During the mid- and late-1990s, multinational carmakers were launching older editions of their hot-selling cars in the Indian market. Rumors were that some MNCs even brought in their junked plant material and machinery into India, in the name of foreign direct investment. But then, those were the best Indian roads had received in a very long time.
None of those "dumped" editions sold like hot cakes. What did sell was the Maruti 800, a mini-car that was launched in 1983. The reason? It was affordable and better in performance than the cars Indians were buying prior to 1983.
Most auto MNCs then believed that it made little sense to pour huge investments in India since it lacked the volumes that could justify such investments. As a reporter covering the automobile sector, I was often told that it costs US$1 billion to develop a new car, from scratch. And given the low volumes of the Indian car market, no auto MNC was willing to put in that kind of money to develop a "made in India" car.
But, by late-1990s, things began to change. At the 1998 Auto Expo held in New Delhi, Hyundai unveiled its small car--Santro--and then-called Daewoo Motors India showcased its Matiz. Tata Motors unveiled its small car, Indica.
Since then, there has been no looking back. The real change came around 2003 to 2004, when Indian IT finally started moving up the value chain and the world started talking about the "India growth story". MNCs, in almost every industry, started setting up their captive R&D centers here.
Thanks to IT, today it does not cost US$1 billion to develop a car. Moreover, cars come with better electronic functions. According to the Asian Development Bank, a vehicle manufactured in 2000 had on average approximately double the number of electronic functions of a vehicle manufactured between 1990 and 1991.
Globally, while innovation was on the rise, the sales volume required to support and justify innovation was not being generated. According to a KPMG report, titled India as an Auto Innovation Leader, in the U.S., average annual sales per vehicle fell by one quarter between 1980 and 1999.
"Price and income trends suggest that these sales volumes are unlikely to be rebuilt in the developed industrial markets. On the contrary, they are likely to fall further," the report said.
According to this report, in markets like the U.S., the average price of a new car has doubled over the last 20 years, but average incomes have only risen by 50 percent. "And this price-income gap continues to widen, implying further falls in sales volumes will occur if costs cannot be cut," it added.
"The world automotive industry is caught in an innovation trap," said the report. It is committed to relentless product innovation at an ever-higher cost, but with ever-lower returns in terms of sales and customer recognition. And that's why India stands a good chance of emerging as an innovation leader. It's a cheaper destination to carry out R&D.
The answer, therefore, lies in a refocus on costs through innovation.
Today, companies like Toyota, VW, Renault-Nissan and Ford, are busy developing ultra-cheap cars, priced at around US$3000. And Tata Motors launched the world's cheapest car yesterday, at US$2,230.
Every manufacturer's focus today is on growing the price-sensitive emerging markets. But what about the developed markets? Surely, they could also do with cheaper and smaller cars. Perhaps, this maybe one way of growing these recession-ridden markets and getting the Detroit automakers back in the black.
And that's why, it didn't come as a surprise when Ratan Tata, chairman of the Tata group, said yesterday that he plans to take the Nano to the U.S. and Europe in three to four years' time. By then, Tata would have probably recovered the capital investments he made in the Nano through the volumes generated in India, and elsewhere in the developing world.
Expanding the market would then only bring him additional revenues. That's what GM and Ford were doing in India in the late-1990s, right? Have the tables begun to turn?