Posted: July 31, 2012 |  AUTHOR: KEN FOX | CONTACT ME


It started in a big way with India’s $84 billion (2010 sales revenue) Tata Group launching the Nano automobile on March 30, 2009 for a about $2,500. Called the People’s Car, the Nano was specifically designed for emerging markets like India. The Tata Group, which consists of about 100 companies, is no slouch when it comes to new business or the automotive market. Tata acquired the Jaguar and Land Rover brands for $2 billion from Ford in 2008. The Nano is very basic, with no heater or air conditioning, one front windshield wiper, a 33 horsepower, two cylinders, manual, rear drive engine and a trunk only accessible from inside the car. After several years, poor marketing, reports of fires and limited distribution to the 750 million poor or lower income residents living in rural areas of India, the Nano is faltering. When Tata Motors investigated the Nano fires, it was confirmed they were started by owners rigging the cars to accommodate manually installed heaters, radios and CD players. However, the company is striving to make the Nano a success. To this end, it is seeking new distributors in small and rural towns across India, and has started exporting Nanos to Sri Lanka and Nepal. There are even plans to export a Nano version to the U.S., Europe and Latin America.

Any Nano for the U.S. will need to be significantly modified to meet safety and emission standards. Ratan Tata, Tata Group’s CEO, announced another version of the Nano called the “Pixel” city car” could start selling in Europe in 2-3 years.

The Nano was a game changer. It created a new segment in the auto industry. It took five years of research & development by Tata engineers to identify low cost manufacturing solutions. Nano’s launch clearly generated extensive global media coverage. The growing middle class in countries like India, China and Indonesia represent a sizeable and growing low income segments who may want to buy their first four wheel drive vehicle (upgrading from a two wheel scooter, motor bike or bicycle). Other car companies have taken notice of the Nano while others wave it off as no threat.

One admirer of the Nano is Carlos Ghosn, CEO of Renault/Nissan. He used a similar concept, although a bit “higher up” to create and launch a back to basic Renault car called the Logan, which is made at a subsidiary in Romania. It sells for approximately $10,000. According to the Boston Consulting Group: approximately 400,000 Logans are sold each year, with a higher profit margin than other Renault vehicles. It is one of the Renault’s best selling car models.

Mr. Ghosn wants to take the Nano concept even further:
“We’re working on a new platform that will be ultra low cost” in India. This car would be made in India by Renault and its alliance partner, Nissan Motor Co, and potentially one or more regional partners.”
In mid March 2012, Nissan announced plans to resurrect the Datsun brand, hoping to attract aspirational customers in high growth, emerging markets.

Datsun was a Nissan brand phased out about 30 years ago. Inexpensive new Datsuns are expected to be launched in Indonesia, India and Russia in 2014. The cars will likely be priced from $5,000 to $6,000, about one half the price of Nissan’s currently least expensive vehicle. Simon Sproule, Nissan’s VP for global marketing said “What we see is an opportunity in the emerging markets to grow at lower price points.”

Indonesia will be a key market for the new Datsun rebranding effort. Nissan will increase their production capacity in that country to 250,000 vehicles a year, versus 100,000 currently. Mr. Ghosn adds: “Indonesia is becoming the Powerhouse of ASEAN,” referring to the ten member Association of Southeast Asian Nations. Steady population growth and a robust economy mean the future of this market is bright.”

Indonesia attracted a national record of $20 billion in foreign direct investment in 2011, as its GDP rose 6.5%.

Another low end market idea came about trying to provide refrigeration solutions to rural India. A product was developed, often referred to as the “Nano refrigerator.” This mini refrigerator was launched in India, with a brand name of Chotukool (Little Cool). It does not have a compressor, but runs on a battery and opens on top. It only weighs 7.8 kgs., runs on a cooling chip and a fan similar to those used to cool computers. Given the power shortage in the Indian countryside, it uses high-end insulation to stay cool for hours without power. It also costs 35% less than the lowest cost refrigerator, with a price of about $69. About 70% of India’s population lives in rural areas or villages, which makes distribution a challenge. The company that manufactures the Chotukool is called the Godrej Group. To reduce distribution and marketing costs, the company uses village girls to sell the units for a commission. It also has an arrangement with India Post, which sells the refrigerators through their post offices. The design of the unit is small and mechanics are simple. The number of parts has been reduced from 200 in a small refrigerator to 20 in the Chotukool.

G. Sunderraman, VP of Corporate Development at Godrej & Boyce, says the idea to target the “bottom of the pyramid” customers stems from a workshop with Clayton Christensen of Harvard University. Christensen in best known for his concept of “disruptive innovation.” The villagers from the rural areas in India were involved from the design to the selling of the product. Among many details, the favorite colors of red and blue were chosen from villager input. Chotukool is bound to attract a huge new group of consumers in a country where less than one in five homes has a refrigerator.

Another well known U.S. professor and management guru, C.K. Prahalad, has been saying: “serving the poorest of the world can and should be good for business.”
The middle class populations of the BRIC nations, especially China and India will stimulate demand for products other socio-economic classes have and use. This aspirational drive should create demand for not only products but services such banking, credit cards, repair and maintenance, as well as insurance.

A key rationale for these low end strategies is based on the growing middle class populations in emerging markets. These target markets represent future buyers, whose needs and aspirational wants are changing. The chart below highlights some of the growth patterns in select emerging markets.

Final Thoughts
The Tata Group’s confidence of being able to invest 5 years of R&D for the Nano introduction has legitimized targeting to the low end consumer, at least for durable goods. This implies being able to design and customize products, where reasonable profit margins can be achieved. It also represents an investment in a market segment that will hopefully grow in disposable income, influence and mobility. In my mind, this buying dynamic creates not only a new market segment but brand or company loyalty often generated by creative and innovative approaches to problems not addressed previously. I expect to see this trend continue as global companies seek new markets for products and services to low income markets in the Pacific Rim, Africa and the Middle East.

Stuck in Low Gear, The Economist, August 20, 2011
Unloved at Any Speed, Foreign, October 7, 2011
Godrej’s Nano: Chotukool, Business Standard, November 23, 2009
At Godrej, Chotukool spawns major business Strategy, Daily News & Analysis, Dec. 5, 2011

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