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There are clear signals that the crisis in the automobile industry is impacting the Tata’s plans. The $2000 car was announced with much fanfare, balloons, and dancing girls. Now that reality has taken its toll, the Nano faces humongous financial woes.
Tata Motors’ $2,000 Nano
…its fuel economy is a disappointment. Around 101 grammes of CO2 per kilometre means that it wouldn’t quite qualify for a band A rating in the UK, and that’s before it’s fitted with the heavy safety features required here. Load those on and it’s likely to be hungrier than my Renault Clio, which is among the leanest models sold here, but hardly space age. As the Nano’s engine — at 624cc — is less than half the size of the Clio’s, its engineering doesn’t appear space age either.
On the other hand the production volumes are surprisingly small, given the breathless claims made for the Nano and its planetary impact last year. Rather than a million or more cars a year, Tata now talks of selling 100,000 this year then of switching to a new plant with a production capacity of 250,000.
It can’t be the global recession: the impact in India so far has been to reduce economic growth from 9% to a piffling 7% this year. Perhaps it’s because of India’s notorious congestion: for most short journeys, you will get there faster by bike; and this car is designed for city travel, not highways. In any case, this doesn’t look as if it will become the environmental nemesis that so many predicted — especially if, as its promoters suggest, it will displace overloaded motorbikes. Guardian UK. Is the world’s cheapest car on the road to ruin? Production numbers are small and consumption levels relatively low but the Tata Nano could be an ominous development
PAL, Tata and Hindustan Motors were one of the few manufacturers of Tata, Tata trucks, Ambassador and Hindustan brands of automobiles.
For forty years, while Toyota moved from almost nothing to the largest manufacturer of the world Tata kept on doling out the same model of cars and Truck without any significant improvement of the product or design.
This monopoly of the automobile business, allowed Tata to venture into other monopolies like Tea and enabled Tate to purchase Tetley Tea in England. It also made a small acquisition of part of Daewoo.
In half a century, Tata was unable to come up with any product that the world wanted to purchase. With a captive audience in India, a huge population and stringent restrictions on imports Tata could have been the Toyata of Asia. Half a century later, Tata Automobile seems to have emerged from its Rip Van Winkle sleep and has now tried to catch up by purchasing products in the market. It is as if a student who has been a failure in high-school tries to impress his class makes by spending an inordinate amount of money. Analysts all over the world disagree with the strategy, which seems to be based on emotion than sound business practices.
The Tata monopoly was hit hard with the opening up of the Indian market in the 80s. Guess what, Tata was the biggest importer of automobiles into India, bringing in Suzuki and other brands. Recently Tata introduced a new car called Tata Nano which may become a reality sometime in the future. According to the Economic times of India”For years, critics termed Tata’s vehicle business as a millstone around the neck.”
Ford purchased several brands and has been unable to transform any of them or to use them for any significant value. Fords acquisition of Volvo has not achieved the results that Ford wanted. Ford was unable to capitalize on the failing brands called Jaguar and Land Rover.
The reason Ford acquired Jaguar and Land Rover was because the companies were failing and the consumers were not interested in unreliable cars. Jaguar had acquired a reputation of being the second car, because one always needed another car to make sure one could get to work or school.
Bloomberg reports the following:
“These are vanity products and probably these brands will have a tough time in a weak economy..Tata “will have trouble doing well in this sort of environment,” Edwin Merner, who oversees $2 billion as president of Atlantis Investment Research Corp. in Tokyo.
“Turning around Jaguar will be a major challenge,” said Ashvin Chotai, an independent London-based analyst specializing in Asian automakers. “Tata will need to tread carefully and ensure there is no negative impact on these brands.”
According to analysts, the pessimism goes beyond the cyclical issues. There are inherent problems with Land Rover and Jaguar. These brands failed decades ago. Acura, Infinity, Kia and Hyundai luxury models drove these automobile manufacturers to bankruptcy.
From a business point of view acquisition of either Land Rover or Jaguar does not make any sense at all. Tata paid about $2.3 Billion for the two brand names. According to automobile analysts it paid $2.3 Billion too much. From a technology perspective, neither Land Rover nor Jaguar offer any substantive gain to the purchaser. That is the reason why none of the Korean or Chinese companies were interested in acquiring these archaic brands. It would be logical for the brands to be sold to a company that has nothing to lose. Surely not its reputation.
“Jaguar has been nothing but a financial millstone.” Peter Schmidt, managing director of U.K. consulting firm Automotive Industry Data.
According to the Guardian “Few remember that Tata’s first car 10 years ago, the Indica, was little more than a noisy box on wheels. It was instantly dubbed “Ratan’s folly.” Guardian also says “Tata and Jaguar are worlds apart – a premier brand bought by an aggressive upstart. Dealerships in North America made clear that customers might balk at buying a Jaguar that was made under Indian ownership.Similarly when Tata’s hotels division offered to buy Orient-Express Hotels, a global luxury chain, the British-run company responded by saying “any association of our properties with your brands would result in a reduction of the value of our brands and our business”.
