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World's cheapest car may be pricier than promised

High raw material costs and production delays could force top vehicle maker Tata Motors to raise the price of the world's cheapest car.
Reuters | By Rina Chandran, Mumbai
UPDATED ON JUL 23, 2007 04:09 PM IST

High raw material costs and production delays could force top vehicle maker Tata Motors to raise the price of the world's cheapest car, with suppliers resisting pressure to lower prices any further.

Tata Motors is turning the screws on parts makers as it pushes to launch the car next spring or summer, despite delays in construction of the plant in the state of West Bengal after farmers opposed the acquisition of their land.

The company, India's third-biggest auto maker, had earlier announced the launch would be in early 2008.

Suppliers, already grappling with volatile raw material costs and softer domestic demand, are baulking at Tata's price and delivery targets. Some have reportedly turned down its orders and others are seeking guarantees on volumes and prices.

"The Tatas' demands are pretty aggressive, be it on product, cost or delivery," said one supplier who asked not to be identified. "We're being stretched."

Tata Motors has promised to sell the car for 100,000 rupees, but some analysts say it will now have to price it 25 per cent higher in order to maintain a profit margin of 8 per cent.

A sticker price of 125,000 rupees would put the vehicle in line with other low-cost cars being considered by competitors such as Renault and Nissan.

Chairman Ratan Tata said at a recent shareholders' meeting that the firm was committed to launching the car in the first half of the fiscal year ending March 2009. A company spokesman on Monday reiterated that timeline and said it had no fresh comment on the price.

A car priced so cheap in a country where small cars make up two-thirds of sales could have a potential market of one million units, Chairman Tata has said. Suppliers say they have been told to gear up for an initial run of 250,000-300,000 units.

Tata Motors also has been encouraging suppliers to set up factories near the new plant to reduce transport and packaging costs, which can make up 8-10 per cent of total manufacturing costs, while also enabling "just-in-time" deliveries that reduce the need to hold costly inventories.

The company, which is estimated to have invested about $450 million in the project so far, also has said it may use satellite assembly units owned by franchisees, alternate materials like General Electric's re-engineered plastics, and some modern adhesives instead of welding to cut costs.

Its plan has prompted Carlos Ghosn, the head of Renault and Nissan Motor Co, to study the feasibility of making a $3,000 car with an Indian vehicle maker.

Toyota Motor Corp, Honda Motor Co, Fiat, Volkswagen and India's Bajaj Auto are also looking to build small, low-cost cars, but others say a car so cheap cannot meet strict emission and safety standards.

Launch Price
Tata's suppliers include Sona Koyo Steering Systems, Gabriel Ltd, Kinetic Engineering, Lumax Industries, Rico Auto, Bosch Chassis Systems and Tenneco.

Also among its suppliers are a large number of Tata group companies, including Tata Bearings, Tata Toyo Radiator, Tata Johnson Controls, Tata Yazaki and Tata Ryerson, which should help ensure better cost control and timeliness.

"It is a shared responsibility, so if specs are followed in a disciplined manner, they can do it (the launch) as planned," said Manish Mathur, a principal at consultancy AT Kearney.

Still, analysts say suppliers may take a hit initially.

"Their initial investments will pressure margins, but everyone is expecting big volumes, so it will be a long-term positive," said Ajay Shethiya, an analyst at Enam Securities, who has an "outperform" rating on Tata Motors stock, a recommendation he says is unlikely to change ahead of the launch.

Shares of Tata Motors, which is also India's top bus and truck maker, have gained about 12 per cent over the last year.

Other analysts expect the car to be priced at 120,000 to 140,000 rupees, but given the high expectations in the market, some believe Tata will stick to its highly-touted 100,000 rupee price, at least initially, as a matter of pride.

"We could see a higher price after a month, two months, but at least at launch they will absorb the additional cost," said Mohit Arora, director for India at JD Power Asia-Pacific.

"The whole world will be watching, so they wouldn't want to be seen as backing off from that promise," he said.

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