A $2,500 Car

Can an auto company, by improving processes through a lean strategy, manufacture a car that can be sold profitably for $2,500?

            In the United States, the short answer is no. (More on that in a moment.) But in India, Tata Motors – India’s largest commercial vehicle maker – is attempting to do exactly that.

            It won’t be easy. Tata’s cheapest Indian vehicle currently is a small truck that sells for $5,100, so the new plan means cutting that price in half.

            An intriguing article in the April 16 issue of Forbes describes how Tata has reinvented itself over the past seven years since the Indian government began allowing foreign competitors to sell in the country. The change has been dramatic; in 2000 Tata lost $110 million, but in the quarter ending December 2006, the company earned $116 million on revenue of $1.55 billion.

            Lean has clearly been a key factor. The article, written by Robyn Meredith, notes:

 

            Workers at the Tata Motors factory have been trained in Japanese manufacturing techniques that call for continuous improvement. A worker building Safaris noticed that each day on average, one front grille was ruined when a worked leaned over to work on the engine and accidentally scratched the grille with his belt buckle. Cost: about 2,500 rupees – $57 – a day, or $17,000 a year. Tata designed a simple protective cover for the grilles, plus a slip-on fabric cover for belts and watches that is now used to cut down on expensive waste at each of Tata Motors’ factories. Cost: about 25 cents per vehicle.

 

            The article also notes that it now takes between 12 and 15 minutes to change a die on the passenger car assembly line at Tata, down from two hours in 2000. And the article quotes author and lean guru Jeffrey Liker as saying he is very impressed with Tata.

            However, for me the most interesting point is why Tata has decided to build a $2,500 car, which is scheduled to go on sale next year.

            The decision resulted from Tata executives doing something the article says they had never done before: they talked to customers.

            They did so because they were curious whether there might be a market for a car designed to compete with the three-wheeled motorized rickshaws that are widely used in India. Also, they had been surprised when the $5,100 truck, first offered for sale in May 2005, became a gigantic hit, selling 100,000 units in 20 months.

(The Indian market for motor vehicles is much less mature than the U.S. market, with far fewer cars per capita.)

By speaking to customers, the Tata executives identified a huge pent-up demand, not only because a four-wheeled car would be a better vehicle, but because it would represent a big leap in status for the rickshaw drivers, who are looked down on in Indian society.

            Here we have a company embracing two fundamental lean concepts: seeking to understand what value is from the customer’s perspective, and recognizing that the market, not the manufacturer, sets the price.

            The new, still unnamed car is planned primarily for India, though it might also be sold in other poor markets in Africa, Southeast Asia and maybe eastern Europe and Latin America.

            It probably won’t be sold in the U.S. Forbes quotes consultants at Roland Berger as estimating that it would cost as much as $4,000 on top of Tata’s $2,500 price to engineer the car to meet U.S. safety and emission regulations, transport, pay tariffs, market it, pay lawyers and other warranties.

            And while $6,500 would still be lower than even the cheapest new car currently sold in the U.S. – the $10,560 Korean-made Chevrolet Aveo – it would then be competing with vehicles from America’s vast used-car market, where $6,500 can buy some pretty nice wheels.

            What will the $2,500 get an Indian buyer? While there are no pictures yet, the article makes it sound like this will be a small, bare-bones vehicle. (It brings to mind the Datsun 710 I drove more than 30 years ago.) I suspect it will be a car that not many Americans would want to drive. But for the Indian market, it may be the right product at the right time – and a lean approach is clearly helping make it possible.