Govindraj Ethiraj: Tough to keep the Nano at Rs 1 lakh

DOUBLE EDGE

Three years ago, I visited the Taj Hotels IndiOne (now called Ginger) budget hotel property in Bangalore. I didn't actually stay there. I wanted to understand how a hotel room could retail at Rs 1,000 a day and yet offer some pretty decent amenities.

The 101-room property located at Whitefield was small, yet smart and modern in appearance. You walked in and were greeted with a reception on one side and a tastefully laid-out café. Every room had an LCD television and a coffee maker. There was no room service or house keeping.The entire place was spotless clean.

For a budget business traveller, this made a lot of sense since most people only need a room to sleep. Since then, the Ginger chain, the Tatas' first conscious go at the "bottom of the pyramid", has grown to 11 properties, somewhat quietly. Incidentally, C K Prahalad, the author of the concept, was present at the IndiOne launch along with Ratan Tata in June 2004. Tata made one of his early mentions of the Rs 1 lakh car then.

After having browsed around, I asked an Indian Hotels official the secret behind the sub-Rs 1,000 a room-night. "There are several reasons but one is our capital cost per room, which is between a fifth to a tenth, depending on who you compare us with. And second is that there are only 25 people running it," he said. There are no porters, either.

As I understood, the project managers on the Ginger had done an exhaustive job of researching costs and materials before putting together a combination of product and service that was affordable to a larger populace while remaining faithful in form to the parent brand.

A few days ago, I checked what the Ginger rates were. Well, the single room that went for Rs 900 in late 2004 when I visited is now going at Rs 1,999, a more than 100 per cent increase. The double room, which went at Rs 950, now quotes at Rs 2,499. Quite possibly, there are more amenities being offered for the same price.

The Tata Nano project has scored some amazing firsts in terms of technologies and material costs. The Rs 100,000 question everyone is asking for the past few two weeks and will ask in coming months is how long it will stay that way.

There is, unfortunately, a growing dichotomy between the cost of development in India (drifting lower) and the cost of running and operations, which is high or going higher. The producers and the innovators understand this but consumers tend to mix up the two, leading to disappointments, at least perceptionally. Most companies (including no-frills airlines) have failed to hold prices post launch. For various reasons including some beyond their control.

Prices don't stay down unless there is strong competition and scale production to keep it that way. At Rs 1,999, a night at the Ginger is still good value for money. But the launch promise (maybe not so overt as the Nano) was for a sub-Rs 1,000 room. So while there may not be street protests on the matter, the only way that price will come back is if a competitor launches a chain with similar features at lower prices.

Will that happen with the Nano? Several global auto majors have announced small car projects but it's unlikely that anyone will really take on Tata Motors in this department. So what could well happen is that the Nano's price will drift upwards to a more comfortable equilibrium. Which might well be forced by inflationary pressures as well.

The challenge, to my mind, is to apply the same R&D and cost rigour to operations and continuing development as was done while developing the original product or service. Will Tata Motors put the same R&D rupees into the project figuring how to keep the car at Rs 100,000 (or thereabouts) in 2010 as they did while creating it in 2008. Possibly, but it won't be easy.

Markets like North America have a lot to teach in this regard. Prices of most consumer products have either remained static or have been drifted lower as corporations have outsourced en masse. Billions might have been spent designing the iPod in Cupertino. But the price of the iPod has been falling since launch. Yes, it's made in China. Competition and cost-cutting endeavours in the west created an entire outsourcing industry which created an Indian IT services industry.

The bottom line is that few markets in India witness the bitter competition that is required to keep running costs low. Would Indian companies have done what companies in America do to hold costs? Perhaps yes, but they may not be forced to. So will the Nano continue to cost Rs 100,000 or the Ginger sell rooms at Rs 1,000 per night. That would depend on how much continuing R&D the Tatas do into holding and reducing costs. Which typically would depend on how much competition they are truly exposed to.

The author can be reached at govindrajethiraj@gmail.com