Why the World's Cheapest Car Flopped

No-Frills Minicar Gets Chrome, Sound System, Higher Price to Boost Appeal
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By SEAN MCLAIN
CONNECT Oct. 14, 2013 1:55 p.m. ET

MUMBAIWhen the Tata Nano, a stripped-down minicar priced at around $2,000, was introduced in 2009, it was marketed as a car that would transform the way aspiring consumers in India and other developing countries got around.
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But the low-cost automotive revolution fizzled. Selling poorly at home and with exports drying up, the Nano has become a cautionary tale of misplaced ambitions and a drag on sales and profit at Tata
MotorsLtd. 500570.BY -0.01% , India's fourth-largest auto maker and the owner of Jaguar and Land Rover

luxury vehicles. It turns out that those climbing into India's middle class want cheap cars, but they don't want cars that seem cheapand are willing to pay more than Tata reckoned for a vehicle that has a more upmarket image.

Now, Nano is trying remake the "people's car," into the "cool people's car." It has given the car itself a face-lift, adding a stereo, hubcaps and chrome trim, raised the price and started a new marketing campaign to give it more cachet. If the remake fails to boost sales of the Nano, a Tata mainstay, the company's outlook could be grim. Tata Motors has been laying off workers and cutting production. Analysts say without a revival in Nano demand, Tata Motors could cut further jobs next year. "This was the flagship product for the passenger-car market. The disappointing sales are a pretty big negative for the group," said Anil Sharma, an analyst at IHS Automotive, an industry consulting company. Tata made a big bet on the Nano. It spent close to $400 million developing the vehicle and hundreds of millions more building a factory capable of manufacturing 15,000 to 20,000 of the tiny cars a month. With sales now hovering around 2,500 a month, down from a peak of about 10,000 in April 2012, that means a lot of idle capacity at the plant in the western state of Gujarat, and a lot of frustrated Tata dealers around the country. Tata's September sales in India were down 40% from a year earlier. Second-quarter net income for the company as a whole was down 23% year-to-year despite a large increase in income from sales of Jaguars and Land Rovers. It was the company's third straight quarterly decline in profit. A sharp deceleration in the Indian economy this year that has hit auto sales across the board isn't helping. "I think I would be imprudent to say we aren't worried. We are," said Ankush Arora, the head of Tata's passenger-vehicle business. One of the few bright spots is Tata's U.K.-based Jaguar Land Rover luxury-vehicle unit acquired from Ford
Motor Co. F +0.57% in 2008. For the three months ended June 30, profit at that unit rose 33% to 675

million ($1.07 billion), while sales rose 11% from a year earlier to 4 billion. In August, Tata sold about the same number of Jaguar XF sedans than Nanos. Roughly 19 Nanos could be purchased for the about $47,000 starting price of an XF base model in the U.S. market.
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Sales of the jellybean-shaped Nano minicar, above in 2009 in Kolkata are around 2,500 a month, down from 10,000 a month at their peak. Agence France-

Presse/Getty Images

When Tata first designed the Nano, engineers tried to pare down features to keep costs in check. The car is the least expensive mass-produced automobile in the world. When the first models hit the roads, the base model had no air conditioning, no stereo and just a single windshield wiper. The Spartan interior had no glove box and thinly padded seats that didn't adjust. Kunal Bahl, a 28-year-old salesman, looked at a Nano in 2011 when he was shopping for his first car. "I didn't like the sound of the engine. It sounded like an auto-rickshaw," a three-wheeled vehicle common in India, Mr. Bahl said. Mr. Bahl, who works in the mountainous state of Himachal Pradesh, also said, "the car was underpowered for driving in the mountains." He decided to buy a Hyundai Motor Co.005380.SE +0.57% i10 compact instead, even though it was considerably more expensive. The Nano's image has also been tarnished by a series of cases in 2010 when the cars caught fire. The company said it investigated and that the blazes weren't the result of any manufacturing defect. "When a person buys a Nano, there are a lot of people who always ask them: 'Why? Why did you buy this car?' " said Delna Avari, a Tata marketing executive trying to change the way people think about the Nano. Younger customers, Ms. Avari said, are saying "I'm not happy with the car the way it is, I need certain things in it for it to be my first car." The updates are designed to make the car more appealing to buyers under 35 years old and "a little more aspirational than what it was before." The new top-end Nano LX will cost $3,578. New Nanos have a sound system with four speakers, dual glove boxes and improved interiors, in addition to the refurbished exterior. Tata is trumpeting the changes in television spots that show young people, often well-known Indian entrepreneurs, dancing. The tagline is "Celebrate Awesomeness." The company hopes that by getting more young people into Nanos, they will also drive demand for the rest of their vehicles. Around 35% of Tata buyers are repeat customers. But changing public perceptions of the Nano and turning it into something akin to theVolkswagen VOW3.XE +0.14% Beetle or the Morris Mini will take time, company executives admit. "Perceptions are hard to change overnight. It's going to take us a while," said Tata's Mr. Arora. Aditi Malhotra and Mukesh Jagota contributed to this article.