Tata Motors will unveil its Rs 1-lakh (Rs 100,000) car at the 9th New Delhi Auto Expo on January 10. The commercial launch of the car is slated for the second-half of 2008. Both events are keenly anticipated by India's burgeoning middle class, in general, and the auto industry, in particular.

Not since the launch of the Maruti 800 in 1983 has a new car model been more keenly awaited. And just as the Maruti 800 before it, if the Tata Rs 1-lakh car is commercially successful, it will alter the passenger car market in India beyond description.

The then Maruti Udyog [Get Quote] (now Maruti-Suzuki) rode Maruti 800 to market dominance in India and Tata Motors [Get Quote] hopes to do the same with its 'people's car.' Besides, Tata Motors also hopes that its new product, aimed at new consumers and new markets, will propel it to being an important player in the global passenger car market.

It is worth noting that the Rs 1-lakh car and Maruti 800 are not vastly different in terms of performance specs, with the former marginally better than the latter -- it is somewhat less powerful, but somewhat more fuel efficient and less polluting.

But if there are similarities between Maruti-Suzuki's 800 and Tata Motor's 1-lakh car, there are important differences as well. At about little more than twice the price of an average Hero Honda motorcycle and 1.5 times the price of a Bajaj Chetak scooter, it will draw in buyers who would are currently priced out of the passenger car market.

The fact that it is so much cheaper than Maruti 800 (it is about half the price) is in part because it is engineered differently than the small cars currently in production the world over.

Changing industry dynamics

As a general manager at Ariba, a Tata vendor for the Rs 1-lakh car noted¹, "There are so many legacy costs built into a design, and trying to engineer those out is difficult . . . It's better to start with a clean sheet of paper and engineer low costs in."

It is cheaper also because it will be produced differently, using dealers as a part of a distributive manufacturing network. In other words, it is based on a different production and business model than currently in play in the automobile industry.

Little wonder then that a senior executive of carmaker Mahindra & Mahindra said, if successful, it would "change industry dynamics²." Of course, all this will come to naught if it is not commercially successful.

Disruptive innovator

But if it is, Tata Motors' Rs 1-lakh car has the potential of being a disruptive innovation³. And disruptive innovators are viewed with a mix of both anticipation and trepidation because they change competition benchmarks and therefore while they create a new opportunity they also have the potential to cause the demise of some existing players.

According to Robert Bosch, a German firm that is the world's largest supplier of automotive components, between now and 2010, globally the small car market will grow at 5% p.a. which is twice the rate of growth of the industry as a whole⁴.

A disruptive innovator in the industry's most dynamic market segment -- not surprising then that Tata Motors' new offering has evoked so much interest among industry majors.

Renault-Nissan and Toyota have announced plans to build small cars, though both are as yet on the drawing board. Perhaps the most interesting response has come from Suzuki, the current market leader. After having pooh-poohed the idea of Tata Motors' Rs 1-lakh car, it seems Maruti-Suzuki is in the process of making a competing product⁵.

Tata Motors' Rs 1-lakh car has been greeted with a great deal of scepticism, both, at home and abroad. Somewhat unusually, it has been the international business press that has been less sceptical and more open to the idea that Tata Motors might actually pull-off the Rs 1-lakh ($2,500) car and trigger a 'paradigm-shift,' at least at the bottom end of the market.

'Tax it like crazy'

More recently, as it became clear that the Rs 1-lakh car was on schedule, it has faced a barrage of criticism from environmental groups like the Centre for Science and Environment (CSE) that have argued that the success of the Rs 1-lakh car will put enormous strain on inadequate urban road infrastructure and worsen India's already serious problem of urban vehicular pollution.

They argue that the focus should be on developing urban mass transit systems rather than on cheap modes of personal transport. According to Sunita Narain, director of CSE, the solution is not to ban the Rs 1-lakh car but to "tax it like crazy until it (India) has a mass transit system that can give people another cheap mobility option.⁶"

The environmentalist position found the backing of an influential opinion maker, Thomas Friedman (New York Times columnist and author of The World is Flat and The Lexus and the Olive Tree). In a New York Times op-ed he argues that "If it (India) applied itself to green mass transit solutions for countries with exploding middle classes, it would be a gift for itself and the world. To do that it must leapfrog . . . It will also be an India that gives us cheap answers to big problems -- rather than cheap copies of our worst habits."

It is not very clear what Friedman means by leapfrog. Does he mean not use cars as a form of mobility? Or does he mean tax the Rs 1-lakh car "like crazy" so that the market does not grow until a mass transit system is in place? One thing, however, is quite clear: he does believe that the Rs 1-lakh car is a cheap copy of some American car (or idea).

Yes, we must invest in mass transit systems. . .

Before responding to Friedman's view on the Rs 1-lakh car, I should make clear that I wholeheartedly agree with one part the environmentalist position: the need to invest in efficient, affordable and green mass transit systems.

Indeed given urban India's high population densities and the increasingly urgent problem of global warming, this is not a matter of choice but a necessity.

