Tata Nano likely to lose much-hyped price tag

MUMBAI: India's Tata Nano was launched with great fanfare as a 100,000-rupee (2,200-dollar) vehicle -- a round number that neatly encapsulated its status as the world's cheapest car.

But analysts say parent group Tata and its chairman Ratan Tata will struggle to keep the jellybean-shaped vehicle on sale at this level due to the rising costs of raw materials, labour and new higher taxes.

Described as India's "People's Car," the Nano is pitched at the country's aspiring middle-classes, many of whom currently travel on two wheels but are looking to upgrade.

"The Nano is Ratan Tata?s dream project. But as costs rise, the Nano will not remain a 100,000-rupee car," said Vaishali Jajoo, from Mumbai-based Angel Broking.

Tata faces the same problems as other car manufacturers, such as Japan-owned Maruti Suzuki and its rival Hyundai Motors, which have hiked their prices this year.

Steel in most forms has seen an average price rise of 25 percent since April 2009, Jajoo said, while the prices of tyres and auto accessories are rising as demand for copper, aluminium, plastics and rubber picks up.

The increase in commodity prices can be attributed to rising global demand following the end of the financial crisis and deep recessions in developed countries, analysts say.

Tata Motors has guaranteed that the first 100,000 cars will be delivered "price protected" to owners, which means they get the vehicle at the promised price, regardless of rising costs.

At least 26,500 Nanos have been sold since its launch in July last year, with the basic model priced at 100,000 rupees from the factory floor, while the popular, high-end version, the Nano LX, sells for 172,360-185,375 rupees.

When a second round of bookings opens -- seen as likely in the last quarter of the year -- the cost of an LX could rise to nearly 200,000 rupees, while the basic model could be about 130,000, analysts say.

Tata Motors was coy on a possible price rise.

"What happens in the future is difficult to say," a company spokesman said.

But while announcing its previous quarter earnings, the company admitted it faced challenges from the rising cost of raw materials, withdrawal of government stimulus and a possible hike in interest rates.

The Nano has sparked a race to create other ultra-low-cost cars for the Indian and other emerging markets.

India and its 1.2-billion-strong population is a huge draw because of the low number of car owners. Car penetration is just eight per 1,000 people, compared with 550 per 1,000 in Germany and 495 in France.

French automaker Renault and its Japanese partner Nissan plan to launch a car to rival the Nano in 2012 in partnership with scooter and three-wheel specialist Bajaj Auto.

Ford, Toyota and Honda are also poised to launch small cars in India in the next two years.

Nevertheless, analysts said the Nano would still hold its place.

The basic Nano is on average about 1,300 dollars cheaper than its nearest rivals, the Maruti five-seater Omni at 200,000 rupees and the Maruti-800 at 210,000 rupees.

"The Nano has a first-mover advantage (in India). Rural demand will offset any impact of lower demand due to a price rise," said analyst Gaurang Shah, from Geojit BNP Paribas Financial Services.

The car's novelty value is also a big advantage, with the Nano still getting second looks on busy Indian roads eight months after its launch.

"It has that toy-like, cuddly, safe feeling," said Sunaina Kakkad, a Mumbai call-centre worker, who is looking to buy her first car.

The company is also looking to sell it in the United States, but it could be years before the car hits US showrooms, as the company re-designs to incorporate a larger engine and meet higher safety standards.

Last year, Tata unveiled a European version of the Nano sporting airbags and leather trim, with more stringent safety and emissions standards.

The Nano Europa will hit the market in 2010-11 at a price near 5,000 euros (6,390 dollars).