The Tata Nano car was launched with great fanfare in January 2008, more than eight and a half years back. In fact, given its low price point, the car was supposed to disrupt the automobile market in India.
One of the fears on which many columns were written was that the traffic on the roads would increase dramatically. The assumption was that way too many Tata Nanos would be sold. Nothing of that sort happened. This was also a point of discussion among people who already had bigger cars. They were worried, now that everyone would be able to afford a car, the traffic on the roads would simply explode. In that scenario, how would they drive their cars?
But nothing of that sort happened.
In fact, over the last one year (between September 2015 and August 2016), the Tata Nano Gen X has sold 15,949 units. In comparison, the Maruti Suzuki Alto 800, the bestselling car in this category has sold more than 1.69 lakh units.
More than eight years after it was first launched, it is safe to say that the Tata Nano is nowhere near the success it was expected to be. Many reasons been offered for it. One reason offered is that by talking about the Rs 1 lakh price point, over and over again, the Nano was projected as a “cheap” car.
As brand guru Jack Trout told The Economic Times a few years back: “People don’t want a ‘cheap’ car, which their neighbours can see. Especially in India, there’s a prestige thing about buying a car.”
Another reason offered was that with all the hype around the car, people were expecting something out of this world. What they got was a normal car.
Still others felt that the launch should have been small instead of the big bang launch that was carried out at the 9th Delhi Auto-Expo in January 2008. The press from the entire world descended on Delhi to cover the launch of the Tata Nano.
Nevertheless, as marketing professor Nirmalya Kumar put it: “When the product development is radical you always do a small launch. They did a huge launch for Nano. They should have done a smaller launch.” The idea was that any innovation which as radical in nature as the Tata Nano was, needs to be tinkered with and it gradually needs to be figured out what the customer really wants.
But with a big bang launch, the tinkering that Kumar talks about was no longer possible. Another reason offered for Nano’s failure was that the negative publicity that the company faced in the aftermath of some cars catching fire in 2010.
The one thing common with all these reasons is that they were all offered after the car did not meet the expectations that it was supposed to. Hence, there is a huge hindsight bias built into these reasons. Further, some of the reasons offered could have been offered even before the launch.
Take the case of the Nano being projected as a cheap car. This was a reason that could have been offered even before the car was launched because everyone knew what the likely price point of the car was to be.
The point is that in retrospect many reasons can be offered for a product not doing as well as it was expected to do. Nevertheless, there is only one valid reason. As Yuval Noah Harari writes in Homo Deus—A Brief History of Tomorrow: “In a free market, the customer is always right. If the customers don’t want it, it means that it is not a good car. It doesn’t matter if all the university professors and all the priests and mullahs cry out from every pulpit that this is a wonderful car – if the customers reject, it is a bad car.”
And when it comes to the Nano, that is the only truth. The customers rejected it. We can keep figuring out the other reasons till kingdom come.
The Financial Express hada very interesting newsreport on the super-luxury real estate market in Mumbai, a couple of days back. As per this report around 5,000 upmarket flats in Mumbai that are built and ready to occupy, have not been able to find any buyers.
And how much do these flats cost on an average? The Financial Express estimates that each of these flats costs at least Rs 10 crore. Hence, the total market value of these unsold flats is at least Rs 50,000 crore. That clearly is a lot of money.
As the newspaper points out: “Sales are tepid in central Mumbai – Lower Parel, Mahalaxmi, Prabhadevi and Parel. In these areas, the apartment sizes are typically between 4,000 sq ft and 7,000 sq ft accommodating three, four and five bedrooms. At the very least, they cost Rs 10 crore or approximately Rs 25,000 to Rs 30,000 per sq ft.” Interestingly, anyone who has moved around in this area would know that there are many other properties still under-construction and will hit the market over the next few years. So, this oversupply is unlikely to go any time soon.
In fact, super-luxury is not the only segment where sales are slow. Liases Foras, a real estate rating and research firm, estimates that the Mumbai Metropolitan Region has 46 months of unsold inventory of flats currently. “Months inventory denotes the months required to clear the stock at the existing absorption pace. A healthy market maintains 8 to 12 months of inventory,” Liases Foras points out.
Further, the sales velocity or the ratio of monthly sales to total supply currently stands at 1.05% in Mumbai. Liases Foras considers a sales velocity of 2.75% optimum as it translates into a gestation period of 36 months. And despite the slow sales, launches of new home projects have remained on a firm footing in Mumbai.
During the period January and March 2015, the Mumbai Metropolitan Region witnessed new launches of 18.16 million square feet. This amounted to the second highest new launches ever-the highest having been in April to June 2010. What is interesting is that the new launches form around 9.5% of the total unsold space of 192.27 million square feet.
