BUSINESS

What drives the Tata Motors strategy?

By Govindkrishna Seshan & Bijoy Kumar Y
January 23, 2008 11:42 IST
With the Nano on one end and the Land Rover-Jaguar deal at the other, is Tata Motors trying to do too much, in too little time?

Last fortnight, when Tata Group chairman Ratan Tata unveiled the company's Rs 1-lakh car, it was in a loud, crowded, chaotic gathering, prompting Financial Times to comment that the event was a possible indicator of what could happen on Indian roads, when the car is launched later this year.

On his part, Tata would prefer to not be distracted by such remarks, as the development of the Nano has seen opposition from various quarters; politicians, environmentalists, competitors.

"The toughest part was continuing to believe that we could do it," Tata told journalists covering the Auto Expo in New Delhi, where he unveiled the lowest-priced car in the world. He added that "a promise is a promise", hinting at the ability of his company to deliver even in the face of brutal scepticism.

But Nano is just one reason why the world is looking at Tata Motors, the Tata Group's automobile venture.  The other big event is the company's likely association with American auto maker Ford's premium brands Land Rover and Jaguar. 

Here, Tata is competing with a group of private equity players including one with Jacques Nasser, former Ford CEO, at the helm. Recent reports, though, indicate that Tata is the frontrunner. Between launching the Rs 1-lakh Nano and the Land Rover and Jaguar that are priced anywhere between 30 and 100 times more, Tata Motors is aiming for a presence across the spectrum.

At one level Tata might well compete with two-wheeler manufacturers - Ratan Tata has admitted that Nano has been inspired by the vision of middle-class Indian families, complete with children, balanced precariously on two-wheelers.

On another front, the company aspires to compete with giants like BMW, Mercedes and Audi, if it bags the Jaguar, and take on the Landcruisers of the world with the Land Rover acquisition. What drives the Tata Motors strategy? Will the company be able to pull it off?

Too much, but too late?

The answer could be as complex as the question, say analysts. But they add that the company has little choice, particularly if it is nursing global ambitions like its group companies Tata Steel, Tata Tea and others.

Already shackled by government regulations and licensing norms, Indian automakers are at least two, if not five, decades behind their global peers. "If Tata Motors wants to be at the forefront of the global automobile scene, it has to take the fast-track route to progress," says an automobile industry analyst. The company declined to comment.

Both the Nano, widely promoted as the common man's automobile, and the luxury brands are capable of doing exactly this: instantly push Tata Motors onto global centrestage.

"Smaller automobile companies like Tata Motors or the French automaker Renault have little option but to develop low-cost cars to grab global attention," says another analyst.

His rationale: all the bigger car makers are concentrating on developing bigger, sturdier and more powerful cars, because that is where the demand is. In most developed car markets, even the small car (hatchback) is no longer a sub-1,000 cc car, but a more powerful 1-litre (1,000 cc), if not 1.4-litre engine.

"No automobile company today can survive with presence in one single market alone. You have to go global," states Dilip Chenoy, director general of the Society of Indian Automobile Manufacturers (SIAM).

Chenoy adds that companies need to grow volumes in other markets, not just by exporting but by establishing manufacturing facilities in these countries. For instance, the Tata Group has started production facilities in Thailand and South Africa for its commercial vehicles (it also has assembly lines for cars).

One in a billion

The 623-cc Nano targets a market that has been left vacant and unguarded by most global players. The Nano may meet not just the requirements of the Indian market, particularly in the smaller, tier-three and tier-four towns, but could also find a huge export market in other South Asian, African or Latin American countries.

The speedometer and other instruments panel in the Nano are, therefore, kept in the centre of the dashboard, rather than facing the driver, to make it easy - and cheaper - to switch the position of the steering wheel from the right to the left.

The Nano could also give Tata Motors crucial global-scale volumes and access to a larger distribution network, besides helping it to churn its models faster.

Typically, Indian car models roll out of plants for a far longer time than any global car. For instance, it took Tata's first car, the Indica, about nine years to roll out a million cars. Even that was a record, of sorts, in India.

In comparison, for a global manufacturer, it may take just three or four years. That's because the market is huge globally, with the US market itself estimated at 14 million units a year. Compare that with India - just 1 million units a year, although the market is growing rapidly and is expected to touch 3 million units by 2012 (source: industry estimates).

The surge in demand and access to more markets means that Indian car makers will be able to develop cars with better technology, much like their global peers.  "It takes roughly Rs 3,000-4,000 crore (Rs 30-40 billion) to develop a vehicle from scratch. But global auto manufacturers can do it more regularly because they recover their investments faster, given their access to larger markets," says an industry analyst. (True, the Tata Nano, much like the Indica, was developed at a cost of Rs 1,700 crore, including the cost of the plant that will build it. Being able to do that 10 years down the line since Indica is quite a feat. But both cars are essentially machines with no-frills.)

