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The $2,500 Car

From the January/February 2008 Issue

A century after Henry Ford introduced the Model T, Tata Motors of India has launched a new people’s car. Is another revolution ahead? RALPH KINNEY BENNETT explores.

One Lakh Car Feature(Editor’s note: Yesterday in New Delhi, Tata Motors of India unveiled its four-seat Nano, which at $2,500 per vehicle is the world’s least expensive car. In our January/February issue, Ralph Kinney Bennett considers the global implications of the so-called "One Lakh" automobile, comparing it to another famous "people’s car" made in the United States.)

The automotive world is abuzz about what might be the next Model T Ford or Volkswagen Beetle—an entry-level sedan to be built in India by Tata Motors Ltd. for about $2,500.

That would be about half the cost of the low­est-priced car now available in India—the bare-bones Maruti 800, which is essentially unchanged from its introduction in 1983. If Tata pulls this off, it would be one of the cheapest cars ever built, and it could have a huge impact not only on India’s growing car market but also all over the semideveloped world.

Tata hopes to begin selling the car by this fall, almost exactly 100 years after Henry Ford intro­duced the vehicle that defined “people’s car”—the world-changing Model T. And there are interest­ing parallels and lessons in what was happening in the automotive world one century ago and what might be happening in India right now.

Many have said Tata’s goal is impossible. The so-called “One Lakh” (equaling 100,000 rupees) car is a four-door compact sedan with a small luggage compartment under the front hood and a rear engine producing 33 horsepower. It will be a base model by all means, but it will not be one of those go-kart or jitney-like vehicles so com­mon throughout India and Southeast Asia. “It is not a car with plastic curtains or no roof—it’s a real car,” Ratan Tata, chairman of Tata Motors and the dreamer behind the One Lakh, assured Forbes magazine.

Two thousand five hundred dollars? For a new car? Adjusting prices to 2007 U.S. dollars, Ford’s Model T would have cost just under $20,000 and the Volkswagen Beetle just over $11,000 when they were introduced.

Other manufacturers say it can’t be done. Profit margins on entry-level cars (Honda’s Fit, for instance) are about 2 to 3 percent at best, while profits on SUVs and trucks can be 10 to 20 per­cent and higher. Tata’s price goal is what might be considered a normal profit on an SUV.

But that’s not the point. If Tata comes near its objective it will mark a huge achievement. And rival auto companies, while skeptical of the One Lakh, are already moving to counter it. Renault-Nissan is reportedly working with an Indian maker on a car with a price point somewhere between $2,500 and $3,000. Volkswagen sub­sidiary Skoda, South Korea’s Hyundai, and even mighty Toyota are also looking with renewed interest at the “bottom of the pyramid” in the Indian market.

The 'One Lakh' car will be a base model, by all means, but it will not be a go-kart. 'It is not a car with plastic curtains or no roof—it’s a real car.'

India is a country of 1.1 billion people, thirst­ing for cars—a people on motorbikes, mopeds, motor scooters, electric rickshaws, ox carts, hand-pushed wagons, and weird three-wheeled “tri-cars” of varied motive power, all longing to be on four wheels.

At present, only 12 people out of a thou­sand own a car in India (compared with 765 per thousand in the United States, more than 600 in Australia, and 233 in Croatia). But India has a rising economy, a growing middle class, and, more significantly, a young population—the median age is just under 25. By the end of this decade half of India’s immense population will be aged from the mid-teens to 50. Vehicle sales, now a little over a million a year, are expected to triple by 2015 according to Indian government estimates. But Tata Motors thinks that vision may be too small.

Look back for a moment at the world in which the Model T was introduced. By 1900, auto­mobiles had been long established in Europe, particularly France, which was not only the fount of automotive technology but also the lead­ing automobile producer in the world. But the industry was quickly glutting its market, which was pretty much confined to the wealthy or near wealthy.

The idea that these newfangled (and expen­sive) motorcars were only “toys for the rich” had spread to the United States as well, but the notion withered quickly before a new reality. America was a nation of people with rising incomes and a people spread out over great distances. They were hungry for a way of getting around that was faster and less troublesome than the horse and more articulate than the railroad car.