Within this total unsold space, the maximum is for flats which are priced at Rs 2 crore or more. 62.06 million square feet of home space remains unsold in this category. This is around 32.3% of the total unsold inventory of flats in Mumbai.
The weighted average price of a flat in the Mumbai Metropolitan Region is around Rs 1.3 crore. Banks and home loan companies give a loan of 80% of the price of property. Hence, on a flat which is available for a price of Rs 1.3 crore, the bank would give a home loan of Rs 1.04 crore. The remaining Rs 26 lakh would have to be paid by the buyer.
Further, the EMI on this loan at 10% interest and repayable over a period of 20 years, would amount to over Rs 1 lakh per month. Hence, in order to get this loan the buyer would need to have a monthly income of Rs 2.5-3 lakh per month. How many people have that kind of income?
Hariprakash Pandey, senior vice-president, finance and investor relations, at Mumbai-based developer HDIL,recently told Business Standardthat flat prices in Mumbai had gone beyond Rs 1.5-2 crore and this meant that homes were beyond the reach of the middle class. As he said: “If you take a loan of Rs 1.5 crore, you have to pay an EMI of Rs 1.5 lakh. For that you should have a monthly income of Rs 4-5 lakh.”
This was a rare occasion of an individual who makes his money in the real estate industry admitting that there is a problem. The usual tendency till date has been to blame the slowdown in the real estate industry on high interest rates and the fact that the Reserve Bank of India was not doing enough to bring them down.
This as I have often pointed out in the past is a very stupid argument.
All these numbers have some lessons to offer. First and foremost is the fact that the Indian real estate is now way beyond the affordability levels of the rich as well and not just the salaried middle class, as Pandey of HDIL pointed out.
The Indian real estate companies have stopped catering to demand. As Dhirendra Kumar rightly points out in a recent column: “It’s as if the car industry would try to sell nothing but large BMWs, Mercedes and Jaguars while most of the country yearned for cheaper cars.”
I think I would go a step ahead and say that “it’s as if the car industry would try to sell nothing but Maybachs.” (Maybach is incidentally also made by Mercedes).
Even in a city like Mumbai it would be difficult to find so many genuine buyers who would have the ability to cough up Rs 10 crore or more for a home to live in. And those who have that kind of ability, already have a home or two to live in.
To conclude, it is worth pointing out a couple of numbers from the latest Maharashtra State Economic Survey. The per capita income in Mumbai in 2013-2014 was at around Rs 1.88 lakh. In Thane, it was Rs 1.73 lakh. And we are selling homes priced at greater than Rs 10 crore. Who is the joke on? And when will we get around to build and sell flats at prices at which there is real demand?
Mumbai real estate is like a super-expensive Maybach-what we need are Tata Nanos. Or maybe even bicycles.
In July this year Bill Gates wrote a blog. He titled it The Best Business Book I’ve Ever Read. As he wrote “Not long after I first met Warren Buffett back in 1991, I asked him to recommend his favorite book about business. He didn’t miss a beat: “It’s Business Adventures, by John Brooks,” he said. “I’ll send you my copy.” I was intrigued: I had never heard of Business Adventuresor John Brooks.” Gates got a copy of the book from Buffett. “Today, more than two decades after Warren lent it to me—and more than four decades after it was first published—Business Adventuresremains the best business book I’ve ever read. John Brooks is still my favorite business writer. (And Warren, if you’re reading this, I still have your copy),” Gates added. The book is essentially a collection of 12 long articles (I don’t know what else to call them) that Brooks wrote for the New Yorkermagazine, where he used to work. A chapter that should be of interest to Indian readers is The Fate of Edsel. A reading of this chapter clearly tells us why Tata Nano, the most hyped Indian car ever, has failed to live up to its hype. But before we get to that, here is a brief summary of the chapter. In 1955, the Ford Motor Company decided to produce a new car, which would be priced in the medium range of $2,400 to $4,000. The car was designed more or less as was the fashion of the day. It was long, wide, lavishly decorated with chrome, had a lot of gadgets and was equipped with engines which could really rustle up some serious power. The car was called the Edsel. It was named after Edsel Ford, the only son of Henry Ford who started the Ford Motor Company. In 1943, Edsel Ford had died at a young age of 49, of stomach cancer. In fact, even before the Edsel car was launched there was a lot of hype around it. As Brooks writes “In September 1957, the Ford Company put its new car, the Edsel, on the market, to the accompaniment of more fanfare than had attended the arrival of any other new car since the same company’s Model A. A model brought out thirty years earlier.” The company had already spent $250 million on the car, before it was launched. The Business Week called it more costly than any other consumer product in history. Given this huge cost, Ford had to sell around 200,000 Edsels in the first year, if it had to get its investment back. Nevertheless, two years, two months and fifteen days later, it had only sold 109,446 Edsels. This included cars bought by Ford executives, dealers, salesman, workers etc. The number amounted to less than 1% of the cars sold