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Is two a crowd in the market for small and cheap cars? Close on the heels of Tata’s Rs 1-lakh ($2,500) Nano scheduled for launch later this year, Bajaj Auto has entered into a joint venture with Renault and Nissan to produce a car with an identical pricetag. It is hardly surprising that manufacturers are scrambling to occupy the potentially gigantic market for small cars in India. Sharp and steady economic growth with an ever-growing middle-class sets up a good market scenario for the medium to long term. The Indian automobile market has always been dominated by small and, perhaps more importantly, cheap cars. India is a price sensitive market, much more than a quality sensitive one. Assuming that this is the case for other developing and emerging countries as well, there is a potential market for cheap and small cars in a significant number of countries. Both the Tata Nano, with an annual production target of 2,50,000 cars and the proposed Bajaj-Renault-Nissan car with an annual production target of 4 lakh units will operate at, or above, minimum efficient scale levels for the industry. They will, thus, reap considerable economies of scale.

India can then, quite possibly, become a manufacturing hub for small and cheap cars, which will help our manufacturing base in the long term. Perhaps more importantly, India can also become the technological hub for small cars. The real value added in the industry is in original design, both at the level of original equipment manufacturers and component manufacturers. The technological learning process may subsequently spill over to larger cars as well. The downside of the cheap cars revolution will, of course, manifest itself in traffic congestion and pollution. But this calls for greater investment in public transport rather than a clampdown on cheap cars. The really important question mark hangs over the profitability of the cheap car venture for the manufacturers involved. The Society of Indian Automobile Manufacturers estimates that 54% of the price of a car in the Indian market is made up of taxes. Given that, is it viable to make a profit on a 1-lakh car? Someone’s dream will take a reality knock. Tata and Bajaj will both have to reinvent part of their business model. And they will have to carry componet manufacturers with them. It’s an effort that deserves all the luck.