The People vs. the People's Car

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Desmond Boylan / Reuters

The Tata Group's newly launched "Nano" car.

When Tata Motors unveiled designs last year to build the Nano — a cheap, two-wheel drive car for the people — it proudly declared its hopes for India's mass market. It's getting a dose of mass protest instead. Last week, Tata Motors shut down its plant in Singur, West Bengal, citing "obstruction, intimidation and confrontation" by protesters that had been demonstrating at the site for the past month.

Like so many protests in India, this is about land: Local farmers are upset that, under a 2005 policy to create a series of special economic zones, the state government acquired about 1,000 acres of land in Singur and sold it to Tata Motors for the plant. The farmers say they were not adequately compensated for their land and allege that in some cases, the sales were forced. They and their political supporters are demanding 400 acres back. The issue has been smoldering for almost two years, but the protests reached an intense pitch last month, until finally on Sept. 2, Chairman Ratan Tata decided that he could not keep running a factory under police protection. He announced that production at Singur would halt indefinitely, and the company would look for a new site in another state.

The carefully worded statement leaves Tata the option to change his mind if the protests subside. He has much less room to maneuver around the company's promise to launch the Nano by the end of this year. Tata has staked his reputation on successfully producing and selling the fabled world's cheapest car, which will sell for about $2,300 — a price low enough to turn India's millions of motorcycle and scooter drivers into car owners. "This is an iconic project," says Abdul Majeed, who follows the Indian auto industry as a partner at PriceWaterhouseCoopers in Chennai. "The whole world is watching."

To meet those expectations, Tata Motors will have to shift some of Singur's production to its two other Nano plants in northern and western India while it builds a new third factory somewhere else. There are plenty of other cities that would welcome the jobs and tax revenue, but the process of shifting workers, equipment and suppliers could take 12 to 16 months, Majeed says. He expects that the first Nanos will be sold this year as promised, but there may be fewer of them. With just two plants, the company may be able to produce only 30,000 to 60,000 Nanos instead of the 200,000 vehicles it had hoped to sell to grab at least 5% of the two-wheeler market. A Tata Motors spokesman said it was too early to tell whether volume will be affected.

It would be easy to cast Tata Motors as the villain in this story — it is run by a super-wealthy car buff who comes from one of India's most famous industrialist families. But the real — and much less colorful — bad guy in the Singur debacle is India's misguided industrial development policy. India wants booming manufacturing hubs like the ones that have transformed Chinese cities like Shenzhen. But instead of creating a handful of large special economic zones, or SEZs, and locating them strategically near ports and cities with large pools of labor, India has approved more than 500 SEZs as small as 5 hectares (12.3 acres), and scattered them all over the country. "I don't think that really makes sense," says Chetan Ahya, a managing director at Morgan Stanley in Mumbai. Throw in inconsistent guidelines about how to compensate displaced landowners, and standoffs like this one were all but inevitable. This is not the first heated protest over SEZs since the policy was put into place. "If they had let the private sector negotiate directly with farmers that would have been better from a transparency perspective," Ahya says.

Because it's attached to a globally watched product, the Tata Nano controversy may push the Indian government to rethink its policies on buying land. But there are no plans so far to increase the size of the SEZs to make them more effective. These zones work best, Ahya says, when they are large enough, and have extensive enough infrastructure, to attract a significant number of companies, which then grow and attract more. And it's the impact of that missed opportunity that will be felt long after the first Nano rolls off the factory floor — wherever that happens to be.