in America during that period. On November 19, 1959, it pulled the plug on the car. Estimates suggested that Ford lost around $350 million on the car. So what went wrong? Some of the feedback from trade publications was negative. Over and above that, some of the cars that were sent out initially were badly made. As Brooks writes “Automotive News reported that in general the earliest Edsels suffered from poor paint, inferior sheet metal, and faulty accessories, and quoted the lament of a dealer about one of the first Edsel convertibles he received: “The top was badly set, doors cockeyed, springs sagged.”” Some individuals who worked on making and launching the car liked to believe in later that it was the because of the Sputnik, the first artificial space satellite launched by the Soviets that led to the car not selling. As Brooks puts it “October 4th, the day the first Soviet Sputnik went into orbit, shattering the myth of American technical pre-eminence and precipitating a public revulsion against Detroit’s fancier baubles.” Detroit was the city were the biggest motor companies in the United States were head-quartered back then. While these could have been reasons for the car not selling, the real reason for the car not selling was the hype that accompanied it. As Brooks writes “It was agreed that the safest way to tread the tightrope between overplaying and underplaying the Edsel would be to say nothing about the car as a whole but to reveal its individual charms a little at a time—a sort of automotive strip tease…The Ford Company had built up an overwhelming head of public interest in the Edsel, causing its arrival to be anticipated and the car itself to be gawked at with more eagerness than had ever greeted any automobile before it.” C Gayle Warnock, director of public relations of the Edsel division of Ford, shares an interesting example, which provides the real reason behind the failure of the Edsel car. In 1956, a senior official working on the Edsel launch (in fact it wasn’t called the Edsel then, it was just the E-Car) gave a talk about it in Portland, Oregon. Warnock was aiming for some coverage regarding the event in the local press. But what he got was something he had not expected. The story got picked up by wire services and was splashed all across the country. As Warnock recounts in the chapter “Clippings [of the media coverage] came in by the bushel. Right then I realized the trouble we might be headed for. The public was getting to be hysterical to see our car, figuring it was going to be some kind of dream car—like nothing they’d ever seen. I said… “When they find out it’s got four wheels and one engine, just like the next car, they’re liable to be disappointed.”” And this is precisely the reason why the Edsel flopped. The hype was so much that the public expected something that was totally out of the world. But what Ford was basically giving them in the rephrased words of Larry Doyle, the head of sales at the Edsel division, “exactly the car that they had been buying for several years.” As Doyle put it “We gave it to them and they couldn’t take it.” Further, it did not help that the first lot of cars was not properly manufactured. “Within a few weeks after the Edsel was introduced, its pitfalls were the talk of the land,” writes Brooks. Now replace the word Edsel with Nano and the situation stays more or less the same. The hype around the car was huge. When the car was launched in 2009, the entire world media was in Delhi for the launch. In fact, before the car was launched the rating agency Crisil said that the car couldexpand the Indian car market by 65%. People who had cars were already worried about the traffic on the roads getting worse than it already was, because of the Nano. Before the car was launched in 2009, prices in theused car market fell by 25-30%, given Nano’s expected price point of Rs 1 lakh. Nonetheless, Nano could not live up to the hype. In a May 2014 newsreport, the Business Standard pointed out that “Launched in 2009,Nano sales between 2010-11 and 2012-13 constituted 23-24 per cent of Tata Motors’ total sales. But Nano sales declined dramatically after peaking to 74,527 in 2011-12. The numbers came down by more than 70 per cent in two years to 21,129 in 2013-14. Tata Motors has set up a facility at Sanand in Gujarat to make 250,000 Nanos a year.” So, the car sold nowhere near the numbers it was expected to. What did not help was that when the car actually started hitting the market in 2010, some units caught fire. After all the hoopla around the Nano, this wasn’t what the public was ready to accept. Brooks’ sentence written for Edsel can be re-written for Nano as well: “After the Nano was introduced, its pitfalls were the talk of the land.” Further, the hype around the car was so huge that the people were expecting something totally out of this world. They did not know what they wanted, but they did not want, what they got. The question that remains is how much could you expect out of a car which was supposed to be sold at Rs 1 lakh? The article originally appeared on www.FirstBiz.com on Nov 18, 2014
(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)
