Tata Motors builds $3,000 car -- Buy Asian automakers

January 8, 2008

India’s Tata Motor Corp. announced it will launch a car January 10, 2008 priced to sell at less than $3,000. This price is less than half that of the least expensive car on the market today, the Romanian built Renault Logan. Tata has already built ACE, a rudimentary car that costs $2,100. Although it doesn’t meet safety standards, sales have increased eight times since its initial launch. (Source: IHT, India offers cheapest car on earth, 1/7/08)

The market for such a low-priced car is huge...90% of China and India’s adult population do not own a car. Even in the U.S., sales of cars priced under $10,000 could grow by 65% by 2012, according to industry consultant Roland Berger. (See Forbes, “Tata in Tacoma?” April 2007)

What the the Tata Motor Corp’s $3,000 car means:

Many experts are skeptical that Tata, which has only been making cars for the last 10 years, can manufacture a $3,000 car that meets emission and safety standards. However, even if the car falls short, it will open the door wider for other auto makers to produce cars that are small and affordable. Even now, Pakistan’s Transmission Motor company has built basic four-wheelers for $2,100 and has started exporting them to Sudan, Qatar and Chile.

Although India’s car sales are less than 1 million, China’s 2007 total cars sales are estimated at 8 million. In 2006, China overtook Japan as the world’s second largest car market, selling 7.2 million units, an increase of 25%. China’s government forecasts that demand for cars will top 20 million by 2020. (See People’s Daily, "China's home-made car sales surge 22 pct in first quarter," April 9, 2007)

A further indication of the trend toward smaller cars is reflected in Japan’s auto sales, which were up 6.3% in 2006 to 11.5 million units. Demand in North America (up 34%) and Europe (up 10.8%) for smaller cars drove the increase. For the first time since 1987, over 50% of Japan's auto production was for exports.

Over 75% of the world's cars are manufactured in North America, Europe and Japan, but China has overtaken South Korea and France to become the fourth largest auto production area in the world. The capacity of China’s car industry is 8 million in 2007, growing to 10 million by 2008, and 20 million by 2010. In March, Chery became the first Chinese car company to top domestic monthly sales.

India could become the next big hub for auto manufacturing. Although the country only produces 1.1 million cars per year now, it is projected to triple to 3 million by 2010.

Action steps:

In February 2007, I advised that you look towards including Japanese auto companies as part of your portfolio, since GM and Ford’s strategies look anemic. (See “Could Toyota overtake GM as the world leader in auto sales?”) Now , it makes sense to look towards Tata as another potential investment, so check with your financial advisor to see if it is already included in your Asian mutual funds.

Second, forget about corn-based ethanol as an investment to capitalize on the need to reduce global warming. In most of the developing world, any foodstuff that could be grown for fuel will be needed to feed the drivers.

Third, if you want to support efforts to reduce global warming, the way you drive and the way you look after your car are almost as important for mileage as the choice of car itself. Keep the tires pumped up; change the air filter regularly; don't accelerate too quickly after a stop; and take sports gear and other heavy junk out of the trunk. (For more great tips, see The Economist, “Mean Machine”, April 9, 2007)

Source: Der Spiegel, “We Indians Have to Struggle to Catch Up,” April 9, 2007; People’s Online Daily: “Insiders Say Measures Won’t Hit Top Carmakers,” January 17, 2007; “Booming auto sales in emerging markets lure world’s carmakers,” March 15, 2006; Delaware online, “India could be next hub for car making,” ; The Economist, “A different route,” December 13, 2006.

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