Case Study: Tata Nano

Economies of scale are very important to car manufactures. For example, manufactures that
produce in high volumes will tend to have lower bought-in component costs because these mass
producers enjoy market power over component suppliers. Technical economies of scale are also
important. Niche market manufactures will not have sales volumes needed to dilute the high fixed
costs of purchasing modern capital that has the potential to drive down average cost.
Over 100 years ago Henry Ford recognized the power of economies of scale in terms of
their ability to create mass markets. Cost saving economies of scale made these price cuts
possible, without any loss of profit margin. A virtuous circle was created as below.
Price cuts
Lower unit costs

Rising sales

Economies of scale
By UK standards, India is still a poor country. In 2010 per capita income in India was less
than $3000 per year. With incomes this low, one would expect car sales in India to be relatively
low. However, they are not! In 2009 over 1 million new cars were sold in India. Furthermore the
market is also growing very rapidly. In 2010 the Indian car market is expected to grow 50%.
The global financial crisis has not had much of an impact on the Indian economy, which is
expanding at over 8% per year, creating a gap in the market for a cheap family car for Indias
growing middle class. The gap in the market was filled in 2008 by the Indian car maker, Tata,
which launched its Nano model at the equivalent of just $2000. The Nano is a simple no-frills car
that is extremely cheap to mass produce. For example, it does not have power steering and only
has one, rather than two windscreen wipers and wing-mirrors.
Car ownership in India is still very low: just 13 in every 1000 households own a car. In
Britain the corresponding figure is 450. In short, Tata stands a very good chance of being able to
replicate the virtuous circle achieved by Henry Ford over a century ago.

a) Explain the meaning of the term economies of scale

(4)
b) Explain how economies of scale can create competitive advantage for Tata Nano.
(6)
c) Sales of the Tata have been growing rapidly in India. Discuss the implications of this trend
for Tatas stakeholder

(10)