If the opinion of consultants matter, Tata's Nano has all the makings of a winner. "Going forward, even other companies present will make India their hub for production of small cars. India will be the small car hub for the world," says Yezdi Nagporewalla, national industry director of management consultancy KPMG.

He adds that the country has an edge in terms of labour cost and flexibility that put India in the best place as far as the Asia-Pacific region is concerned.

According to KPMG's just-released India Automotive Study 2007, "India's low labour costs, high level of available management and engineering skills have maintained the competitiveness of domestic auto companies and made it an attractive location for direct manufacturing investors."

The report, however, hints that cost competitiveness could be threatened if infrastructure bottlenecks continue in India.

Brands or high technology?

If the Nano is intended to reach the masses across the globe, much like the global small cars Model-T, Beetle and Mini did in the 20th century, what is the strategy behind bidding for the Land Rover and Jaguar? That's a question others, too, have pondered.

Internationally, media reports are a mixed bag. While some feel that the Tatas can leverage the benefits of the acquisition with their existing business, others pooh-pooh the suggestion. 

"These are marquee brands, and pride of ownership - which is what the equity analysts fear - could be a factor driving the desire to acquire them," is the comment in a India Knowledge@Wharton article (Tiger by the tail: the Tatas are closing in on Jaguar and Land Rover).

But analysts agree that the legacy of both the Land Rover and Jaguar brands could be a shot in the arm for the Tatas as the company powers its global ambitions in automobiles. Both Land Rover and Jaguar are well recognised badges in the upmarket SUV (sports utility vehicle) and luxury car segments, respectively.

"The Jaguar-Land Rover deal is meant to fuel Tata Motors' global aspirations. This buy-out will establish its global footprint as a company with premium brands," says Nagporewalla.

Also, the acquisition can give Tata Motors access to a readymade product pipeline and technology. Developing a car from scratch could otherwise take the company anywhere between two and five years. The Nano, for instance, has been talked about for more than four years.

However, the technology that propels top-end cars is changing. "Hybrid technology will take over luxury cars in a decade," predicts an auto expert. Post the takeover, will the Tatas be left with obsolete technology? No, says the expert. "In the interim, Ford's existing technology will fill the need gap for the Tatas."

He predicts that at a later stage, the company could acquire a hybrid powerplant manufacturer or enter a strategic technology development venture with an established car maker to meet their technology requirements.

"Couple the heritage of Jaguar and new-age technology and you can see a winner emerging," he adds. Tata Motors is unlikely to follow the Toyota-Lexus route and wait for three decades before attacking the luxury car market with its own brand.

But is the Tata Group capable of bringing that little extra to the table for Land Rover and Jaguar - something more than what Ford could? An industry observer says that marketing skills is certainly one extra.

"Indian companies like the Tata group will respect and protect the legacy of these brands," he says. Proof: the Tata acquisition of another UK brand, tea major Tetley, has worked to the brand's advantage.

The red lights

The road taken by Tata Motors is not without risks. The Nano is certain to make an impact on the existing small car market in India. A reaction from a wounded Maruti, the market leader, could be devastating, warn analysts. "Maruti could take a price cut for the M-800, which would dent Nano sales. Indian buyers may prefer the M-800 for its good resale value," points out a Mumbai-based auto analyst.

Tata himself fears that rising costs of steel and rubber could play havoc with the car's pricing. "My greatest fear is inflation. With steel and tyre prices going up, we can't hold the price that we have held emotionally," he said at the Auto Expo.

Another risk is a change in government regulations that could affect the prospects of the Nano. In the mid-1990s, Pune-based auto maker Kinetic developed a 700-cc, low-cost car but the plan had to be abandoned after the government revised excise regulations so that all automobiles above 650 cc pay a similar excise. With a 623-cc engine, the Nano is safe. For now. You never know what next month's Budget will bring.

Then, what works for small cars may not work with Land Rover and Jaguar. Tata Motors may not be able to take advantage of its low-cost manufacturing skills in the premium end - Ford may be unwilling to sell to a company that could shut plants in the UK immediately after the acquisition, given that trade unions play a vital role in clearing or opposing a deal.

"At least in the short-to-mid term, Tata will have to take the costs of manufacturing abroad into consideration," says an expert. KPMG's Nagporewalla, however, is confident that the company can leverage synergies like sourcing of components at cheaper prices from locations like India. "These will be really long term benefits," he says.

The other issue is the current performance of both the brands. While Land Rover is a profitable machine, the same cannot be said about Jaguar - according to the IndiaKnowledge@Wharton report, Land Rover is expected to post profits in excess of $1 billion for 2007, while Jaguar's losses are estimated at $500 million for the same period. Nagporewalla, however, maintains these are good buys.

"Buying now will get the Tatas two global brands at a very fair price. They will get better operating efficiency," he says. That remains to be seen. Meanwhile, there's no doubt that Tata Motors has an interesting ride ahead.

Govindkrishna Seshan & Bijoy Kumar Y
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