Tata's Nano: A Small Car with Large Consumer Surplus?

Ref. No.: ME0012

Tata’s Nano:
A Small Car with Large Consumer Surplus?
“Since, promise is a promise the standard dealer version will cost Rs 1 lakh,”1
– Ratan Tata, Chairman, Tata Sons
“We designed the Nano to offer a new form of transport to the people of India and maybe later, to the
rest of the world.”2
– Ratan Tata, Chairman, Tata Sons
“…if economists are to play their part in shaping the canons of economic policy fit for a new age, they
will have to build on the foundations of consumer’s surplus.”3
– J.R. Hicks, Nobel Laureate British Economist

Tata Motors, set up in 1945 to manufacture locomotives, is India’s largest automobile company.
With over 4 million of its vehicles plying in India, it not only stands out as the market leader in each
segment of commercial vehicles but also takes rank among the top three passenger vehicle producers
of the country. India’s first fully indigenous passenger car Indica came from its stable in 1998.
Though derided as the truck man’s idea of what is a car, Indica came up as the largest selling car in
India in segment B compact cars within 2 years of the launch. Tata Motors also earned kudos for
developing India’s first indigenous mini-truck Ace in 2005. It spread its operations in the UK, South
Korea, Thailand and Spain through subsidiaries and associate companies. Its classic steadfast alliance
with Italy’s Fiat and heroic acquisition of two iconic British brands Jaguar and Land Rover have
served as templates for emulation. It is the fourth largest truck manufacturer and the second largest
bus manufacturer in the world.4 Tata trucks, buses and cars find good foreign markets in countries
1
“Tata unveils Rs-1 lakh People’s Car ‘Nano’”, http://ibnlive.in.com/news/tata-unveils-rs1-lakh-peoples-car-nano/56046-7.html, January
10th 2008
2
Njoroge John,“The Nano – the World’s Cheapest Car”,http://www.independent.co.ug/index.php/news/todays-news/90-todays-news/
905-the-nano-the-worlds-cheapest-car, May 7th 2009
3
Currie John Martin, et al., “The Concept of Economic Surplus and Its Use in Economic Analysis”, http://www.jstor.org/pss/2230317
4
“Tata Motors: Profile”, http://www.tatamotors.com/our_world/profile.php

This case study was written by Akshaya Kumar Jena IBSCDC. It is intended to be used as the basis for class discussion rather than to
illustrate either effective or ineffective handling of a management situation. The case was compiled from published sources.

© 2009, IBSCDC.
No part of this publication may be copied, stored, transmitted, reproduced or distributed in any form or medium whatsoever
without the permission of the copyright owner.

Background Reading: Chapter 5, “Demand and Consumer Behaviour”,

Economics (Paul A. Samuelson and William D. Nordhaus)

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 Tata's Nano: A Small Car with Large Consumer Surplus?

across Europe, Africa, Middle East, South Asia, South East Asia and South America as well. However,
what has become the buzz and nudged the global auto industry to take a big look of Tata Motors is its
small car Nano, lovingly nicknamed ‘The People’s Car’, thanks to its endearingly accessible price of
INR 100,000. People who were previously been unable to afford a car have now the exciting prospect
of driving one. First unveiled at the ninth Auto Expo in New Delhi on January 10th 2008, Tata’s Nano
is perhaps the world’s most awaited car since the Model-T of Ford.

Nano Mania
As Tata’s Nano was launched in Mumbai on March 23rd 2009 marking a finale to an endeavour
that started 6 years ago, Tata Nano website received around 30 million hits during the period ending
April 25th 2009 (the date of the closure of the booking), implying almost 1 million hits a day. The day
of its commercial launch has generated among thousands of families a new hope of ushering in a
four-wheeled transportation in their driveways. Nano has come to represent a pleasant break from
the past. It has allowed people, who could hitherto afford up to a motorcycle, to dare to dream of
buying a car.
In India, millions often convey on motorbikes and scooters their entire families, perched precariously,
often with luggage. This common observation – inducing heartfelt sensibility and pragmatic business
sense that there is a crying need for a people’s car – prompted Ratan Tata to take initiative in
manufacturing one. When others had nodded ‘No’ to signal its impossibility, Ratan Tata came to
conjure up ‘Nano’ to make the mass-aspired small car a smashing hit. Tata was proved right when
people went crazy in their quest for the conquest of Nano to satisfy their want for a convenient, safe
and all-weather affordable personal family transport. So much was the mania for Nano that for the
first time in its history, Tata Motors had to gladly charge an application fee (INR 300). The number
of bookings registered during the prescribed period of 17 days from April 9th 2009 to April 25th 2009
more than doubled the initial production capacity. 2.03 lakh bookings for Nano, which fetched Tata
Motors nearly INR 25,000 million5 , have necessitated the selection of the first 1 lakh owners through
a lottery. Among the three variants of the car (Annexure I), the base version accounted for 20% of
the bookings, the mid-level CX variant 30% and the top-end LX variant the remaining 50%. The
delivery of Nano is expected to commence in July 2009.
Tata Nano gives a warranty of 18 months or 24,000 km whichever is earlier. It provides the usual
three rounds of free service based upon distance and time whichever is earlier. The first round of
free service is for 1,000 km or 1 month, the second for 5,000 km or 6 months and the third for 10,000
km or 1 year. Subsequent rounds of service are paid ones and are recommended to be done on every
10,000 km covered.
The three variants of Nano come with various colour options. While the low-end Nano base is
available in three colours such as Bright red, Ivory white, Summer blue, the high-end Nano LX is
also available in three colours but different from the above such as Champagne gold, Lunar silver,
Sunshine yellow. The medium version Nano CX is available in five colours, which include all the

