If the invention of the wheel can be credited with changing the course of mankind, the addition of a wheel has been equally successful in transforming futures. Just ask the team at Tata Motors. The Nano may well be redefining Tata Motors’ identity now, but to understand how the company’s present route was charted, drive back to mid-2005, and the launch of a mini-truck called Ace.
The ingenuity was in its simplicity: Ace was the first small goods-carrier on four wheels, in a market dominated by three-wheeled commercial vehicles. In 2009-10, just four years after its launch, sales of the Ace crossed the 100,000-mark—the only goods commercial vehicle in the country to reach that milestone.
The achievement is especially significant considering the Ace’s genesis. The project was started in the backdrop of Tata Motors’ jaw-dropping Rs 500 crore loss in 2000-01. “That is when we took stock of the customer segments and our own product portfolio. We wanted to reduce our dependence on the goods-cargo heavy commercial vehicle business,” says Prakash Telang, MD, Tata Motors’ Indian operations. Still, the move to a four-wheeled light commercial vehicle was a radical decision. While most competitors were focusing on medium-sized trucks, Tata Motors was considering a compact four-wheeler in the lowest-tonnage segment of the market: a mini-truck.
Last-Mile Distribution
The business opportunity was sound, even if untested (three-wheeled goods carriers were the standard product in the segment). When a country is in the early stages of road development, medium trucks operate as a point-to-point workhorses. But as a country begins to evolve, as the transportation network assumes a hub-and-spoke model, in cities, sales of medium trucks start to shrink. “You then have large trucks that are carriers from hub to hub. We saw the opportunity in retail distribution with smaller vehicles—for the last-mile distribution,” says Telang. By opting to develop a small truck in 2001, Tata Motors was betting on a stable revenue contributor as long as infrastructure projects were on track.
Other domestic players, notably Eicher Motors, Piaggio Vehicles India, Force Motors and the Mahindras, were also working on the four-wheeled variant in early 2000. A year before the Ace, Piaggio Vehicles had a ready variant in Europe that it wanted to localise for India. “We tried to introduce the concept of a quadricycle in this country in 2004,” recalls Ravi Chopra, Chairman and MD of Piaggio Vehicles in India. “This was a three-wheeled vehicle with a fourth wheel (at the back). All the testing procedures, emission norms, rules and regulations for the quadricycle are as they are for three-wheelers. We wanted to introduce that in India,” he explains.
For government approvals, there was no opposition to a Piaggio quadricycle in the commercial (goods carrier) configuration, but there was opposition to it in the passenger segment over safety norms: the domestic industry wanted the gross vehicle weight to exceed 600 kg, the global standard. This eroded its production volumes on the Piaggio quadricycle platform, which was meant for sub-600 kg vehicles. “Our idea of a four-wheeled vehicle had to be postponed,” Chopra rues. Around the same time, Force Motors, too, had displayed its mini-truck at an auto expo. It was their market to lose.
Within Tata Motors, the New Product Innovation (NPI) team tackled the same challenge differently. For long, Tata Motors had been the incumbent in the medium and heavy commercial vehicles (M&HCV) market with more than 70% share. So, the brief to the NPI team was: miniaturise an HCV. The man to head the Ace project was a 30-year-old divisional manager called Girish Wagh. Eight years on, he would head Tata Motors’ small-car project.
Frugal Engineering
With the engineering of Ace, Tata Motors demonstrated how to keep a project’s overall cost tight, and its final price competitive. To achieve this, the automaker had to get a stranglehold on the budgets of each component. “The Nano team that was doing its costing decided that all single components would have a target base-cost to reach the golden mark of Rs 1 lakh,” says Telang. “So, we had to have a tighter budget each for axles, engines, tyres—and then work towards that. Ace was also such a tightly costed project,” he explains.