The two billion Dollar investment was hardly made on a return on investment (ROI) measurements. There is no ROI on these acquisitions. This was probably an emotional deal that tries to place Tata on the automobile manufacturing map. The Jaguar and Land Rover plants require massive investments which Tata will be unable to to. The Tata management announced that it will not interfere with the management of the companies.
The deal involves around 13,500 employees in the UK and covers plants at Solihull in the West Midlands, Castle Bromwich near Birmingham and Halewood on Merseyside.
British Trade Unionist are in for a rude awakening. The fine print will create resentment among British workers working for an Indian company. This is a total labor union disaster in the making. British Textile Industries laid of thousands of South Asian when the market conditions were bad. Will Tata be forced to keep these non-productive employees on the rolls? Obviously not. It will also be a foreign policy fiasco as the British government tries to straighten out the labor relations between Britain and India. Bloomberg reports that “Britain’s Unite trade union said it had secured written guarantees for all five U.K. plants involved in the Jaguar and Land Rover deal, covering worker numbers, pensions, conditions and sourcing agreements.”That may be true for the next few weeks, but it is inevitable that the manufacturing will be transported to India and the parts will be outsourced to parts manufacturers in Korea and China.
Tata is an inefficient bloating bureaucracy brewed on monopolies acquired by bribing the right government contacts. Tata has great marketing directors who say the right things. According to the Guardian
No member of the Tata clan, who are Parsees – a Zoroastrian sect living in India for over a thousand years, can be found on the world’s rich lists and the company remains a family firm with a public-spirited tradition. It is well known for refusing to pay bribes. Tata refuses to enter the drinks business or the movie industry – sectors that have shadowy undercurrents, it says.
Owned by charitable trusts that have access to a third of the group’s $3 bn profits, philanthropy plays a big role in the company’s thinking. Tata has built hospitals, research institutes, still schools 7,000 schoolchildren in Jamshedpur – and even gave a scholarship to Clement Attlee to lecture at the London School of Economics before he became prime minister
According to Bloomberg “Tata has obtained $3 billion of loans to use for the purchase, according to people familiar with the situation“. This is about 7% of the Groups annual claimed revenues of $40bn (£20bn). The three businesses account for most of the group’s profits: Tata Steel, which bought Corus; Tata Consultancy Services, and Tata Motors, the new owners of Jaguar and Land Rove
If Tata is unable to transform the two companies and make them profitable, Tata’s own viability will be at stake. Tata is responsible for more than 3% of Indian GDP growth. If Tata fails the entire Indian economy will be impacted. With so much leverage, Tata like Chrysler in the 80s may bank on huge Indian government subsidies or loans to bail them out. This in effect will get the Indian government subsidizing British jobs for Land Rover and Jaguar workers in England. It remains to be see if this is a sound business decision?
Among much fanfare Tata purchased Anglo-Dutch steelmaker Corus Steel for about $13 Billion. According to the Guardian”Corus remains unproductive”. It also adds “the Indian company is making big bets at a risky time, when the world appears to be heading into a recession”
According to Bloomberg “Tata will have to resuscitate demand after Jaguar sales in the U.S. and Europe dropped 33 percent so far this year.” With fuel costs rising and demand for luxury models in a downward spiral, Tata will have an uphill task in resurrecting or even stabilizing the sales of the failed brands. Gas guzzling Land Rover offers gas mileage of less than 10 miles a gallon, and Jaguar is internationally known as an unreliable car. Backed by Ford some consumers purchased the car. Now they have to trust a Tata backing!
According to the Canadian Press “Tata said Ford will continue to supply engines, transmissions and other components ‘for differing periods.’ Ford also will provide environmental and other technologies as well as engineering support.” Analysts wonder if Ford has any technology to offer. It itself may be on the chopping block if this latest restructuring is unable to bring it back into the black.
Ford purchased the brand names for more than $4 Billion, was unable to transform the sales numbers and sold the names as junk for about half that amount. BMW which was also in the running for the Land Rover brand name is laughing itself to the bank. BMW could have transformed the Land Rover brand and taken it to new heights.
Forbes reports: “They made bad investment decisions, and they are paying for it right now,” said Michael Ward, analyst with Soleil-Ward Transportation. Ford is attempting to cut costs, jobs and operations in a bid to salvage its North American operations, much like rival General Motors
Ford stock rose probably under the banner “Good riddance to bad rubbish”. Bloomberg reports that the Indian stock market was pessimistic about the purchase of these name brands by Tata.
Ford gained 11 cents, or 1.8 percent, to $6.11 at 8:55 a.m. before regular New York Stock Exchange composite trading. Tata Motors fell 0.1 percent to 679.4 rupees in Mumbai. The stock has dropped 14.5 percent since Ford named Tata preferred bidder on Jan. 3, while Ford has lost 7 percent in the same period.
For now, consumers will have to make a choice. Will they trust Tata to resurrect Jaguar and Land Rover. They didn’t trust the original manufacturer and the consumers rejected Fords version of Jaguar and Rover.
