India - Economics
How should Tata´s Nano go global?
Ashley Jenner elucidates the challenges to be faced by companies from emerging countries in their internationalization strategies. By using the example of Nano, he shows the most assertive way to achieve success in global markets. From São Paulo.
As one of the most progressive companies on earth, the Tata group has decided to take on the international motor industry. It has come up with the idea of a pocket-sized $2.500 priced automobile, the four wheeled version of the $100 computer. Its name is NANO.
Appropriately called the “People’s Car”, (not, however for the likes of the People’s Princess, the late Princess Diana who preferred her Bentley) Mr. Tata says that the Nano has its origins in Calcutta rickshaw cabbies and a very Indian scenario of scooters with four family members perched on top, but Tata has been careful to avoid giving the Nano the image of an auto rickshaw or a four wheel scooter. The aim was to produce a proper car that will take four or five people in all weather conditions to where they want to go, running on regular fuel and not some exotic fuel. It is even aimed at anyone who is to be found riding a bike; on the other hand, more affluent families may want to have one in addition to their sedans or SUV´s.
The very thought of the Nano puts shudders up the spines of General Motors and Ford executives and even has Honda and Toyota wondering what their next move should be. Not even the about to be launched Uruguay assembled Chinese Chery is being marketed just on its price merits in one of the major emerging markets, Brazil, because it actually will cost about the same as a lower end price range establishment car.
Tata is not the first company to think up the idea of globalizing a really cheap car. In the early 1990´s, many São Paulo taxi drivers turned to the Lada which was one of the first to export sardine-can type cars from Russia. They were considered a step up from the VW and Fiat compacts because they had 4 doors. KIA Motors was one of the most popular exports to Brazil in the mid- 1990´s especially the utility van called the Besta, (which in Portuguese means “dumb or thick”). Then the Yugo appeared out of nowhere from the Balkans but the war stopped it in its tracks before it made it to Latin America but only after managing to establish a wide network of dealers in the UK. The Lada, Besta and Yugo all had one thing in common. They were cheap and nasty. Above all they were not properly tropicalized, which means converting the car for fuel, suspension, height, paintwork etc in order to withstand the rigors of the tropical climate, the holes in city roads and the rough rural landscape. All of these brands discovered that price is paramount and consumers place great trust in the quality of imported cars. Correction: Used to place great trust in imported cars. Times have changed and consumers have become more demanding over quality standards. How will the Nano stack up in this new globalized scenario?
Consumers have become more demanding over quality standards. How will the Nano stack up in this new globalized scenario?
It is natural to compare it to the 2.69 meter long gasoline Smart car which runs on a one liter engine as opposed to the 3.1 meter long Nano with a 623cc two cylinder engine (Isn’t that the type of engine the 1960´s tinny Citroën two-stroke car used to run on?). The main difference is in price: $2.500 for the Nano against the average price of $15.000 for the Smart car, although the Nano could not be sold for that price outside of India.
According to Professor George Yip from the London Business School, for its global strategy, Tata could use the value adding chain, also known as the business system, which comprises all the activities that a business conducts. A typical sequence begins with research and development, runs through production, and finishes with selling, marketing, distribution and after sales service. The value chain can provide advantage to a company if the company is superior in one or more elements of the value chain. Companies can leverage their business system advantage by either exporting from their domestic business system or through relocation of specific activities. Tata Motors is already doing both to leverage its competitive advantage. It already exports commercial vehicles to over fifteen countries from India using its domestic business system. In Africa, Tata Motors markets both its passenger and commercial vehicle range. The company is present in South Africa (the Tata brand is one of the fastest growing in the history of the South Africa´s automobile market) and six other African countries. Tata cars, buses and trucks are being marketed in several countries in Europe, Africa, the Middle East, Asia and South America. As can be seen, Tata is no stranger to globalizing its products.
