threat ? These methods will lead to even more new manufacturing innovations to offer affordable cars to consumers. Tata Motors is expecting to build around 250,000 units annually, excluding the markets of Africa, Southeast Asia, Latin America and Europe. In the next couple of years, more than a million of Nanos are expected to be on the road. In addition, Nissan and Renault are planning to form alliance with Bajaj Auto to develop a car with a price tag of around US$3000 by 2011. Volkswagen is also considering in developing a low cost car, under a separate brand name and China's Guangzhou Motors had announced its collaboration with an Indian-based company, Global Automobiles, to roll out a low cost car. As this continues, the growing small segment car industry is set to expand exponentially. According to United Nations, at the start of 2008 about 12 in 1,000 Indians have a car. Due to the low-cost innovations like Nano, the ratio is expected to increase rapidly in the coming years. If the same trend happens in China and its neighboring countries, the situation might become worse. Today, light duty vehicles account for more than 10 percent of global carbon emissions. As Asia, where Tata Motors are aggressively promoting its Nano, accounts more than 60 percent of the world's population, the contribution of carbon emissions from light duty vehicles is set to increase swiftly. Due to its price advantage Nano can eat away the two-wheeler market. The twowheeler takes much lesser space on the road, so an increase in cars creates more congestion. As congestion increases, so does pollution, possibly up to five times, in a continent like Asia. Also, a car leaves twice the harmful particulate matter compared to a two-wheeler and four times more compared to a bus or a truck. With the rising population of cars, the demand for gasoline is expected to increase on a large scale. So, as millions of affordable cars hit Asian roads, the prices of gasoline will rise to new highs. Ironically, gas prices could increase to a point where people who are now affordable to buy cars like the Nano might not be able to afford to fuel it. What Should Car Makers Do? With little competition today at the Nano's price point and as yet unmatched intelligent manufacturing techniques, Tata Motors is in a position to recover its capital investment, but the implications presented above show a need for additional development. New entrants in this category need to address various challenges such as inflation, low-price barriers, substantial changes in raw

material prices, and government regulations, for example vehicles above 650cc pay excise taxes in India, but with 624cc engine, the Nano is exempt. Achieving a US$2,500 will be difficult for any carmaker, but going forward more automakers will develop low cost cars. Eventually the zeal to buy one is expected to drop as gas prices increase and people will compromise on cost for greater fuel efficiency. It takes 4 to 5 years and a huge investment for a car maker to design and build a low cost car, which itself has low margins. Such time and money would be well spent developing alternatives to small, internal combustion engines on low cost cars to address the growing issues of emissions and rising gasoline prices.