It was hardly the new-car launch Ratan Tata might have hoped for. About six months overdue, the $2,000 Nano won’t actually be delivered until July. The plants where the five-seater was to be built are still unfinished. And the tiny cars are so low-priced that automaker Tata Motors (TTM) probably won’t get much of a profit boost initially.
But six years after the project was conceived, Ratan Tata, founder of the Tata Group, announced on Mar. 23 that the world’s cheapest car would soon be available in one of the world’s fastest-growing car markets. Tata Motors, which is 37% owned by Tata Group, plans to begin a lottery to pick 100,000 people who will be eligible to buy the first Nano cars that roll off the production line. “We have made a promise and we have kept that promise,” Tata told journalists in Mumbai.
Despite the project’s ups and downs, the Nano remains a singular achievement for Tata Motors, India’s largest automaker. Globally, Tata’s pledge in 2003 to build a $2,000 car set off a race among bigger global players to develop a similar vehicle. In India, it meets all government-required safety and emissions standards. And the buzz has led to big expectations for sales, with Indian dealers clearing out their inventory of other models since the beginning of the year to make space in their showrooms for the Nano.
The question facing Tata Motors now is: Will investors applaud?
TEMPERING EXPECTATIONS
While the Nano will no doubt raise Tata Motors’ brand, few analysts think the car will add much to the company’s earnings for some time. The most generous estimates from analysts put the company’s $8 billion in revenues up by 3% this year. The car probably won’t make a profit for another three years, when the company could be churning out 350,000 units annually, says India Infoline (INFL.BO) analyst Jatin Chawla. By then, Tata Motors might be offering higher-end versions that meet stricter airbag and rear-crash requirements in other markets, may be exporting to Europe, and may even have diesel and hybrid versions that the company says are in the works.
But that’s a big question mark at this point. Even Tata Motors seems to be trying to temper expectations. The automaker’s managing director, Ravi Kant, said it may not have the capacity to produce more than 50,000 of the ultralight cars this year. That’s half of what Tata had hoped for before protestors drove the company out of its nearly completed $300 million plant in Singur, near the east coast of India. “At that rate of production, it’s highly doubtful if they can achieve operational efficiencies, let alone operational profits right away,” said Vaishali Jajoo, an auto analyst with the Mumbai-based Angel Broking.
Those numbers are also a far cry from the half a million cars per year that Tata eventually thinks it can build—an ambitious target when you consider that Indians bought a total of 1.2 million passenger cars last year. Ramping up to that level could take years, allowing rivals a chance to close the gap. Indian two-wheeler manufacturer Bajaj (BJAT.BO) has a tieup with Nissan (NSANY)-Renault (RENA.PA), which could launch their own low-cost car by 2011, said an official in Bajaj’s product development unit.
“NIGHTMARES” ABOUT PROJECT’S COMPLETION
There’s also competition from Maruti Suzuki (MRTI.BO), which had sold the least expensive car until the Nano came along. The Maruti 800, which is made by a 50-50 joint venture between Japan’s Suzuki Motor and India’s largest passenger car manufacturer, is about 80% more expensive than the cheapest variant of the Nano. Its sales have soared despite the financial crisis that has hit economies around the world. (American manufacturers such as Ford (F) and General Motors (GM) control less than 5% of the Indian market, mostly with higher-end models.)
There are other challenges. A new plant that Tata is building in the western Indian city of Gujarat remains far from complete, according to executives working for suppliers who have visited the site. To meet demand for the initial orders, Tata has had to set up assembly lines at a temporary site in Pantnagar, in central India. In addition, suppliers are now shipping parts to that site, inflating Tata’s costs.
Another distraction: how to finance the purchase of Jaguar and Land Rover. Tata bought the British luxury car brands last year, paying just over $2.3 billion, but it’s now scrambling for cash. Some $2 billion of its loans are due for refinancing in June. Tata Motors’ Kant refused to answer questions about financing for the Jaguar-Land Rover deal, but analysts think Tata Motors will turn to the Tata Group for help. Tata Group, which has annual revenues of $64 billion, already has nearly $20 billion of debt, according to a report by Indian brokerage house Kotak Mahindra. The Tata Group could sell shares or assets, or look for more expensive refinancing options. Last year, Tata Motors’ shares fell 78%, compared with a 52% drop for the benchmark Sensex index. Since January, the stock has rebounded 1.2%, vs. a 7.7% drop for the Sensex.
The one area where Tata has benefited from project delays is in materials costs. Hot rolled coil, a benchmark for steel prices, has fallen nearly 62% since June 2008, to about $450 a metric ton, making the nearly 600kg (1,322-lb.) car cheaper to produce. At the news conference, a reporter asked Ratan Tata if he thought the Nano might get any cheaper. “For now, I have no dreams of any sort, only nightmares about getting this project complete,” Tata said. Srivastava reports for BusinessWeek from New Delhi. Tata Motors’ overdue launch of its tiny ultracheap car for the masses faces limited supply, factory delays, and a growing field of rivals By Mehul Srivastava
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