The euro 12 billion Tata Group is a formidable business force. In most of the sectors the giant conglomerate has entered into, from hotels and automobiles to telecoms and steel, Tata has chased the bigger picture. So when it planned entry to the automotive components field, it would have to be visionary, big and with a definite mission to reach the top league. By Deepesh Rathore and Tilak Swarup.
It would have been easy to take the inorganic route of acquisitions to grow fast but the Tata Group wanted to start from scratch. It started with a new company – Tata Auto Components (TACO) – to look at global synergies and technologies in the key fields of automotive components. Since the future lay in manufacturing in low-cost locations, TACO would leverage India’s latent potential in that area.
TACO has its eyes set on big business from the global automotive industry and describes its relationship with Tata Motors as a purely commercial one, maintaining a little distance. Tata Motors can be at best be adjudged a launch pad for TACO which came about with Tata’s foray into small-sized passenger cars. In fact, TACO’s dependence on Tata Motors as a percentage of its revenues has steadily decreased from 85% in 1999 to 45% currently.
Actually the passenger car initiative was a hand-in-hand endeavour since Tata needed a supplier set-up to build its volume car Indica. All key components for the Indica project were required to be sourced indigenously and hence the idea of Tata Auto Components emerged. As it began to take shape, the TACO idea attracted more attention and was eventually moulded into a massive establishment of a number of joint ventures in partnership with the global leaders in each component field.
TACO was formally created in 1995 as a holding company for individual manufacturing ventures. In order to enter the fee-based high margin business of services, TACO formed four other strategic business groups in the areas of manufacturing, supply chain management, engineering, electronics and aftermarket operations.
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By GlobalDataJoint ventures formed
Clinching initial joint ventures was difficult for TACO as there was no company background to talk about. But with Tata Group’s backing and ready business from the Indica available, TACO had a revenue model in place and gradually built wider credibility. The first big break came in 1995 with Johnson Controls Inc wanting a seating solutions joint venture with TACO. Soon after that six more joint venture agreements were signed in 1997 for further joint ventures. These included JBM Tools (stamping and die tooling), Tata Toyo Radiator (aluminium radiators), JBM Sungwoo (steel stampings for Hyundai Motors India), Tata Yazaki Autocomp (wiring harness), Tata Ficosa Automotive Systems (rear view mirrors, control cables, wiper assembly) and Tata Nifco Fasteners (fasteners).
Since then Tata Auto Plastic Systems (in Faurecia partnership), TC Springs (in collaboration with Chuo Springs), Automotive Composite Systems (partnering Owens Corning), Tata Yutaka Autocomp and Knorr Bremse Systems for Commercial Vehicles have been formed. These twelve joint ventures cover about 14 key components while TACO is still looking forward to take the count up to 40 such products.
New joint ventures still sought
Currently, joint venture invitations are sought for CV joints, steering systems, wiper systems, automotive electronics & software, lighting systems, batteries, sealing & rubber parts, NVH systems, automotive electricals, automotive switches, hydraulic braking systems, HVAC, air induction systems, plastic fuel storage and delivery systems and airbags & seatbelts. This is a colossal plan for a decade old company which in its vision statement strives to become a full service provider and break into the top 100 suppliers league with sales exceeding USD 1.0 billion leveraging its cost effectiveness via its engineering solutions and supply chain management expertise.
TACO’s engineering business
Apart from the growth in manufacturing joint ventures, TACO has also steadily been growing its engineering business. This again started with Johnson Controls in an engineering tie-up to cater seating and interiors engineering solutions for Johnson Controls global businesses. Tata Toyo and Tata Ficosa already have design, prototype and tool development capabilities, while similar projects are mulled under Tata Auto Plastics and Tata Yazaki. A wider role is played by the Engineering Special Business Group in product design and process & application engineering. Leveraging the software skills available in India, it has expertise in designing of components, modules and assemblies followed by prototyping, tooling testing and homologation. Product work has been delivered for new models, model localisation for new markets of existing vehicles and mid-product life cycle upgrades. A question of expertise arises given the short life span of TACO but fears are reduced by quality certification by ISO, the adoption of the Malcolm Baldridge National Quality Award based Tata Business Excellence Model and incorporation of Capability Maturity Model processes.