Among the many tourist attractions of Mumbai are homes of famous people. The Ambanis used to live in Sea Wind building at Cuffe Parade till Mukesh Ambani built the 27-floor Antilia on Altamont Road. Kumar Mangalam Birla’s bungalow is very close to Mukesh’s Antilia. So is the Jindal Mansion of the Jindal family. Lata Mangeshkar’s flat in Prabhu Kunj building is not too far off. Recent news reports suggest that industrialist Gautam Singhania is building a 40- storeyed building, JK House ,on Warden Road, which again is in the vicinity of Ambani’s Antilia. For those who are historically inclined, there is Jinnah House (originally referred to as South Court), the erstwhile residence of Muhammad Ali Jinnah, which is very close to the residence of the Chief Minister of Maharashtra. The other famous residences in the city are Amitabh Bachchan’s Jalsa and Pratiksha, Shahrukh Khan’s Mannat, the late Rajesh Khanna’s Aashirwad and Salman Khan’s one-bedroom-hall-kitchen flat in Galaxy Apartments. Before you start wondering why I am giving you all these titbits that you may already be aware of, let me tell you, dear reader, that I have always wondered where Ratan Tata lives. Where is his Anitilia and his Jalsa? Is it as posh as the other residences I have mentioned above? And given the fact that Tata is an architect by qualification, did he design it himself? The point is that unlike a lot of other industrialists, Tata is very low key. You won’t find him hosting a Page 3 party or even attending one for that matter. His reclusiveness is famous. No wonder The Economist magazine, in a January 2007 profile of him, called him the “shy” architect. But, as it turns out, he has designed only two houses till date. As the Guardian newspaper wrote in a 2008 profile of his “He only designed two houses: his mother’s and his own beach-house off the Arabian sea.” (You can read the complete profile here) Ratan Tata took over as Chairman of Tata Sons in 1991, just as the Indian economy was opening up. “His uncle (JRD Tata), who had run Tata for more than 50 years, had started Tata Airlines (which became Air India)…He was a good-looking philanthropist with a French wife and held the first pilot’s licence to be issued in India.His shy and unglamorous nephew, in contrast, trained as an architect at Cornell University, slipped quietly into the family firm and was not marked out for the succession even when his uncle was due to bow out,” wrote The Economist in the 2007 profile. (You can read the complete profile here) Ratan Tata took over as Chairman of the group from the great Jehangir Ratanji Dadabhoy Tata, or JRD Tata, of Jeh as he was known to friends. JRD had been Chairman of the group for more than 50 years starting in 1938. He took over the reins after the untimely death of Sir Nowroji Saklatvala. JRD Tata’s father RD Tata was the first cousin of Jamsetji Tata, the founder of the Tata group, and had been a partner in the original Tata & Sons. As Morgen Witzel writes in Tata —The Evolution of a Corporate Brand: “He (RD Tata) had been a partner in the original Tata & Sons, but then moved to Paris, where he set up in business on his own account…He married a Frenchwoman (Suzanne Briere), and JRD their eldest son was born in 1904…He grew up and was educated in France; years later, some Indians remarked that he still spoke with a French accent.” JRD was surprised at being appointed Chairman of Tata Sons and, as Witzel points out, he “once described the decision of the directors to appoint him as chairman as a ‘moment of mental aberration’”. But the group did rather well under him despite the setbacks it received in the way of its companies being nationalised by the government now and then. In 1939, the group had 14 companies with total sales of Rs 280 crore. By the time JRD retired and Ratan took over, the group had more than 50 companies with sales of around Rs 15,000crore. JRD was a visionary and a lot of labour reforms that Indian corporates had to carry out over the years where envisaged by him and first implemented within the Tata group. “Tisco (Tata Iron & Steel Co, now Tata Steel) was…probably the first company in India to have a dedicated human resources department, a practice followed by other Tata companies,” writes Witzel. JRD was also a great believer in letting his managers do what they wanted to do. This was one of the reasons why the Tata group reached the size that it did under JRD. “Russi Mody…was exceptional in the way he steered Tata Steel through difficult times; Darbari Seth built Tata Chemicals and Tata Tea from scratch; Ajit Kerkar was instrumental in turning a one-hotel company into a 1,000-room hospitality giant. And, of course, there was the indomitable Nani Palkhivala, who served on the board of many Tata group companies,” an Outlook Business story on the Tata group points out. (You can read the complete story here) But what this freedom did was that it made the entire group very unwieldy. “JRD had a clean, uncomplicated portfolio of businesses when he took over in 1938. There was textiles, the group’s first business, steel, power, cement, insurance, and, of course, JRD’s first love—aviation… In 1991, the Tata business structure was quite complicated. Till then, the group was not run as one business group. Each company was led in the direction that each of the mercurial chairmen chose. JRD allowed them to give full vent to their managerial entrepreneurialism. The result was a maze of businesses. Three companies were making cement and at least five were in the pharmaceutical business in some form or the other,” points out Outlook Business. Other than making the group unwieldy different managers ran different companies within the group as their own personal fiefdoms. What also did not help was the fact that JRD did not bother much about ownership. As Witzel points out, “By the 1980s Tata Sons held a smaller share of steel-maker Tisco than did their rivals the Birlas. Tata Sons’ share of…truck maker Tata Engineering & Locomotive Co (Telco, now Tata Motors) had declined to 3 percent, and