Tata also has to consider the direction in which they move in 'the pyramid of international competitive advantage.' Professor Yip´s general rule is that when a company is moving down the pyramid it should emphasize the country of origin, because the new market perceives it as superior. When a company is selling up the pyramid it should hide the country of origin and acquire another local name and brand and sell that there, because the products from the home company are considered as inferior. Nowadays, emerging market companies go overseas and buy an established brand name in developed countries. Tata Tea leverages Indian tea plantation assets in conjunction with the Tetley's marketing network to access markets for branded tea around the world. In the motor business, Tata has partnerships with names such as Fiat, Daewoo and Marcopolo.
Having the right partners is also another plus. As Professor Yip says, Microsoft's initial basis of competitive advantage was its partnership with IBM. Emerging market companies can follow their partners, have partners follow them or find new, local partners to go global. Tata Motors is leveraging local partners to sell its existing passenger cars (Indica, Indigo, Sumo, Safari and Maruti) and has entered into an agreement including branding and distribution inter alia with the UK's long established MG Rover to sell them across the UK and Europe. Tata should seriously consider this alternative for the Nano, bearing in mind that none of their partnerships have involved anything as ambitious as a $2.500 car. The globalization model which should not be followed is the one Renault adopted in Brazil. This involves persuading a prominent local partner to set up a dealer network for imported cars and promote the brand and then pushing the local partner aside when he has created sufficient critical mass so as to be able to produce cars locally. Renault rues the day it went it alone, whereas the former partner has being doing very nicely with another Asian brand.
Emerging market companies can follow their partners, have partners follow them or find new, local partners to go global.
While it is important to be superior in one of the above advantages, real power comes from putting together multiple bases of advantage. Truly successful companies are those that manage to build on their initial base of advantage, and increase it, while continually adding other bases of advantage. Toyota Motors for example, started with just one source of competitive advantage; their business model based on low labor cost. (Tata´s present situation?). They gradually built on the other advantages such as product quality, and economies of scale. Today their cars command a 15% premium over American brands.
The globalized Nano will be forced down this same route because price and quality are no longer trade-offs. Buyers expect and can get both. Environmental problems could loom because two cylinder engines are believed to give off more emissions than four cylinders. The advantages of the two stroke are that it has more get-up-and-go because it fires once every revolution, giving it twice the power of a four stroke, which only fires once every other revolution, it packs a higher weight-to-power ratio because it is much lighter and is less expensive (vital for the Nano) because of its simpler design. These attributes make two stroke engines very popular for a variety of uses from dirt bikes, mopeds, jet skis, and small outboard motors, to lawn and garden equipment such as mowers, chain saws and hedge trimmers.
There are other differences between the two stroke and four stroke engines that aren't so favorable, which is why two stroke engines are not normally seen in cars. They suffer from faster wear and shorter engine life than a four stroke due to the lack of a dedicated lubricating system and require special two stroke oil ("premix") with every tank of gas, adding expense and at least a minimal amount of hassle, which heavily pollutes because of the simpler design and the gas/oil mixture that is released prior to, and in the exhaust (it also creates an unpleasant smell). It is fuel-inefficient because of the simpler motor design, resulting in poorer mileage than a four stroke engine and has a high-decibel whine. All of this means that Tata has to not only reinvent the body and chassis but it needs to recreate the two cylinder engine. Lastly, some people are not exactly turned on by the thought of an unprecedented flood of bikers taking to the road in cars. There is a strong case for moving up the pyramid of international competitive advantage.
Companies from India, including Tata, and other emerging economies face many challenges when they go global but there are many strategies that they can use to offset their disadvantages and to leverage inherent advantages of coming from poorer countries. Indian companies such as Tata now have every opportunity to become truly global forces. This can only be achieved by high quality standards from the outset since a bad quality reputation from day one would be the answer to a prayer for the established auto companies. By the way, the $100 computer is an IT Holy Grail. It does not include shipping and comes without a monitor. Tata makes no mention of the Nano´s options which, as every car buyer has discovered, end up being not so optional. However, even if the Nano costs twice as much as the Indian price, including non-optional options, the car will still rock the industry unless it tanks because of poor quality.