Careful What You Wish For...

Careful What You Wish For...
By Pete Lester, Sr.
January 14, 2007

The rank-and-file citizen of India received good news last week. Soon, they will all be “free to move about the country.” Later this year, when the world’s most inexpensive car rolls off the production line, many consumers who previously could not afford a car, will now have the ability to purchase one.

The Indian automobile manufacturer, Tata Motors, unveiled its $2,500 (slightly more than 100,000 rupees) automobile. While the car does not have many creature comforts demanded in the US auto market (power steering, air-conditioning, anti-lock brakes, etc.), many citizens of this Asian country are excited about the product.

Unveiled on January 10th in New Delhi, Ratan Tata, Chairman of the Tata Group and Tata Motors stated that the “Nano” will truly be “The People’s Car.”

The Nano is the product of years of engineering, 40 new patents and offers families an alternative to travel by foot, bus, or motor scooter. The car can seat four people and because it is constructed of light-weight aluminum, its two-cylinder gasoline engine is relatively efficient – achieving 54 miles per gallon. The car’s top speed is 65 miles per hour. The company promises that the car produces less pollution than many of the motorcycles/scooters in manufactured in India and in use in that country today.

The chairman of Tata Motors stated that he conceived of the car when he saw a father driving down the road on a scooter with a son sitting in his lap, and his wife sitting behind him holding a baby. That’s right – a family of four riding a scooter.

So what will this car mean to India? First, more people will need to learn how to drive. Certainly, there will be greater congestion, a need for more parking spaces. Surely, India has a version of GIECO or State Farm that is already coming up with some form of insurance to cover these drivers. Additionally, more tires and gasoline will certainly be consumed.

Is there such a thing as a “drive-thru” at the McDonald’s in Bombay? If not – there soon will be.

[side note] I saw a piece recently about the McDonald’s in China and Japan – where they just introduced the drive-thru window. They had to educate the consumers: many were driving through, placing their order, and then parking their car and coming into the restaurant to eat. They did not understand the concept of eating in their car. Who the heck would! So, certainly, some changes are coming to India.

Additionally, the US automakers are taking note. The Southeast Asian market is huge, and the introduction of an automobile so significantly cheaper than other new cars stands to totally shift the demand curve. While Ford, GM and Chevrolet may never produce a car to compete with the Nano, it could easily undermine a secondary market for their cars. Rather than buy an older American car, one fear is that those used cars will simply go to the junkyard. Rather than by a used, inefficient, American car, the consumer may choose to by the smaller, more efficient Nano – brand new.

Now, I am certain that, like the Model T, which Henry Ford stated would make the horse and buggy obsolete, will be a blessing to many families. However, given the congestion in many parts of India, the potential increase in additional cars (they are projecting 200,000 per year) could very well be a curse. Having said this - it has to be safer for that father and his family of four than the scooter he was driving...

QUESTIONS for STUDENTS of ECONOMICS:

1. Have you been outside of the country? If not, reflect on what you have seen (in the news, movies, travel shows, etc.) and how cars, drivers, traffic, roads differ from the US.
2. If you were in the market for a car, what car kind of car would you be looking for? Miles per gallon, Safety devices, air conditioning, cup holders, a connection for you Ipod. If you were manufacturing cars in India, what do you think the key decision points for the consumer are?
3. Can you think of another example where there was a total shift in the Demand curve: a similar product came on the market and forced other manufactures to adjust?
4. What pressures could a large number of new drivers put on the government: licensing, traffic, pollution, road construction, bridges, etc.