its share of Indian Hotels, the parent company for many of the Taj Hotels, was now just 12 percent…The family’s own stake in Tata Sons had shrunk to just 1.5 percent,while construction magnate Pallonji Mistry owned 17.5 percent… ‘There was a question,’ says Ratan Tata, ‘as to whether we had the right to claim to manage these companies. In fact we didn’t have the legal right or even the moral right, to manage them.’” What also did not help was the fact that JRD had left the appointment of Ratan as Chairman till very late in the day. Speculation had been rife on who would succeed JRD since the mid-1980s, when JRD had crossed the age of 80. JRD it is said to have made up his mind to pass on the baton either to Russi Mody or Nani Palkhivala. Palkivala’s political views worked against him. And Russi Mody did not do his chances much good by criticising the performance of other senior leaders within the group. So it was left to JRD to pass on the baton to another Tata. Ratan Tata was born to Naval and Soonoo Commisariat in 1937. Ratan’s father Naval Tata was the adopted son of Lady Navajbai, who was the wife of Sir Ratan Tata, one of the sons of the group founder Jamsetji Tata. Sir Ratan Tata died of a heart attack at the age of 47 in 1918. He and Lady Navajbai did not have any children. Neither did his elder brother Sir Dorabji Tata. So it was decided that Lady Navajbai would adopt Naval, who was an orphan and the son of Sir Ratan’s favourite cousin. As business historian Gita Piramal told the Guardian newspaper a few years back: “The Tatas are a reconstructed family who adopt and cobble together people to make a family. That way they do promote talent rather than blood relations.” Ratan Tata completed his graduation in architecture from Cornell University in the United States in 1962. It is said that he had a job offer from IBM but he came back to India and was put to work at Tisco, what was then the biggest group company. His first independent assignment was in 1971 as the director of National Radio and Electronics (Nelco) which was in dire straits. As soon as Tata had managed to turn the company around, Indira Gandhi declared emergency and Nelco was in dire straits again. Tata was then asked to turn around Empress Mill, which was one of the three businesses started by the group founder Jamsetji Tata (the other two being the Taj Mahal hotel and Tata Steel)). Tata managed to turn around the sick mill but was refused an investment of Rs 50 lakh that was needed. Soon the mill workers’ strike led by Datta Samant hit Bombay (now Mumbai), and the mill had to be shut down in 1986. In 1981, Ratan Tata was appointed as the Chairman of Tata Industries. “Ratan helped draw up a group strategic plan in 1983. Among other things, it emphasised venturing into hi-tech businesses; focusing on select markets and products; judicious mergers and acquisitions; and leveraging group synergies. Accordingly, Ratan promoted seven hi-tech businesses under Tata Industries in the eighties: Tata Telecom, Tata Finance, Tata Keltron, Hitech Drilling Services, Tata Honeywell, Tata Elxsi and Plantek,” points out another Outlook Business story on the Tatas. (You can read the complete story here). But outside Tata Industries, the blueprint did not achieve any success with various CEOs and managing directors continuing to run their individual fiefdoms. Given this, Ratan Tata’s career within the Tata Group hadn’t been great shakes and his appointment as Chairman was as big a surprise for others as it was for himself. This is something that Ratan Tata admitted to in an interview later. He had believed that Palkhivala and Mody were the main players in the race. So it remains a mystery as to why Ratan Tata was appointed as the Chairman of Tata Sons by JRD. One version is pointed out by Tata group historian RM Lala in an interview to Outlook Business. “RM Lala recalls speaking with JRD some 10 days after the announcement and asking whether Ratan had been chosen because of his integrity. ‘Oh no, I wouldn’t say that; that would mean the others did not have integrity,’ JRD replied. ‘I chose him because of his memory. Ratan will be more like me.’” Was this JRD’s way of saying that Ratan Tata was chosen because he was a Tata at the end of the day? He probably felt that only someone with the Tata name could hold a group built by various satraps independently together. But we will never know for sure. The first few years of Ratan’s tenure as the Chairperson were spent fighting the leaders within the Tata group and the fiefdoms they had built. And the fight with Russi Mody got very ugly with JRD having to fire Mody in 1993. Ratan Tata, on that occasion, had said that Tisco would not be affected by Mody’s exit. To this Mody had replied “Ratan is quite right. No one is indispensable. My disappearance from Jamshedpur may not be felt, but the arrival of Ratan Tata and (JJ) Irani will certainly make a difference. It’s all like a circus — the serious acts of entertainment are always shown first. Then come the clowns and the animal trainers. That may well be the case with Tisco.” (quoted in Russi Mody: The Man Who Also Made Steel, written by Partha Mukherjee and Jyoti Sabharwal). That was uncharitable, but Mody was quite off the mark on this. Ill-health forced Nani Palkhivala to leave (he was later affected by Alzheimer’s disease). Other biggies like Darbari Seth and Ajit Kerkar were forced out by implementing a long dormant retirement rule. It is the same retirement rule that Tata has now implemented for himself and appointed Cyrus Mistry in his place. The other thing that Ratan Tata did was