Will Cheap Cars Undermine India’s Future?

Stephen DeAngelis

November 8, 2007

India is trying to turn the automotive industry on its ear by offering cheap automobiles [“In India, a $2,500 Pace Car,” by Heather Timmons, New York Times, 12 October 2007]. Timmons frames this announcement in revolutionary terms:

“A revolution is taking place in India that could change what most of the world drives. Next fall, the Indian automaker Tata Motors is scheduled to introduce its long-awaited People’s Car, with a sticker price of about $2,500. Hot on its tail may be as many as half a dozen new ultra-affordable vehicles — some from the world’s leading carmakers, including Toyota and Renault-Nissan.”

There is no question as to why automakers want to make and sell cheap cars — to make money from India’s blooming middle class and similar economic groups growing elsewhere.

“With a median age of just under 25 and a rapidly expanding middle class, India will overtake China next year as the fastest-growing car market, according to estimates by CSM Worldwide, an auto industry forecasting service. To tap that emerging market, automakers are starting to respond to Indians’ desire for small and cheap cars. As a result, car companies are coming up with new ways to develop and build automobiles worldwide. ‘Ask one billion people, and 99 percent of them are going to say they want a car,’ said Jagdish Khattar, managing director of Maruti Suzuki India, the country’s largest car manufacturer. ‘The problem is, How many can afford it?’ For a long time, only a few carmakers in India concerned themselves with that question. … India differs from giant slow-growth and no-growth auto markets like the United States and Western Europe, and even from fast-growing markets like China, in that the emphasis is on small, low-cost cars — but with four doors, not two, and room for the extended family. While the Indian upper classes are snapping up roomier models and even imports like Mercedes-Benz, first-time buyers will provide a big chunk of growth for years to come. By 2013, CSM predicts, India’s market will expand an average of 14.5 percent a year, compared with just over 8 percent for China. CSM estimates that in 2013, the Chinese will buy 10.8 million cars, compared with 3.8 million in India, but says there is already a glut of local and foreign manufacturers in China, making India a more attractive long-term market.”

Like other companies, the automobile industry is discovering that bottom of the pyramid economics can be profitable. Timmons points out that if the car companies can conquer the Indian car market they will look elsewhere to export cheap cars. Making a cheap car is not easy even if it comes with few frills.

“To satisfy that market, manufacturers and suppliers will need ‘exceptional creativity and inventiveness,’ Wolf-Henning Scheider, president of Robert Bosch’s gasoline services division, said in a speech in June. ‘Slimmed down versions of existing components and systems are not sufficient.’ Daryl T. Rolley, general manager for international operations at Ariba, a sourcing and procurement company working closely with Tata, agreed. ‘There are so many legacy costs built into a design, and trying to engineer those out is difficult,’ he said. ‘It’s better to start with a clean sheet of paper and engineer low costs in.’ The competition to make cars less expensive could finally help make India an automotive research and development hotspot — after years of false starts and complications from bureaucracy, poor infrastructure and labor unrest.”

Innovative ideas could make their way into cars sold in the developed world and that would be a good thing. There is, of course, a rub. As Timmons puts it, “Environmentalists and safety advocates are less enthusiastic.” Automakers have not suddenly discovered cheap air bags, catalytic converters, and so forth. These basic cars will be … well … basic. And that’s what worries consumer and environmental advocates.

“Anumita Roychowdhury, the associate director for the Center for Science and Environment in New Delhi, said the ultra-affordable vehicles would worsen India’s pollution and traffic congestion. Already, nearly 60 percent of India’s cities have pollution levels that are considered critical, she said. On the safety front, auto executives insist the cars will comply with the safety standards of the markets they are sold in. But in India those standards do not currently include full-body crash testing, airbags or antilock braking systems. Critics worry that thousands more cars on the roads will increase an already high accident and fatality rate in India, and those traveling in cheap cars are most likely to be injured or killed.”

