Some 18 months after Tata Motors Ltd.’s Nano went on sale in India, the 2-cyl. subcompact car is more a puzzle than a challenge to competitors.

The bold plan to produce the world’s lowest-priced car has been beset by serious problems, ranging from production constraints and limited distribution to rising prices and inadequate financing.

Tata planners compromised themselves,” says Deepesh Rathore, IHS Global Insight’s managing director-India, who does not believe the price is right.

While Rs100,000 ($2,200) made a good sales pitch, “Rs150,000 ($3,284) would have permitted a more wholesome product,” he says. “They designed a low-cost car and had to use low-cost components.”

The Nano was launched in March 2009, but because of political protests at the original plant site in West Bengal, production had to be moved across the country to Gujarat.

“Normal production did not really begin until July, and Tata basically lost almost a year and a half,” says Darius Lam, a senior market analyst with J.D. Power and Associates.

Because production initially was hobbled, advanced bookings and a lottery system were substituted for immediate deliveries. More than 100,000 Indian buyers signed up, but more than half reportedly lost patience and opted out.

“We asked customers to pay the full amount of the car up front and not see or drive the vehicle for six months,” one Nano dealer tells Forbes India.

Spontaneous fires in several Nano cars have been a major turn-off for other potential buyers. Market-leader Maruti Suzuki put an additional damper on sales by steadily cutting the price of its Alto, India’s best-selling car, which delivered 300,950 units last year.

“Many Maruti dealers have been discounting entry-level Altos, and when rebates and other incentives are added in, the Alto-Nano price difference was as little as $500 (Rs23,000),” Lam says.

Nano sales have been anemic from the start, peaking at 9,000 units last July and bottoming out at 509 in November, according to J.D. Power. Total deliveries in 2010 reached 59,576 vehicles. Since the car’s launch, only 77,110 have been sold.

Tata managers rather belatedly have begun pulling out all the stops in a rescue operation to improve the appeal and dependability of their “people’s car.”

All existing Nanos are being retrofitted with improved fuel, electrical and exhaust systems. One estimate of the cost is Rs6.5 billion ($14.2 million). The car’s warranty also has been extended from 18 months to four years or 37,000 miles (60,000 km), for all customers.

A bargain Rs99 ($2.18) per month maintenance contract is available, as well. And easy credit now is being offered by Tata Finance that requires a 10% down payment and the balance financed at 9% interest for seven years.

Nano’s marketing team also has been reshuffled, and its dealer network has been expanded nation-wide from just 12 states to all 28. Print, television and billboard advertising campaigns are under way, the first ever, as company strategists originally felt confident the Nano was so well-known it would sell itself.

And there’s a new sales pitch. No longer is the emphasis on price, which has risen to R145,000 ($3,110) for the base model. The Nano now is marketed as a comfortable family car with world-class technology and innovative design, a claim that provokes skepticism in some quarters.

Targeting has changed, too, according to a company spokesman, who said in December the Nano will be bought increasingly by users in the hinterlands not fully familiar with cars.

Rathore agrees. “Tata is now appointing sole Nano dealers in smaller towns and rural areas that the car was meant for. The cost of living there is lower and potential customers have annual incomes of $8,000 to $10,000.

“That’s why easy financing is very important. The Nano was not designed for large cities like Delhi and Mumbai,” he adds.

The critical question is how well the damage control and new approach will work.

“The basic concept was sound, but the execution was flawed,” Lam says. “Suppliers were squeezed so hard that quality suffered. The Nano business plan was built on low-margin, high-volume sales, and the company is not making any money on the project yet.”

Although breakeven for the Nano has not been revealed, analysts estimate it is somewhere between 200,000 to 250,000 annual sales. Rathore foresees deliveries this year of about 120,000 units.

Lam declines to make a projection, “because the brand has been negatively impacted and the Nano is in a tremendous state of flux. Sales of 5,784 units in December were wholesale to dealers, not retail. It will take two to three months to tell whether the rescue measures have really helped.”

The pattern of deliveries has been surprising, even to Tata marketers who expected most Nano customers would choose the base version. Instead, the stripped-down basic cars only have attracted some 20% of buyers, while about 30% have picked the mid-level version.

Roughly 50% have chosen the top-of-the line model, with air conditioning, radio, power windows and other frills; sometimes as a second or third family car.

“Most sales so far have not been to those moving up from motorcycles and scooters but to the trend-setters who buy new products,” Rathore says. “Only now that the car is becoming widely available can Tata begin to determine who regular Nano customers are likely to be.”

But attracting this group will be more difficult as competition heats up.

“The sweet spot for a low-cost car in India is between the Nano and the Alto, selling for around Rs200,000 ($4,400), and small cars being developed by Hyundai and Maruti Suzuki will be in that range,” he adds.

Says Lam: “Hyundai is developing a car smaller than the i10 and Santro, due out in mid-2011, priced at Rs204,000-Rs225,000 ($4,500-$5,000) and aimed at the top end Nano. Maruti has a new car, codenamed YE3, slightly smaller and cheaper than the Alto, coming out at the end of 2011 and priced around Rs200,000-Rs250,000 ($4,400-$5,500).”

Once all these new models are launched, Tata will face a big battle, he adds.

The state of the Renault SA-Nissan Motor Co. Ltd.-Bajaj minicar project, another Nano contender, is described by industry experts as confused and delayed. “I don’t think they have a rolling prototype yet, and I understand the car is not due out until 2013,” Rathore says.

Analysts believe the last 18 months may be viewed by Tata managers as a painful but valuable learning experience or even an expensive marketing test.

“Tata Motors is still striving to improve its quality standards,” says Lam, emphasizing “the Nano is a prestige project, especially for the company’s Chairman Ratan Tata. Company managers are determined to get the car right and now have access to (Tata-owned) Jaguar and Land Rover resources.”

Hidden faults have been found and shortcomings addressed to assure the Nano is more reliable and desirable. Some $440 million already has been invested in the car project and additional investment is expected to be incremental, possibly another Rs1.8 billion-Rs2.3 billion ($40 million-$50 million).

The Europa, a bigger and more-powerful version of the Nano, is under development for export markets. Analysts consider overseas sales unlikely until production has been stabilized but suggest the modified Europa could become the next-generation Nano for sale in India, as well.

“It’s a distinct possibility,” says Lam. “Tata could focus on selling the basic car in the rural areas and smaller cities, where most customers just want a basic car, and the Europa in larger cities and urban areas where consumers are more demanding and able to pay more.”

Says Rathore: “Despite the setbacks, there’s a great potential for Nano sales, domestically and internationally. The Europa is what the car should have been in the first place.”

Near-term, Bloomberg says Tata is considering expanding Nano sales to Asia/Pacific markets such as Thailand, Sri Lanka and Bangladesh as early as this year.