Supply chain and logistics capabilities
The logistical opportunity noticed by TACO was quickly developed into its supply chain management Special Business Group (SBG). This provides total procurement service and solutions for global automotive companies, alleviating their task of sourcing components from a new market at the right quality, cost and delivery. Largely being a trading business, scaling up operations with a client has its obvious limitations. Once sourcing of parts reaches critical mass and customers have gained enough knowledge of the region, they would rather skip TACO and shop directly themselves.
But opportunities exist for TACO in this field for small requirements of parts and niche products by global companies. The TACO Supply Chain SBG’s client list includes Honeywell, Modenas and even Lotus to whom TACO supplies steering parts sourced from Sona Koyo Steering Systems. Business last year from this division earned TACO revenues of INR 500 million (Euro 6.6 million), a small part of its entire turnover but nonetheless posting phenomenal growth.
Marketing outposts in Detroit and outposts in Europe start the process clinching deals while the Indian crew handles product development and delivery. The outposts end the process by providing after sales service too. At home, the company has built up an expertise in the field by hiring a core team with five to twenty year experience including seven ISO & QS certified assessors, a master black belt in Six Sigma and component specific technical and commercial experts. Competitive capabilities in product costing, program management, cost cutting at every stage of supply chain and exposure to other low cost sourcing bases like China have been developed also.
To source components, a base of 50 best-in-class suppliers on Supplier Selection Rating System are tapped initially with tenders. These are largely well known suppliers with ISO/QS accreditation. TACO focuses on specific components which have competitive advantage for exports including ferrous & aluminium machined castings, warm & cold forgings, stockable & small stampings, extrusions & moulded rubber parts, turned parts and small system assemblies.
Electronics division plans expansion
In its Electronics SBG, TACO plans to manufacture high-end electronics and develop embedded software. The company has planned entry into airbags, remote keyless locking systems and climate control system fields in general and also plans a foray into specialised areas of chassis electronics and in-car information system for multimedia, telematics and navigation systems. At a fledgling stage now perhaps, the Electronics SBG’s first deal was recently struck for the manufacture of vehicle tracking systems in collaboration with the Singapore based MobiApps Inc. TACO MobiApps will manufacture m-Trak 100 vehicle tracking module though MobiApps will supply its proprietary software. The newly formed venture will take over the existing operations of the India sales and service office of MobiApps. This consolidation comes with automotive customers including General Motors and Hyundai Motors India who use m-Trak 100 to track and exchange data while testing their vehicles.
Aftermarket
In the auto component business, TACO has plans to go full-fledged into retail business under its Aftermarket SBG. Still very much at the drawing board stage, this division plans to partner a global automotive parts retail major to start a chain for sales and service of vehicle parts. Its long-term mission is to create an international business proposition. This start-up will borrow synergies from every division of the TACO group including expertise of SCM services. While targeting massive growth in this otherwise untapped area domestically, TACO will also experience first-hand the market trends helping it steer its behemoth self for future opportunities. This SBG, one can say, is not only a commercial but also a strategic foray.
Earnings implications and structural changes
Looking ahead, TACO targets huge growth to accrue from foreign earnings. Currently 12 % of its revenue is contributed by exports and that is slated to go up to 15% by 2008 when overall sales revenues are projected to reach USD1.0 billion. Between 1999 and 2003 TACO enjoyed a CAGR of 57 percent with total revenues of INR 12 billion last year. This year growth is expected at 33 percent to close the year with INR 16 billion in sales. In attempt to maintain its accelerated growth path, TACO plans to tap capital markets in the next 15 months.
The Initial Public Offering (IPO) will be preceded by some restructuring in TACO steering it into becoming a manufacturer rather than a holding company for a multitude of manufacturing firms. The plan is to reverse merge its wholly owned manufacturing subsidiary Automotive Stampings and Assemblies Ltd to show manufacturing activity in its balance sheet. The capital raised from selling equity will finance its focus on building its capabilities in stamping and engineering business with exports in mind. These areas give TACO room to expand globally independent of competition with its global partners in other markets.
Deepesh Rathore / Tilak Swarup