5
“Nano Gets over 2 Lakh Bookings”,http://www.thehindubusinessline.com/2009/05/05/stories/2009050551820100.htm

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 Tata's Nano: A Small Car with Large Consumer Surplus?

above mentioned colours except Sunshine yellow. Nano is the cheapest car, only in terms of cost and
price but not in terms of quality and consumer satisfaction. Its technical specifications (Annexure II)
are no way inferior. Its emission norms are Euro-IV, Bharat Stage-III compliant and its safety norms
have tested frontal crash. With a turning radius of only 4 metres, Nano can cutely execute a 360-
degree turn even in its own tiny shadow.
Nano has a luggage space of 80 l provided behind the rear seat. The rear seat of Nano being a
100% bench seat, it lends itself to folding to create an additional luggage space of 420 l.6 With its
body made of sheet metal and engine innovatively mounted in the rear, Nano offers not only fuel
economy but also proportionately more interior space (Exhibit I).

Exhibit I
Nano – A Small Yet Spacious Car

Source:http://tatanano.inservices.tatamotors.com/tatamotors/index.php?option=com_content&task=gallery&id=
174&Itemid=301

As compared to Maruti 800, it is 8% smaller on outside but 21% larger inside. Even though it is
the most affordable car of the world (Exhibit II), Nano has presented features some of which are not
available in Suzuki’s Maruti 800 and Alto or even Hyundai’s Santro (Exhibit III).

6
“Nano Gives You a Top-Gear Package”, http://economictimes.indiatimes.com/articleshow/4307684.cms, March 24th 2009

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 Tata's Nano: A Small Car with Large Consumer Surplus?

Exhibit II
Price Comparison of Nano with Its Nearest Rivals
Standard Version of The Car Starting ex-Show Room Price ( ex-Mumbai) (in INR)
Tata Nano 1,34,000
Maruti 800 1,99,000
Maruti Alto 2,40,000
Hyundai Santro 2,67,508
Compiled by the author

Exhibit III
Comparison of Nano against Maruti 800, Alto and Santro
Nano Maruti 800 Alto Santro

Base Model Nano M800 Std Alto Santro Non-AC

Plus Air Conditioner Nano CX/LX M800 AC Alto LX/LXi Santro GL/GLS

Plus Heater Nano CX/LX Feature Not Available Alto LX/LXi Santro GL/GLS

Plus Tinted Glasses Nano CX/LX M800 AC Alto LX/LXi Santro GL/GLS

Fully Loaded Nano LX M800 AC Alto LXi Santro GLS

Plus Front Power Nano LX Feature Not Feature Not Santro GLS
Windows Available Available

Plus Body Coloured Nano LX Feature Not Available Feature Not Santro
Bumper, Door Handle Available GLS (Only Body
& ORVM Coloured Bumper)

Plus Central Locking Nano LX Feature Not Available Feature Not Santro GLS
Available

Plus Front & Rear Nano LX Feature Not Available Feature Not Feature
Fog Lamp Available Not Available

Source: “Indian Automobiles”, http://www.surfindia.com/automobile/tata-nano.html

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 Tata's Nano: A Small Car with Large Consumer Surplus?