increase the holdings of Tata Sons in all group firms to 26 percent, the level which allows a shareholder to block resolutions at the board level. As Ratan Tata told Witzel in Tata – The Evolution of a Corporate Brand: “Then we set ourselves the task of seeing how we could put ourselves together as a more meaningful and recognisable group of companies with more central control.” The money required for increasing stakes in various group companies came from Tata Consultancy Services (TCS) which had become the largest software company in Asia and was generating a phenomenal amount of cash for Tata Sons. TCS was a success story that had come out of JRD’s philosophy of allowing his managers to do their own thing. And since the company was unlisted back then, Tata Sons owned it fully. The other thing that Ratan Tata did was to make the Tata brand more visible and uniform. “One of the first steps in the establishment of the Tata corporate brand was the harmonisation of the brand mark as it was used. As Ratan Tata says, ‘You could fill a wall with the different symbols used by the companies’. These were now swept away and a uniform style was introduced,” writes Witzel. Also company names like Tisco and Telco were changed to Tata Steel and Tata Motors to make the Tata connection more explicit. Strong brand names like the Taj Mahal hotel were not changed. The group companies were also made to sign the Tata code of conduct. This also meant paying Tata Sons a subscription fees of 0.25 percent of their annual sales, if the companies used the Tata brand name directly. The other big decision of Ratan Tata was to get Tata firms to go global. When Ratan Tata took over only around 5 percent of the group’s revenues used to come from overseas operations. Now the number is at 58 percent. A 2007 story by Business Week magazine best describes Tata’s international forays. “Since 2003, Tata has bought the truck unit of South Korea’s Daewoo Motors, a stake in one of Indonesia’s biggest coal mines, and steel mills in Singapore, Thailand, and Vietnam. It has taken over a slew of tony hotels, including New York’s Pierre, the Ritz-Carlton in Boston, and San Francisco’s Camden Place. The 2004 purchase of Tyco International’s undersea telecom cables for $130 million, a price that in hindsight looks like a steal, turned Tata into the world’s biggest carrier of international phone calls. With its $91 million buyout of British engineering firm Incat International, Tata Technologies now is a major supplier of outsourced industrial design for American auto and aerospace companies, with 3,300 engineers in India, the US, and Europe. The crowning deal to date has been Tata Steel’s $13 billion takeover in April of Dutch-British steel giant Corus Group, a target that would have been unthinkable just a few years ago. In one swoop, the move greatly expands Tata Steel’s range of finished products, secures access to automakers across the US and Europe, and boosts its capacity fivefold, with mills added in Pennsylvania and Ohio.” (You can read the complete story here). If all that wasn’t enough in 2008 Tata Motors also bought iconic British car brands the Jaguar and the Land Rover. This strategy of Tata has come in for some criticism given that a lot of companies were bought during 2003-2008 when prices were at their peak. While this is correct with the benefit of hindsight, it also needs to be pointed out that it is easier to carry out big deals in a bull market when people are willing to sell and finance is easier to raise. On the home front the group has entered newer business like Tata Sky (direct-to-home television) and Ginger Hotels (budget hotels). But Ratan Tata’s big dream has been the Tata Nano, an affordable car for the average Indian. He had the idea to build a car like Nano when he saw a family of four struggling on a two-wheeler on a rainy night in Mumbai. The car has run into a spate of controversies. The Tatas had to pull out of West Bengal where the Nano was originally supposed to be made after political trouble erupted there. They have since moved manufacturing to Gujarat. Other than that, the quality of the initial batch has been criticised with some cars catching fire. But more than anything the car which was supposed to cause traffic jams all across India isn’t really selling too well. Nevertheless it is too early to write off the Nano. (You can read the complete story here). Ratan Tata, for one, believes there is life to the Nano and he could be right. Ratan Tata’s stint at the Tata group is now coming to an end. He is set to retire in December when he turns 75. As he attends his last annual general meeting of Tata Global Beverages today (31 August 2012 in Kolkata), he can look bank in wonder at what he has created over the 20-and-odd-years he has captained the group. The total revenues of the Tata Group in 2010-2011 were around $83 billion,many more times what it was when Ratan Tata took over the group way back in 1991. Tata has remained a bachelor all his life though, in an interview to CNN in April 2011, he admitted that he came close to marrying four times. “When you asked whether I’d ever been in love, I came seriously close to getting married four times and each time it got close to there and I guess I backed off in fear of one reason or another,” he said. The most serious affair was when Tata was in the United States. “Well, you know one was probably the most serious was when I was working in the US and the only reason we didn’t get married was that I came back to India and she was to follow me… and that was the year of the, if you like, the Sino-Indian