This is a little like tobacco companies dumping cheap cigarettes on emerging markets — there are profits to be made but the risks probably outweigh the benefits. Among the chief critics of the cheap car is New York Times columnist Thomas Friedman [“No, No, No Don’t Follow Us,” 4 November 2007].

“India is in serious danger — no, not from Pakistan or internal strife. India is in danger from an Indian-made vehicle: a $2,500 passenger car, the world’s cheapest. India’s Tata Motors recently announced that it plans to begin turning out a four-door, four-seat, rear-engine car for $2,500 next year and hopes to sell one million of them annually, primarily to those living at the ‘bottom of the pyramid’ in India and the developing world.”

What’s Friedman’s beef? He’s concerned, of course, about the environment, but he’s also concerned that in an attempt to make the India poor more mobile, just the opposite will occur. He writes:

“Last week, I was driving through downtown Hyderabad and passed the dedication of a new overpass that had taken two years to build. A crowd was gathered around a Hindu priest in a multicolored robe, who was swinging a lantern fired by burning coconut shells and praying for safe travel on this new flyover, which would lift traffic off the streets below. The next morning I was reading The Sunday Times of India when my eye caught a color photograph of total gridlock, showing motor scooters, buses, cars and bright yellow motorized rickshaws knotted together. The caption: ‘Traffic ends in bottleneck on the Greenlands flyover, which was opened in Hyderabad on Saturday. On day one, the flyover was chockablock with traffic, raising questions over the efficacy of the flyover in reducing vehicular congestion.’ That’s the strain on India’s infrastructure without a $2,500 car.”

I’ve written before about India’s lack of infrastructure and how it cannot afford to make improvements without private assistance. No such assistance to build roads is coming from the car makers. What’s Friedman’s solution?

“It should leapfrog us, not copy us. Just as India went from no phones to 250 million cellphones — skipping costly land lines and ending up with, in many ways, a better and cheaper phone system than we have — it should try the same with mass transit. India can’t ban a $2,500 car, but it can tax it like crazy until it has a mass transit system that can give people another cheap mobility option, said Sunita Narain, the dynamo who directs New Delhi’s Center for Science and Environment and got India’s Supreme Court to order the New Delhi bus system to move from diesel to compressed natural gas. This greatly improved New Delhi’s air and forced the Indian bus makers to innovate and create a cleaner compressed natural gas vehicle, which they now export. ‘I am not fighting the small car,’ Ms. Narain said. ‘I am simply asking for many more buses and bus lanes — a complete change in mobility. Because if we get the $2,500 car we will not solve our mobility problem, we will just add to our congestion and pollution problems.’ Charge high prices for parking, charge a proper road tax for driving, deploy free air-conditioned buses that reach every corner of the city, expand the existing beautiful Delhi subway system, ‘and then let the market work,’ she added.”

Friedman then asks rhetorically, “Why should you care what they’re driving in Delhi?” Aside from the obvious answer, that anything that adds to global warming is a global concern, Friedman provides an economic argument.

“Here’s why: The cost of your cellphone is a lot cheaper today because India took that little Western invention and innovated around it so it is now affordable to Indians who make only $2 a day. India has become a giant platform for inventing cheap scale solutions to big problems. If it 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. If India just innovates in cheap cars alone, its future will be gridlocked and polluted. But an India that makes itself the leader in both cheap cars and clean mass mobility is an India that will be healthier and wealthier. It will also be an India that gives us cheap answers to big problems — rather than cheap copies of our worst habits.”

China has declared that it wants to become a center for research and development. Here is India’s chance to do the same. We would all be better off if India would take Friedman’s advice. India could be the shining example of a post-oil state (and one that could make lots of money selling green solutions to richer nations). Friedman’s concern is that the $2,500 car will drive India even more deeply into oil dependence. Unless you’re living in Venezuela, where Hugo Chavez still gasoline for less than a dime a gallon to preserve his political base, eventually even cheap cars will be expensive to run. Oil dependence is not the best strategy for helping lift millions out of poverty.