Tata Motors is poised to revolutionise the face of automotive industry. Not only would many two-
wheeler users switch to four wheels, but also the companies that are planning to launch a budget
family car have to relook and recast their cost-pricing structure. Consumer surplus is a deciding
factor in purchasing a product. What the consumers would be willing to pay over and above what
they are actually asked to pay marks this surplus. The masses have been mesmerised by the low
offer price of Nano, which has incredibly not gone low on style quotient thanks to Tata’s highly
innovative cost-cutting approach. One windshield wiper, a single piece shiny hard plastic dashboard
and 12-inch steel rims for tyres are some of these quickly noticeable cost-cutting measures. “Nano
is frugally equipped but brilliantly engineered.”7 This is reflected in Tata Motors’ filing of several
patents relating to the design of Nano. Its power train design alone has 34 patents.8 Incidentally,
Nano also received a long drawn free publicity because of the political controversies surrounding the
land acquisition methods at West Bengal’s Singur from which the project was finally shifted to
Gujarat’s Sanand.
While many go gaga over Nano, eulogising its potentiality to generate a lot of consumer surplus
and well-being for Indians, there is no dearth of cynics who conjure up a scary scene of traffic
congestion and environmental hazards that the little Nano is greatly capable of perpetrating by
promoting mass private transport. Apologists for Nano, however, point to greater per capita harm
coming from two wheelers and auto rickshaws that Nano is all set to supplant. Moreover, the bare
bone features of Nano may drive away the potential consumers into the market for better featured
second-hand cars. Whether Nano will be a means for pollution or solution only the future will tell.
And there hangs the poser whether India’s societal consumer surplus will be raised or reduced.

7
Darukhanawala Adil Jal, “Nano Against Established Indian Brat Pack”, http://www.zigwheels.com/SpecialFeatures/Nano-against-
established-Indian-brat-pack/Nano11_20090323-2-3
8
“Nano Technical Specifications”, http://www.mytatanano.co.in/nano-technical-specifications.html

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 Tata's Nano: A Small Car with Large Consumer Surplus?

Annexure I
Variants and Features of Tata Nano
Features/Variants Nano Base Nano CX Nano LX
AC with Heater - Yes Yes
Front Power Windows - - Yes
Cup Holders in Front - - Yes
Console
IRVM Plain Plain Antiglare
Gear Shift Console Basic Basic High End Console with
Provision for Mobile
Charger/ Cigarette lighter
Magazine and coin - - Moulded Door Trim
Holder on all doors
Map pocket Integral Fabric pocket Fabric pocket Separate plastic trim
with Driver &
Co-driver Seat
Front Seat Headrests Integrated Integrated Integrated
Rear Seat Headrests - Integrated Integrated
(With Nap Rests) (With Nap Rests)
Sunvisor on Driver & Yes Yes Yes
Passenger side
Driver Seat with Slider Yes Yes (With Recliner) Yes (With Recliner)
Passenger side Seat - Yes (With Recliner) Yes (With Recliner)
with Slider
Front assist grips Yes Yes Yes
Rear assist grips Yes Yes Yes
Head lamp levelling Integral feature Integral feature Integral feature through
through innovative through innovative innovative suspension
suspension design suspension design design
Low Fuel Warning Lamp Yes Yes Yes
Rear Seat Folding Yes Yes Yes
Intrusion beam Integral feature Integral feature Integral feature through
through innovative through innovative innovative door system
door system design door system design design
Radial Tubeless tyres Yes Yes Yes

Source: “Indian Automobiles”, http://www.surfindia.com/automobile/tata-nano.html

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 Tata's Nano: A Small Car with Large Consumer Surplus?

Annexure II
Technical Specifications of Tata Nano Car

Length 3,099 m
Width 1,495 mm
Height 1,652 mm
Engine 2 cylinder
Capacity 624 cc
Power 35 PS
Fuel Injection Multi Point Fuel Injection (MPFI)
Fuel Type Petrol, diesel versions
Body Type Sheet Metal
Seating Capacity 4 (Four)
Mileage 20–22 Kmpl (City drive) 26 Kmpl (Highways)
Top Speed 105 Km
Emission Norms Euro-IV, Bharat Stage-III compliant
Safety Norms Frontal Crash Tested
Versions One Standard and Two Deluxe
Compression ratio 9.7:1
Power to weight ratio 0.58
Acceleration 0–60 kmph: 8 secs
Transmission Synchromesh on all forward gears, sliding mesh on reverse
gear with overdrive on 4th gear
Gearbox 4 forward speeds, 1 reverse, all forward gears synchronised
Suspension Front Independent mcpherson strut, shock absorber
Suspension Rear Semi trailing arm, coil spring with gas filled shock absorber
Brake Type Dual Circuit, Vertical Split operated by tandem master cylinder
Front Brake 180 mm drum
Rear Brake 180 mm drum
Tyre Type Radial & Tubeless

Contd...

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 Tata's Nano: A Small Car with Large Consumer Surplus?

Front Tyre Size 135/70 R12

Rear Tyre size 155/65 R12
Min. Turning circle radius 4m
Ground Clearance 180 mm
Fuel Tank Capacity 15 L
Battery Position Semi sealed under the driver’s seat

Source: “Indian Automobiles”, http://www.surfindia.com/automobile/tata-nano.html

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