conflict and in true American fashion this conflict in the Himalayas, in the snowy, uninhabited part of the Himalayas, was seen in the United States as a major war between India and China and so, she didn’t come and finally got married in the US thereafter,” he had told CNN. Tata, like his uncle JRD, is an avid pilot and is known to fly the Falcon 2000 business jet on his own within India. In the Aero India 2007 air show Tata co-piloted the fighter jets Lockheed F-16 and Boeing F-18. He has a younger brother Jimmy about whom not much is known. He also has one step brother Noel (who heads the retail business of the Tata group) and three step sisters, one of whom is married to the next Tata Sons Chairman Cyrus Mistry. Mistry also happens to be the son of Shapoorji Pallonji Mistry, the largest individual shareholder of Tata Sons. Given this, chances are that Ratan Tata may be the last Tata at the helm of the Tata group. However, as Gita Piramal noted earlier, one needn’t be born a Tata to be its head. Tata is about a state of mind, not just being born in India’s most respect business family. (Vivek Kaul is a writer and can be reached at [email protected])
A little over three years after it was first introduced Tata Nano is being widely touted as a flop. The car which was supposed to cause traffic jams all over India is not selling as much as it was expected to. Between January and July this year 55,398 units of the car have been sold. This is 13.3% more than the number of units that were sold during the same period last year. So even though the numbers are looking better this year they are nowhere near the installed capacity that the Nano plant in Sanand in Gujarat has, as an earlier piece pointed out. (You can read the complete piece here). Numbers of reasons are being pointed out for the Nano flop show. Let me discuss a few here. In the book The Little Black Book of Innovation Scott D Anthony, who is an innovation consultant, points out a conversation he had with a colleague in late 2009. ““Here’s a provocative perspective,” my colleague said in late 2009… “I think the Tata Nano is going to be a disappointment.”… So why was my colleague being so skeptical? “Look at it from a customer’s perspective,” he said. These people could already afford to pay twenty-five-hundred dollars (or around Rs 1 lakh as the Nano was expected to be priced initially) for a perfectly good used car. Instead they consciously chose the scooter.” Ratan Tata had the idea to build a car like Nano when he saw a family of four struggling on a two-wheeler on a rainy night in Mumbai. But despite the safety hazards people still preferred a two wheeler to a Nano. “Why would consumers choose a scooter? It wasn’t that these people didn’t care about their family. Rather, they didn’t have the space to park a car, or they found scooters that fit into tiny gaps on India’ chaotic streets a much more convenient form of transformation,” writes Anthony. Another major reason being pointed out for Nano’s failure is it’s positioning. As Rahul Shankar points out in a blog post titled “Why did the Tata Nano fail as a disruptive innovation?” “The Nano was essentially branded as the world’s cheapest car…The truth is that no one wants to own a car that is thought off as cheap. Very few people treat a car as just a machine that takes them from point A to point B. This is basically what the Nano has been reduced to. People want to brag about how awesome their car is and how it kicks their neighbor/friends car’s butt….The advertisements that I have seen for the Nano have unfortunately come off as bland and catering again to the theme of affordability.” (You can read the complete post here) These are valid points that have been raised. Even Ratan Tata has admitted to mistakes having been made. “We never really got our act together…I don’t think we were adequately ready with an advertising campaign, a dealer network,” Tata remarked earlier this year. But these reasons notwithstanding, it’s too early to write off the Nano. Nano is what innovation experts call a disruptive innovation. This term was coined by Harvard Business School professor Clayton Christensen. “A disruptive innovation is an innovation that transforms an existing market or creates a new one by introducing simplicity, convenience, accessibility and affordability,” is how Christensen defined disruptive innovation when I had interviewed him a few years back for the Daily News and Analysis (DNA). An important thing with disruptive innovations is that they tend to work out over a period of time. As Christensen said “It is initially formed in a narrow foothold market that appears unattractive or inconsequential to industry incumbents.” A great example is the Apple personal computer which took around a decade to establish itself. As Christensen put it “A great example is the Apple personal computer. The incumbent companies of the time were those like Digital Equipment Corporation (DEC) that made minicomputers, which were big machines that sold for lots of money and could handle very complex tasks. When the personal computer burst on the scene, it sold for significantly less money than the minicomputer did…the PC wasn’t as good as the minicomputer for the market as it existed at that time. Apple made a wise decision and first sold the personal computer as a toy for children. Over time Apple and the other PC companies improved the PC so it could handle more complicated tasks. And ultimately the PC has transformed the market by allowing many people to benefit from its simplicity, affordability, and convenience relative to the minicomputer.” Given