As the world's cheapest car drives into India, big automakers should be very, very afraid.
If you haven't been to India, go on YouTube and search for videos of traffic in Mumbai or Bangalore. You'll see families of four negotiating the anarchy while balanced on a single scooter like a Cirque du Soleil act.
Those families represent the market that's about to change the auto industry for good, thanks to a car from India's Tata Motors that will go on the market this year. The Tata is said to look like an egg on wheels. It will seat five and run on a 33-horsepower engine (that's barely more muscle than a commercial riding mower). It won't have airbags or antilock brakes, and its body will offer all the collision protection of an empty beer can. It will cost about $2,500-100,000 rupees, an amount also known in India as one lakh. Hence the Tata's nickname: the one-lakh car.
The one-lakh car will be the cheapest on the planet. The closest price-point rivals in developing countries cost at least twice as much. In the United States, of course, you can pay $2,500 just to get your transmission fixed. The real impact, though, may be the mayhem Tata inflicts on established automakers, much as People Express and its $19 airfares in the 1980s touched off decades of woes for the major airlines. (View other consumer products that have changed their markets.)
Tata, which in December was poised to buy Jaguar and Land Rover from Ford, doesn't plan to sell its one-lakh car in the U.S. Yet Tata is remaking the business of cars for the 21st century. The Tata Group conglomerate, which sells everything from tea to cellular service, has pulled off what consultants call business-process innovation, a feat far more profound and systemic than plain old innovation. A hundred years ago, Henry Ford engineered a business-process innovation in the auto industry. His Model T wasn't just a car; it spearheaded a new way of manufacturing (the assembly line) and targeted a whole new market for cars (America's emerging middle class).
Today, Tata is gutting conventional practices to manufacture and distribute a car in a country where many roads are a series of potholes with a little surface mixed in. The infrastructure couldn't possibly handle 18-wheel trucks hauling automobiles-so Tata will sell not cars but car kits, shipping them to dealerships where the Tatas will be snapped together. Beyond that, Tata is identifying an entirely new car market. It isn't going after people who buy cars, but people who don't. "The customer-value proposition is to get families off the two-wheeler," says Mark Johnson, chairman of the research firm Innosight, who studied Tata Motors for a forthcoming book. (Johnson's business partner Clay Christensen is on Tata Consulting's board.)
You might wonder why all this threatens General Motors. If the Tata takes off, then eventually the major automakers will also need to make supercheap cars for developing regions. And most can't. Every G.M. model bears at least $1,500 in costs just to cover the corporation's pension and health-care liabilities-a kind of original sin burdening any Pontiac or Chevy. Major automakers have too much invested in factories, labor, and high-end models. This yoke will prevent the large players from competing in the market that Tata is about to ignite. They can no more readily follow Tata's lead than a newspaper company can abruptly shut down its presses and move entirely to the Web.
In the U.S., there are an average of 2.9 people per car. In India, there are 137.2 people per car. The research firm A.T. Kearney predicts that Indians will buy 300 million under-$3,000 cars by 2020. (There are 900 million cars in the world today.) Similar demand will explode across China, Southeast Asia, and Africa: all markets to which Tata plans to export the one-lakh car. If the big carmakers aren't a part of that growth, they'll be as vulnerable as mainframe-makers were at the dawn of the PC era-churning out elegant, high-end machines for an increasingly narrow market segment.
Few auto executives seem to get it. One exception is Carlos Ghosn, the C.E.O. of the Renault-Nissan alliance, who's pushing to develop an under-$3,000 car by 2010. "If we are not present in this sector," he said recently, "we risk losing some of the know-how to compete." On the other hand, G.M.'s plans for India entail rolling out an S.U.V.? Even brash startups are staying away from the supercheap-car segment. "I thought about doing one myself many times," says Bill Gross, who runs the tech company Idealab, "but then I saw the beautiful one from Tata and gave up."
Tata's car could create serious challenges-chiefly traffic and pollution. Add a few hundred million autos to India's roads and pretty soon you'll be able to travel faster by pogo stick. Yet a one-lakh car "is important to create an equitable society," says Vani Kola, a Bangalore venture capitalist. "When we can't breathe anymore and cannot get anywhere," Kola says, "it will force the Indian government to be serious about its policies to create the infrastructure needed."
Shaking up the auto industry, lifting a nation's vast underclass, threatening the planet-this little car could leave quite an impression. Makes last year's iPhone hype seem very last year.Visit Portfolio.com for the latest business news and opinion, executive profiles and careers. Portfolio.com© 2007 Condé Nast Inc. All rights reserved.