Sales of the Nano, launched by Tata Motors to much fanfare in March 2009 as the world's cheapest car, sputtered to just 509 during the month of November, an 85 per cent drop from a year earlier despite a surging Indian auto market.
Indian auto sales rose 45 per cent in October. The Indian festival season peaks in November, during the Hindu festival of Diwali, when it is considered auspicious to buy big-ticket items and when most employees get their annual bonuses.
But Nano sales fell in November to their lowest level yet.
Media reports of a handful of spontaneous fires, difficulty getting financing to purchase the cars and rising prices have hurt sales of the Nano, which was launched at $2,500 and targeted Indians wanting to upgrade from motorcycles.
Last month, the company, which also owns the Jaguar and Land Rover brands, announced an optional retrofit for sold Nanos following the fire incidents.
"There have been enough negative things going on and people are concerned by the fires so they are going for tried and trusted players rather than trying a new product," said Kunal Dalal, head of research at KR Choksey Shares.
Tata has also passed on rising commodity costs to consumers, hurting its single strongest selling point -- its price.
The so called "1-lakh" car (a lakh is Rs 100,000) is getting more expensive.
The base model Nano now sells for about $3,342. Only $2,062 separates it from the base model of the Alto, India's bestselling car made by Maruti Suzuki, the leader in a market where customers are increasingly spoiled for choice in small cars.
Small cars that keep their resale value are popular in India, where roads are narrow, traffic is congested and consumers sell their cars in about five years. Toyota Motor Corp plans to enter the Indian mass market with its first small car in the country next year.
Financing has also been a problem. A dealership manager in New Delhi said some private-sector banks are rejecting borrowers because the loan amounts are too small.
Tata Motors said that while early sales were based on advance bookings, the car is now sold after production.
"Now that we have begun open sales, for the first time we are proactively going to those for whom the car is primarily meant," a company spokesman said.
"It is also our belief that as we penetrate deeper, the Tata Nano will be bought increasingly by users in the hinterlands not fully familiar to cars," he said.
Daimler's high-end Mercedes brand, which banks on niche sales but high profit margins, managed to outsell the Nano in India during November, at 518 units.
"It is primarily the negative marketing about the fires that has driven consumers to the next price point," said Umesh Karne, a research analyst at Brics Securities in Mumbai.