By Martin Hutchinson
India's Tata Motors Ltd. (TTM) last week unveiled its "one lakh' Tata Nano, an automobile that will sell for one lakh [100,000 rupees], or just over $2,500. That price undercuts Tata's Indian competition by about 30%, and is certain to add to the company's market share even as it causes that country's overall auto market to expand.
At the same time, Tata is the preferred bidder to take over the upscale Jaguar and Land Rover brands from struggling U.S. auto giant Ford Motor Co. (F).
Is Tata going mad? Or is there something really big going on here?
The principal factor that maintained Detroit's superiority into the 1950s – and that's protected it thereafter – is the United States' huge domestic auto market, where 16 million to 17 million vehicles are sold each year. No other country has a market anything close to that size. That volume enables Detroit to build cars that U.S. consumers want, while also overcoming the very high wage and benefit costs that are representative of unionized U.S. automobile plants.
In the 1950s and 1960s, when U.S. consumers wanted large cars, Detroit made cars you could more or less live in, with lots of chrome, huge fins and motors that were three or four times the displacements of their European counterparts. When Britain's William Morris tried to conquer the U.S. market after World War II, he had technology just as good as Detroit's, and labor costs that at that stage were much, much lower.
However, even adding in the bits of the Empire that Britain could browbeat into buying its automobiles, Morris was simply not able to build up enough volume to become a significant factor in the U.S. market. After 1950, Germany's Volkswagen (VLKAY) and then the Japanese manufacturers succeeded in doing so, but it took them decades.
That is now changing, and for two reasons. First, automobile manufacturing has become more flexible; with computer-aided design and manufacturing, you can become pretty cost competitive with a production run of about 250,000 vehicles a year, instead of the 1 million it used to take.
Second, other markets have grown in size enough to rival the United States in importance. The European Union gradually forged itself into a single market, which in terms of size and wealth is comparable to the United States. Japan has grown until it is about 30% as large as the U.S. market, making it large enough to compete. And, more recently, the emerging markets of China and India have become large enough to support world-scale domestic manufacturing. India is still on the small side, at about 2 million autos per year, but China – at 8 million vehicles and growing – is already half as large as the United States, and is continuing to advance in size.
This growth in market size is making a huge difference to automobile manufacturers in those countries.
Japanese and European manufacturers have been able to compete in world markets for decades, but they have wage costs close to those in the United States.
Korean manufactures have been able to compete through efficient manufacturing and lower costs, but the Korean domestic automobile market is on the small side, at around 1.2 million units annually.
Still, manufacturers from low-wage countries – Malaysia's Proton Holdings Berhad, for example – have never been able to compete effectively, because their domestic markets are just too small [Malaysia's is only 500,000 vehicles per annum]. However, India and China have huge labor cost advantages. Add that to the gains they're experiencing in domestic sales volume, and they have the wherewithal to support world-class manufacturing capabilities.
Not many people will drive the Tata Nano down I-95, the M4 or the A-5 autobahn in the near future. It has only a 623cc engine, about 15% the size of that of a midsize Buick and will initially meet only Indian environmental standards. However, it will do 50 miles per gallon, and is a huge safety improvement on the normal Indian means of family transportation – a motorbike with the wife behind and the children sitting on the handlebars.
Its price of $2,500 compares with close to $4,000 currently charged for the Maruti 800, its cheapest domestic competitor. In any case, as European and U.S. governments become more and more draconian in their enforcement of fuel economy standards, we may all have a Nano in our future.
High-end automobiles require lots of design, very tight engineering tolerances and often a great deal of manual labor in finishing etc. Before the Internet, that would have made them difficult to manufacture from a poor country like India, which is why luxury cars were typically German – even Japan only seriously entered the market with the Lexus in 1989. However, with modern communications and automated manufacturing, the difficulties in designing and manufacturing luxury automobiles have been greatly reduced. Today, if Tata wants some fancy Italian design, or a U.S. marketing campaign, they can easily subcontract the problem to specialist designers and marketers in Milan or New York.
China and India have populations several times those of the United States and European Union, an increasing proportion of whom are becoming wealthy enough to buy an automobile, yet their labor costs are and will remain a small fraction of those in the United States, Japan or Germany. At the same time, because of their size, India and China will retain important economies of scale in their domestic markets over other countries with similarly low-wage costs. That suggests that more and more of the world automobile industry will migrate to those two countries in the next 25 years. Investors in Indian and Chinese automobile manufacturers are likely to make a lot more money than buyers of Ford, General Motors Corp. (GM) or even Toyota Motor Corp. (TM).
Tata Motors has ADRs fully listed on the New York Stock Exchange (TTM), so its shares are easy to buy, and currently trade at an earnings multiple in the mid-teens. Its main rival Mahindra does not have ADRs so you'd have to buy its Global Depositary Receipts through London or Frankfurt. In China, the only automobile manufacturer with ADRs, although only on the Pink Sheets, is Brilliance China (BCAHY), which is currently loss-making.
That doesn't give you a lot of choice. However, never fear: the automobile business requires large amounts of capital, so in future years both Indian and Chinese manufacturers will doubtless come to New York seeking your money.
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