True, there would be many “high-end” car manufacturers in the United States (protected by a 45 percent tariff on foreign cars), such as Thomas Flyer, Packard, and Pierce-Arrow, catering to the rich. But in an important arti­cle, “Automobile Making in America,” in the September 1901 issue of American Monthly Review of Reviews, J. A. Kingman wrote:

“American manufac­turers have set about to produce machines in quantity, so that the price can be reduced thereby and the public at large can have the bene­fit of machines that are not extravagant in price, and which can be taken care of by the ordinary individual.”

Tata talked to farmers, small business owners, and shopkeepers and used the feedback to design and build the Ace. Introduced in 2005, this little pickup, priced at just over $5,000, took the country by storm.

Shortly before that article appeared, the first truly popular car—at a price ($650) that brought it within the cost of a horse and buggy—had been introduced. The legendary Curved Dash Oldsmobile, with its distinctive toboggan-shaped front end, looked like little more than a two-seat carriage without the horses. But with the 1-cylinder, 4-horsepower engine beneath its seat, tiller steering, and 28-inch buggy wheels, the Olds was amazingly easy to drive and proved to be nimble even on the horrible American roads.

People were mad for it and made it the first mass-produced car. Ransom E. Olds sold as many as 5,000 a year before the car went out of production in 1907. Its reliability and charm were not enough. Automobiles had swiftly surpassed it in power, appointments, and appearance. People no longer wanted “gas buggies.” The clas­sic auto form, enduring to this day, of the engine mounted forward between the front wheels, its power transmitted to the rear axle by the drive shaft under the passenger compartment—a configuration introduced in France in 1891 by Panhard-Levassor—had taken hold throughout the automotive world.

But the plucky Curved Dash Olds had whet­ted an already growing American appetite for a car that everyone could afford. And the man who would assuage that appetite with “a car for the great multitudes” was Henry Ford.

As the automotive writer Ralph Stein put it, “On October 1, 1908, the most maligned and most praised, the most reliable and the most can­tankerous, the ugliest and the most functional of all cars was born—the Model T.”

It was introduced at a price of $825 for the two-seat “runabout” and at $850 for the tour­ing car. It is important to note that the Model T cost $250 more than Ford’s previous car, the acclaimed 1906 Model N, which Ford had con­sidered “the crowning achievement of my life.”

The Model N was a good car and selling very well, but Ford knew he could build a better car. And he did.

The Model T was rugged. It used chrome-vana­dium steel for its axles—more costly, but much lighter and stronger than other steels. It was a forgiving car with a drive train and components that could take a beating, be easily repaired, and still function. Its loose and limber engine could climb hills with less shifting of gears. It looked high-wheeled and ungainly next to other cars, but it could clear the rutted, potholed, muddy rural roads of America with comparative ease. Most important, it could be driven by the aver­age person, not a chauffeur.

Automotive historian James J. Flink called the Model T the “archetype of the American mass-produced gasoline automobile.” Compared with the heavy European-style touring cars then popular with upper-class buyers on both sides of the Atlantic, the T “was significantly lower priced, was much lighter, had a higher ratio of horsepower to weight, and was powered by a larger-bore, shorter-stroke engine.”

In 1908, the year the T was introduced (its for­mal debut was December 31 in New York’s Grand Central Palace), Ford sold 10,202 cars. In the 1909 model year the company sold 17,771, all Ts. In 1910 it was 32,053, a figure which more than doubled to 69,762 in 1911. By 1915, sales were over half a million.

Those who say these cars might not be as safe as 'Western' cars need to spend a little time in the Third World and see five people (yes, five people) riding on a single motorbike.

As sales rose and production efficiency improved, the price of the Model T dropped dramatically. In 1912, the $575 price for the two-seater T was less than the average annual wage in the United States. By 1916 the popular touring model was priced at $360, less than half its orig­inal price. By the time the sturdy T was phased out in 1927, more than 16 million of them had been sold all over the world.

Henry Ford had truly “put America on wheels” with the Model T, and the impetus toward cars for the masses, begun with the Curved Dash Olds and a few other imitators, had vaulted the United States into the automo­tive leadership of the world. France would remain the auto-industry leader in Europe until 1924, but its production numbers were minuscule by American stan­dards. The United States surpassed France in sales volume in 1904. By 1913, when world­wide production of motor vehicles was 606,124, America accounted for 485,000 of that number (more than a quarter of them were Fords). Talk about “broadening the market.”

