The Rise Of The $2,500 Car

Tata Motors (TTM) of India is introducing its new $2,500 car. According to The New York Times "the company wants to provide four-wheel transportation for the first time to people accustomed to getting around on two, including hundreds of millions of Indians and others in the developing world."

The new vehicle is a threat to large car companies, including Ford (F) and GM (GM) for several reasons. The first is that the big car companies have run out of growth in mature markets like Japan, the US, and Europe. All that is left in these regions is a fight over market share and that battle is expensive. It involves bringing out new models on a regular basis and price cutting through incentives.

Large auto operations are looking to the developing world including India and China for most of their growth over the next decade. Extremely inexpensive vehicles from local companies may compromise the ability of outside companies like GM and Toyota to pick up customers.

As odd as it may seem, the $2,500 car is a threat to car companies with big market share in places like the US. To make the vehicle viable for a developed market will involve better emissions technology and amenities like a radio. That makes a car which retails for under $5,000 in the developed world a real possibility. If gas moves above $4, there is a segment of the buying public that may have an interest. The margins on a product like this are likely to be low. It is not even clear that a company like GM, which still has a relatively high cost base, could even build one and make a profit.

A $2,500 car in the US? Coupled with $4 gas? Where does the line start to sign up?

Douglas A. McIntyre