More importantly, because of the presence of all kinds of indivisibilities and coordination problems, the market, left to itself will not deliver this result. Therefore all forms of democratic pressure should be brought to bear on central and state governments to ensure that public policy (including taxes and subsidies) and public and private investment work in concert towards that end.

. . . but 'taxing like crazy' isn't the answer

But I do not think taxing small cars "like crazy" is a coherent part of that policy framework. I will return to this a little later.

That said, unlike what Friedman says, the Rs 1-lakh car is anything but a cheap copy of America's worst habits. In absolute terms it is undoubtedly inexpensive: it is the cheapest car ever made. In 2007 US dollars, it is less than 15% the cost of a Model T Ford and less than 25% that of the VW Beetle⁷. But it is still more than three times India's per capita income whereas the cheapest car in the US market (a Chevrolet Aveo costing approximately $11,000) is less than 25% of US per capita income.

In relative terms the Rs 1-lakh car is not inexpensive in India. This is no 'bottom of the pyramid' product.

Cheap car does not mean low in quality

But the fact that it is the cheapest car ever made does not mean that it is either low quality or a knock-off copy of some high-quality variant. As a senior Robert Bosch executive noted, "Low-price vehicles are not vehicles of inferior quality equipped with the most basic components⁸. . . They are inexpensive technical solutions produced using state-of-the-art components ." And low costs have been engineered into the car by designing the car afresh and not by using cheaper slimmed-down versions of existing components and designs.

It is a globally envisaged Indian manufacturing response to Indian needs, engineered for Indian conditions and markets. Indeed, in my view, given environmental concerns and urban densities, India's mobility requirements are perhaps best met by a combination of mass transit systems and small cars like the Tata 'people's car.'

Therefore to tax the small car "like crazy" so that the market does not grow until an efficient and affordable mass transit system is in place is short-sighted in the extreme. It is odd that both Sunita Narain and Thomas Friedman talk of taxing the price-elastic small-car segment of the passenger car market whereas saying nothing about taxing the more price-inelastic relatively larger car segment.

Odd because despite protestations to the contrary, taxing the price-elastic small car "like crazy" will effectively kill it, and leave us producing a worse product both in terms market growth and the environment.

As it happens, even though I am sure Friedman did not intend it to be so, taxing the small car favours relatively inefficient American car producers. American auto makers have never understood the small car and therefore even today are not a serious presence in the Indian market.

But the Rs 1-lakh car, if it is commercially viable, being potentially a disruptive innovator, will compound the current competitive dis-advantage of American auto makers in small cars and constitute a very serious entry-barrier into one of the most dynamic segments of the car market.

Don't kill the car

On the other hand, if we tax and kill the small car, then there is still a not so marginal market for those gas-guzzling cars that GM and Ford produce here in India.

Be that as it may, perhaps the best solution for an efficient and environmentally friendly mobility policy for India is to focus on an affordable mass transit system and on small cars (including the Rs 1-lakh car).

I would therefore say tax anything above 1500 cc "like crazy," but not to death. Force green emission conditions and continuously raise the fuel efficiency bar and above all invest in cheap and comfortable mass transit systems.

And, if it succeeds in the market, let the Rs 1-lakh car thrive, as another Indian contribution to "inexpensive technical solutions produced using state-of-the-art components."

And to Thomas Friedman say, thank you, but no thank you. His talents of persuasion are perhaps better utilized trying to convince the Bush administration to allow California to impose its own, stricter, emission norms rather than telling us to tax the Rs 1-lakh car to death.

Mritiunjoy Mohanty is an Assistant Professor of Economics at the Indian Institute of Management Calcutta (IIM Calcutta). He is currently on leave and is a Visiting Researcher with Institut d'�tudes internationales de Montr�al (IEIM) of the Universit� du Qu�bec � Montr�al (UQAM), Montreal, Canada. He can be reached at mritiunjoy@iimcal.ac.in

• ¹ Quoted in 'In India, a $2,500 Pace Car' by Heather Timmons in New York Times, 12th October 2007.
• ² Quoted in 'Small car, big dreams' by S.K. Ramanathan in Business World, 30th July 2007.
• ³ Clayton Christensen, the guru of disruptive innovation, believes that Tata Motors has the potential of being a disruptive innovator because of the radical redesign of production and distribution processes. See 'Tata Motors vs Obvio!', Forbes, 26th October 2007.
• ⁴ See 'Renault's race to replace the rickshaw' by Gail Edmondson, Business Week, 2nd November 2007. Robert Bosch is a vendor for the Tata project. The medium-term projection for the small car segment is corroborated by other industry sources.
• ⁵ See 'Suzuki takes up Tata's 1-lakh car challenge' by Nirbhay Kumar, Financial Express, 7th December 2007
• ⁶ See 'No, No, No, don't follows us', Thomas L. Friedman, New York Times, 4th November 2007
• ⁷ For comparative figures see 'The people's car' by Robyn Meredith, Forbes, 16th April 2007
• ⁸ Quoted in 'Renault's race to replace the rickshaw' by Gail Edmondson, Business Week, 2nd November 2007.