this any disruption does not come as an immediate shift. “Disruption rarely arrives as an abrupt shift in reality,” write Clayton Christensen, Michael B Horn and Curtis W Johnson in Disrupting Class —How Disruptive Innovation Will Change the Way the World Learns. This is something that Nirmalya Kumar, a professor at the London Business School (LBS) agrees with. “What I know about is radical versus incremental innovation. The more radical the innovation is the longer the time customers take to adopt it. People think of Nesspresso as being as a great radical innovation, but what they don’t know is that for 20 years it did not sell a whole lot and then the sales went up in a spike,” Nirmalya Kumar had told me in an interview I did for the Economic Times. Nespresso is a cappuccino maker sold by Nestle. Amazon, which started off as a bookseller is another great example of a disruptive innovation which took time to get settled in. Another great example from the field of cinema is the movie Sholay. The film was massacred by critics when it released on August 15,1975. As Anupama Chopra writes in Sholay: The Making of a Classic “Taking off on the title of the film, K.L.Almadi writing in the India Today called it a ‘dead ember’… Filmfare’s Bikram Singh wrote: ‘The major trouble with the film is the unsuccessful transplantation it attempts – grafting a western on the Indian milieu.” The Indian audience had never seen anything like this before. And it thus took time to sink in. The film went onto become the biggest box office hit of all time. What these examples tell us is that it is too early to write off the Nano, despite the fact that the initial planks on which it was sold are largely not true anymore. “A cheap car that’s not really cheap. A safe car whose safety has been questioned. A poor people’s car that poor people aren’t buying. That sounds like a failure, certainly. But really it’s not. It’s par for the course for almost every breakthrough innovation,” writes Matthew J. Eyring the president of Innosight, a strategy innovation consulting and investment firm, on the HBR blog network. (you can read the complete piece here). “In fact, I can think of only one example of a CEO who pre-announced an innovation that was going to change the world and actually delivered it. That’s Steve Jobs of course,” he adds. Critics point out that a lot of assumptions that Nano’s initial strategy was built on are not turning out to be true. The two wheeler riders aren’t upgrading to the Nano as they were. It’s no longer as cheap as it was initially promised to be. And people are buying it more of as a second car rather than their main mode of transport. But this is again in line with the way breakthrough or disruptive innovations operate. As Eyring puts it “There’s nothing unusual about a company having to adjust the price, the production process, the marketing, or even the market of a breakthrough offering. The Nano’s price changes, the new maintenance contract Tata is rolling out to assure buyers of quality, the test drives it’s introducing, the new smaller showrooms, and the new commercials — all widely discussed in the press — should not really be news.” All these things are also happening with the Nano because Tata Motors went in for a full fledged launch of the car rather than a small one. As Nirmalya Kumar put it “When the product development is radical you always do a small launch. They did a huge launch for Nano. They should have done a smaller launch. With radical innovation you need to keep tinkering and figuring out what is it exactly that the customer wants. This is because with radical innovation pre market testing is not really relevant because the consumers are not good at telling you whether they will buy a radical new product because they have no conceptualisation.” This is something that Godrej & Boyce did with the ChotuKool refrigeratior. “Long before most people had heard of the low-power fridge ChotuKool, Godrej & Boyce spent quite some time investigating people’s refrigeration needs, designing and redesigning the product, and redoing its distribution strategy, carefully, slowly, and quietly,” writes Eyring. It would have helped if Tata Motors had followed a similar strategy with Nano. As Eyring points out “It might not have been easy, but had Tata piloted the Nano quietly, on a small scale, perhaps through a limited production run in a small city like Durgapur in West Bengal or Ranchi in Jharkand, its engineering, pricing, financing, and marketing might have been adjusted far from the limelight to suit the needs of an optimal target customer… the Nano might have made its debut to the wider world with less hype and greater effect. It might not have been a 1 lakh car or even an alternative to motorscooters. But when it first appeared in the mainstream, it would have been right product for the right price in the right market.” So now the Nano has entered the tinkering phase. And as this goes along Tata Motors will figure out what works and what does not. And this may be totally different from the assumptions the company started out with. What still doesn’t change is its low price, despite the fact that it never sold for Rs 1 lakh as it was initially expected to. As Nirmalya Kumar put it “That’s the real startling novelty of the product because there is no car available anywhere in the world for $5000.” The article originally appeared on www.firstpost.com on August 24,2012. http://www.firstpost.com/business/why-you-shouldnt-write-off-the-tata-nano-just-yet-429044.html (Vivek Kaul is a writer and can be reached at [email protected])