Tata Motors Hbr Case - Profitability of the Nano
Memorandum
To Chairman, Tata Motors Ltd
Issue Profitable Production of the Nano
Issues
A primary issue Tata must consider is the current and future profitability of the Nano. In order to determine if their strategy of entering the small car market is feasible, the influences on the industry must be evaluated. If evaluation of the industry indicates that future profitability is in question, the company must consider canceling the project, or focus on areas where Tata can influence the industry to improve the likelihood of profitability.
Analysis
Profitability/Feasibility
One must consider the sensitivity to prices and the affordability of the car to the primary target market (India). Case Exhibit 3 estimates that 21% of households have income levels high enough to be considered part of the target market (ie: families that may own a motorcycle or small car), with almost all (98%) residing in the $4000-$10000 income bracket. Even at low gros margins, the Nano would be 22% of household income for those families that make $10000 annual income. Although 40 million households are estimated to be in the $4K - $10K income bracket, it can be expected that a small number of these will be earning $10,000. Therefore, the target market can be considered greatly reduced, and their price sensitivities very high. However, as discussed, it can be assumed that these households already have a motorcycle, and approx 2 million could switch to a cheap car. In the analysis of Case Exhibit 6 there is no reference to Labour or SG&A costs for the Nano. When these are estimated (general and admin costs assumed to be negligible due to Tata’s current operations of vehicle production), the cost of the Nano rises to a point where $2200 (USD) per unit price will not be profitable. If the 24% Post Manufacturing Tax remains (p.18), a promotional budget is included (assumed to be 20% of per-unit sales up to first 250,000 units), and labour cost/unit is
To Chairman, Tata Motors Ltd
Issue Profitable Production of the Nano
Issues
A primary issue Tata must consider is the current and future profitability of the Nano. In order to determine if their strategy of entering the small car market is feasible, the influences on the industry must be evaluated. If evaluation of the industry indicates that future profitability is in question, the company must consider canceling the project, or focus on areas where Tata can influence the industry to improve the likelihood of profitability.
Analysis
Profitability/Feasibility
One must consider the sensitivity to prices and the affordability of the car to the primary target market (India). Case Exhibit 3 estimates that 21% of households have income levels high enough to be considered part of the target market (ie: families that may own a motorcycle or small car), with almost all (98%) residing in the $4000-$10000 income bracket. Even at low gros margins, the Nano would be 22% of household income for those families that make $10000 annual income. Although 40 million households are estimated to be in the $4K - $10K income bracket, it can be expected that a small number of these will be earning $10,000. Therefore, the target market can be considered greatly reduced, and their price sensitivities very high. However, as discussed, it can be assumed that these households already have a motorcycle, and approx 2 million could switch to a cheap car. In the analysis of Case Exhibit 6 there is no reference to Labour or SG&A costs for the Nano. When these are estimated (general and admin costs assumed to be negligible due to Tata’s current operations of vehicle production), the cost of the Nano rises to a point where $2200 (USD) per unit price will not be profitable. If the 24% Post Manufacturing Tax remains (p.18), a promotional budget is included (assumed to be 20% of per-unit sales up to first 250,000 units), and labour cost/unit is