Who Makes the World’s Cheapest Car? Comparing Apples and Oranges
Last week, Tata Motors Ltd., India’s largest truck maker, unveiled what is being touted as the world’s cheapest car, the Nano, priced at 100,000 rupees, or $2,500. The Nano will cost only half as much as Suzuki’s Maruti 800, the cheapest car currently available in the Indian market. Ratan Tata, the company’s chairman, said he was inspired to develop the car when he saw a family on a scooter and then thought of building an automobile that was all-weather safe, fuel-efficient and affordable. Almost 500 engineers worked on the project over the past four years, he said. Tata plans to produce 250,000 Nano’s per year. With its eyes set on the global markets as well as its home market in India, Tata is also in talks with the Ford Motor Company to acquire Ford’s two luxury brands, Jaguar and Land Rover.
Within hours of the announcement, my inbox was filled with e-mails from around the world, friends and colleagues wondering what this meant for China. Most phrased their questions diplomatically, but one friend was particularly blunt and asked the question that was really on everyone’s mind: “Jack, if this is true, doesn’t it mean that India just ate China’s lunch by developing the world’s cheapest car?”
Of course, I had heard rumblings of what Tata was doing before this, and had also heard that Nissan was planning a $3,000 car, but now that Tata’s official announcement was out, I decided to try and understand better what was taking place. By the end of the day, after my colleagues at ASIMCO and I had completed our research, I concluded that rather than designing the Nano, Tata should have instead bought a set of prints for the Alto from Suzuki; removed the radio, air conditioning, passenger side mirror, and one windshield wiper; and contracted to have the car manufactured in China. By doing so, Tata would have ended up in about the same place as it did with the Nano, and saved 2,000 man years of engineering in the process. Here’s how we came to this startling conclusion.
We began by surveying the market to find the most economical car that we could buy in China. Our first thought was of Chery’s QQ, but with a dealer price of RMB 30,800, or $4,219, it was still a bit out of our price range. We then found that we could buy an Alto from Jiangnan Alto, based in Xiangtan in Hunan Province, for RMB 23,800, or $3,260. (For the history buffs out there, Xiangtan may sound familiar because it is the birthplace of none other than Chairman Mao.) Because the $3,260 is the customer price, we took 95% of that amount ($3,097) to adjust for the dealer profit and get a dealer price comparable to the $2,500 price tag for the Nano.
In 1988, Chang’an Machinery, an arm of a large industrial/military company belonging to the Chinese Central Government called Norinco, signed a deal with Suzuki Motor Corporation of Japan to develop and produce Suzuki’s Alto minicar in China. The Alto was first produced by Chang’an in Chongqing, but then in 1992, Norinco added manufacturing capability at three of its other locations, including Jiangnan Machinery in Hunan Province. The two other facilities ultimately quit producing the Alto, but Jiangnan continued on. To date, we estimate that Chang’an Auto and Jiangnan Alto have produced and sold over 600,000 Alto’s in China.
On the surface, Jiangnan Alto’s price, while the lowest in China, appears to be 20% higher than the Nano. But, comparing the Nano to a Jiangnan Alto is like comparing an apple to an orange. These are very different cars as shown by the chart below which Sophy, my assistant, prepared with the help of one of our engineers.
Nano vs Alto Chart
The Nano is a stripped down car compared to the Alto. It does not have a radio, air conditioning, a passenger car mirror and two windshield wipers, all of which are standard with Jiangnan’s Alto. Moreover, the Alto has a much larger engine with more horsepower and an enhanced ABS braking system. The engine alone, we estimate, accounts for at least $400 of the $600 price difference. Add in the price of a radio, air conditioning and ABS, and the Alto is more than price competitive with the Nano.
But we didn’t stop there. All of the articles about Tata’s Nano mentioned that the Maruti 800 was the next cheapest car in India and cost twice as much as the Nano. Knowing that the Maruti 800 was also developed by Suzuki, I asked Sophy to compare its features with that of Jiangnan’s Alto. A few minutes later, she came into my office and said, “Except for the price, $5,000 versus $3,097, these are exactly the same cars!” India’s Maruti 800 is an Alto by another name. In other words, on an apples to apples comparison, making the same car in China is almost 40% cheaper than it is to make it in India!
Despite the hype surrounding the Nano, China is the unquestioned low cost producer in the world when it comes to products like passenger cars. Could a Chinese car company produce a car that sells for $2,500? Absolutely. The reason none do is that even the low end car buyers in China want engines of a certain size and certain features like a radio. Chinese assemblers aren’t just trying to make cheap cars. They are trying to make cars that Chinese consumers want.
Ever since I first came to China in 1993, the China versus India debate has raged. At that early date, the auto industries in each country were about the same size, and at least on paper, each promised to become the largest in the world. For many reasons, China’s auto industry has forged ahead to become the world’s second largest, distancing itself from that of India’s. In many industries, India has strong advantages over China. In auto’s, though, China remains the biggest, fastest growing market and the world’s future industry leader.