According to some analysts, the One Lakh car will cost about three times the Indian per capita income. Purchase of the car will obviously be a difficult hurdle for the majority of Indians. But the people at Tata know something that others seem to have forgotten. They have proven adept at learning not just the needs but the hopes and desires of their customer base in this, “the most optimistic country in the world.”

They talked to farmers, small-business own­ers, and shopkeepers and used the feedback to design and build the Ace, a tiny, dependable half-ton truck priced just over $5,000. Introduced in 2005, this little cab-over-engine pickup with “the agility to navigate narrow by-lanes” took the country by storm, selling over 100,000 in 20 months. Tata had to build a new factory to keep up with demand and is now producing 250,000 Aces a year.

In marketing this truck, the company learned how much pent-up desire there was to get off two- and three-wheeled vehicles. Indians are very status-conscious, and the move to a four-wheeled vehicle is considered a huge event. There are tens of millions of motorbike owners in India who dream of bigger things. 

The Indian people are ready for such a car, but is the government? Will it respond with rules, like America’s CAFE regulations, that drive up costs, reduce choice, and actually increase fuel use?

If Tata delivers at the $2,500 mark or close to it, there will be a crisis point in India. The Indian people are ready for such a car, but what about the government? Will it listen to critics who see a car for the masses only in terms of worsening air pollution, gridlock on already crowded roads, and a rise in traffic deaths? Will it respond with rules, like America’s CAFÉ reg­ulations, that drive up costs, reduce choice, and actually increase fuel use?

Those who say these cars might not be as safe as “Western” cars need to spend a little time in the Third World and see five people (yes, five people) riding on a single motorbike or on some of the other two- and three-wheel get-ups that people use. The Indian government can foster a broadening of the market or bow to environ­mental and public transport pressure groups and make the One Lakh the victim of economic infanticide, strangled by taxes and regulations.

The challenges presented by this car are formi­dable. Every curve in the sheet metal, every control knob must be analyzed for cost. Manufacture on a mass scale is essential. Tata has set an ambitious but necessary target of two million cars in the first five years. The car must be reliable, like the Model T, but it must also have that combination of struc­tural quality and an indefinable element of charm that made the Volkswagen Beetle so compelling and so universally embraced not as a low-priced car but as a chic and interesting one.

In venturing to build the One Lakh, Tata knows that a wheel in the door could open a vast new market for cars, much broader than the one now being slowly penetrated by $5,000 and $7,000 cars. The One Lakh would be a rev­olution for millions who could for the first time get from place to place on their own and be pro­tected from the rain and dust by windows and a steel roof. Is it too grand to suppose that these millions may want to leave their crowded envi­rons and visit other parts of India? To travel to visit relatives without perching precariously on top of a train car or stuffed in a crowded bus? To be free to simply take a drive? To get away from the village or the farm, even for a few hours?

One Lakh CarRobert Martin owned a clothing store in my little western Pennsylvania hometown of Ligonier. He catered mainly to the farmers in the surround­ing countryside. He always remembered a certain day—it was a Wednesday—in the summer of 1914, just before the First World War started. He was surprised to see a farmer walk into his shop.

It was unusual to see farmers in town on a weekday. They came only on Saturdays, with their families, to shop, do errands, and tend to all their business in a day-long ritual that filled the stores with people and jammed the town square with the farm wagons that had brought them on journeys of an hour, two hours, or more.

Was everything okay, Martin inquired? Yes, the farmer assured him. He had come to see the dentist because of a bad toothache, and since he was in town he had decided to see about a new pair of suspenders. He had driven the 10 miles from his farm in his Model T Ford.

Robert Martin never forgot that day, when a farmer, rather than suffer with his toothache until Saturday, had hopped in his trusty Model T and made the approximately 40-minute trip over dirt roads into town to seek relief from his pain, do some impromptu shop­ping, and get back to the farm in time to work the rest of the day. He sensed that a great change, a profound change in life and lifestyle, was taking place. And the cat­alyst was the mud-spattered “motorcar” parked out in front of his store.

Tata Motors, in daring to build the One Lakh, understands profoundly what Robert Martin sensed. It knows, too, that even a little $2,500 four-door can be a dream machine, a freedom machine.

Ralph Kinney Bennett covered national and international affairs for Reader’s Digest in its Washington bureau for 34 years. He is now a con­tributing editor at TCSDaily.com.

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