We should see the Nano as a beacon of hope in the current economic climate: a genuine innovation, grounded in the real world, and a source of confidence in the real economy. Among many interesting aspects of the Nano, here are two:
First, it will punch well above its weight in the competitive automobile market. To see this, consider how much it will cost a consumer to use the Nano over, say, five years. Buyers should certainly be paying attention to the total cost of ownership. The on-road price?over Rs 1.2 lakhs including insurance, registration and taxes?is only a part of the total cost. How does the Nano fare in terms of the other cost components: fuel, maintenance and repairs, financing costs and particularly, depreciation.
The lower fuel cost of the Nano is easily factored in. Financing costs will be lower compared to other automobile models, as it is easier to make a larger proportionate down payment and reduce the interest rate on the loan. Economy in ?content? that has kept Nano?s cost of production low, and particularly its open design and functionalities that are not embedded too deeply, should keep the cost of service, repairs and maintenance in local garages lower.
The largest component of the total cost of ownership is the rate at which the car depreciates. Automobile models lose a large proportion of their value in the first year. What will Nano?s residual value be, five years down the line? How the frugal design will affect its durability and life span awaits empirical determination. If that is not below par, then, not least due to the difficulties that Tata Motors has faced in getting the car into production, excess demand should be high for quite some time. The number of entrants in the lottery for rights to buy the Nano will clearly be a large multiple of the annual production run for a few years. Inflated resale values of durable consumer goods used to be common in the era of industrial licensing. Reminiscent of those years, Nano should carry some significant premium in resale, simply because of excess demand for such a genuinely innovative product in the true Schumpeterian sense.
So, good residual value, fuel economy, and low cost of repairs and maintenance! Till competitors enter this market segment in a few years, the total cost of ownership of the Nano might well be the lowest that the industry could ever conceivably see. The car?s net ?utility? in usage should be high enough to drive demand further up, eating into the market for some higher end automobile models. Manufacturers of some of the more expensive models who shrug Nano away in public will doubtless offer deep rebates soon. A rebate war could result with some unexpected consequences.
It is a second aspect that is potentially more far reaching. Ratan Tata?s vision of distributed manufacturing of the Nano is a genuinely exciting one, not only for the automobile industry, but for many other durable goods industries. Micro-factory retailing (involving the sale of car components as kits to satellite assembly units in various locations owned and operated by local entrepreneurs trained and certified and subject to quality assurance by Tata Motors) may sound utopian, but it was not long ago that the Nano product concept sounded implausible. Undeniably the product is here, and on that basis?not denying serious difficulties in quality assurance and sorting out liabilities in the distributed context?we have grounds for confidence that the company will deliver on this massive organisational innovation. It is one that could change the face of manufacturing a few short years from now.
If this mode of organising production does come together for Tata Motors, it should lower distribution and manufacturing costs and increase returns. Organisational innovations of this type are not business secrets, and what works and what does not will be clearly visible to other durable goods manufactures even as the process unfolds and managerial processes and business structures are built up by the company. Given the number of potential adopters of distributed manufacturing who should be watching, it has the potential to diffuse through a highly visible part of Indian industry. If that happens, there is a lot of potential for entrepreneurship, dynamic capabilities, and of course employment, to spread right across the country to areas where enterprise will do most good.
So significant beneficial externalities could spill over to the rest of Indian economy from the Tata Motors? ?experiment?. It would be a smart choice for policy makers and administrators to do all they can to help the company keep its difficult organisational efforts on rails. That would be a good example of strategic industrial policy.
?The author is reader in economics at the Judge Business School, University of Cambridge, and fellow of Corpus Christi College