The Nano, manufactured at the Pantnagar plant in Uttarakhand, shares more than just the production facility with the Ace. “When Girish moved from here to the Nano project, there was automatically a transfer of learnings,” recalls Telang. The engine development of Ace is a classic instance of the frugal manufacturing that Tata Motors followed. The Tata Indica had a 1.4 litre, four-cylinder engine. “We cracked an ingenious way to convert two cylinders out of this into an engine for the Ace. That proved very handy for us,” he adds.
The decision to go small was critical, and was driven by the nature of the truck market. First, it meant fleet operators’ credit-payback burden with Ace was reduced compared to the credit burden of a medium or large truck. During a cyclical downturn, sales of mini-trucks would thus be largely unaffected. If medium and heavy truck buyers were discouraged by an economic slowdown, the mini-truck buyers would still be relatively comfortable.This was evident in fiscal year 2009, after the financial meltdown. Even as the M&HCV market in India shrank 33% compared to the previous year, Ace in the light-CV segment fell by just 12%. “The moment liquidity conditions improved, the Ace market returned faster,” Telang points out. The Ace today accounts for nearly 70% of the segment, which it virtually created. In terms of competition, Mahindra & Mahindra’s Maxximo and Gio are the only light commercial vehicles.
When the mini-truck project began, internal resources were scarce. Tata Motors’ priority in 2000-01 was to capture market with the Indica, its indigenously developed hatchback. The Indica was a Rs 1,700-crore project. But with the Rs 500-crore loss straining the company’s balance-sheet, the mini-truck’s budget would be a small fraction of that. As it turned out, Tata Motors spent about Rs 200 crore on the Ace, over five years. Compare this with the Rs 2,000-crore Nano project.
“We’d set up facilities within existing premises in Pune. We had to watch out for risk. That was a challenge for the team,” Telang recalls. The Tata Ace was launched in May 2005 with an initial production capacity of 30,000 units a year. The company opened over 300 exclusive sales outlets for the Tata Ace. The response was a pleasant surprise. Within a year, Tata Motors had sufficient demand to double output. Shortly thereafter, in August 2007, it set up a dedicated facility in Pantnagar.
By capturing the small-vehicle share in India, Tata Motors has cracked the mass market. In that sense, the Ace has been a prelude to the Nano.
Path To Profit
While a low-cost vehicle keeps revenue ticking, industry analysts have been quick to question profitability. It is a question that the Nano faces after the 2008 showdown in Singur, and even as its 225,000-unit facility gets up and running in Sanand, Gujarat. In the case of Tata Ace, its profitability rose because of its brand extensions.
The Tata Ace portfolio now comprises the Ace, the Ace HT, the Ace Ex and the Super Ace (a 1-tonne vehicle). In June 2007, Tata Motors launched Tata Magic, developed on the Ace platform, as a four-wheeler for public transportation. Magic has been working, especially in semi-urban and rural areas. With sales of nearly 49,000 units in 2009-10, it clocked a growth of 71% over the previous year. In all, Tata Ace and Tata Magic crossed 150,000 units in 2009-10. The profits vary across product lines, even as the company gets to enjoy economies of scale. In the case of the Nano, Tata Motors seeks to do much the same across variants.
Now, Tata Motors is also looking to lead in clean technologies. There are 15 prototypes of the electric Ace being tested in Europe for foreign markets. In India, the CNG variant has caught on in Delhi. “CNG is a better alternative as a fossil fuel, especially when electricity generation in India is largely coal-based. There is no point cutting greenhouse gases in cities when our electricity comes from coal mines,” Telang asserts.
When the mini-truck first hit the domestic market in fiscal 2006, 70% of the segment was in the cities. The rural-urban market break-up for the Ace is now at 50-50. And Tata Motors seeks to make it 70-30 in favour of rural markets on the back of the government’s progressive policies.
More than anything, the shift from a three-wheeled commercial vehicle to a compact four-wheeler sub-1 ton category truck has been a branding success. It had unexpected results. “We found that Ace gave a sense of respectability to the owner of the product,” Telang smiles. “In the south, one customer said, ‘I started getting offers for my wedding once I began driving the Ace’.” Clearly, the wheel of fortune didn’t turn for Tata Motors alone.