Rising costs could eat Tata Nano's profits

The climbing price of steel and other materials could be the undoing of Tata Motors' ultra-cheap Nano. The company is being forced into a difficult position by the rising costs, having to choose between reduced demand due to a higher retail price or reduced profits due to a smaller margin.

With so little in the way of vehicle price - the car's target is still set at $2,500 - to absorb fluctuations in the global materials market, Tata has very little breathing room. Costs of the materials that make up the car have risen from roughly 13% to 23% over the car's development, which began in 2003. That may still seem like a small figure, but a typical American car's materials costs account for only about 7% of its final cost, a figure which has itself doubled over the same period, reports the UK's Times.

Now industry analysts are beginning to posit strategic pricing on Tata's part, with a short introductory period at the price the company has built the Nano's fame upon, followed by a rise to bring the car's price in line with its cost. But as Ratan Tata, owner of the Tata Group, said, raising prices will reduce demand. And that will keep the car from becoming the middle-class motorcycle replacement it was designed to be.

Other carmakers are taking note of Tata's struggles with the Nano, too. Several companies, including a partnership between Renault-Nissan and Bajaj Auto, had been considering building a Nano-fighting cheap car, but reports indicate they are now doubting the feasibility of the project.