After struggling for the last three years in a depressed domestic market, Tata Motors – previously known as Tata Engineering and Locomotive Company (or Telco) – is riding on a new high. Domestic sales have been on the increase in the last 12-15 months and an ambitious programme of international expansion is beginning to take shape. Tony Pugliese reports.

While its recent agreement to supply customised Indica sub-compact cars to MG Rover over a five-year period provides the company with a tremendously opportunity to substantially increase business levels, Tata Motors is steadily building up its core strengths in the commercial vehicle sector.

In the latest fiscal year ending in March 2004, Tata Motors generated a turnover of INR154.9bn – its biggest ever and equivalent to over Euro2.9bn. Net profits rose by 170% to a record INR8.1bn (Euro152.9m). While its 314,259 vehicle sales were mostly from its domestic market, the company’s global footprint is expanding rapidly and the company is building up some important long-term strengths. It exported just over 22,000 vehicles in the last fiscal year, compared with 9,800 units previously, and volumes are expected to rise sharply over the next couple of years. Its global sales in the current fiscal year are likely to reach 360,000 units, for a turnover of around INR190trn. Half of these volumes and around two–thirds of revenue will come from trucks and bus sales.

Domestically, Tata Motor’s core strength is in the commercial vehicle sector, where it enjoys enviable economies of scale. Sales of light, medium and heavy vehicles trucks and buses amounted to 152,195 units in the last fiscal year. Medium and heavy trucks (over 8 tons GVW) account for around 40-45% of its commercial vehicles sales and around two-thirds of the domestic market. Its major competitors, Ashok Leyland and Eicher Motors, trail way behind. The company’s truck sector dominance has gone largely unchallenged since India’s automotive sector was deregulated in 1992. In the more diversified light commercial vehicle market, Tata’s share is around 40%.

Tata Motors’ Indica V2

The domestic vehicle market has enjoyed buoyant demand thanks mostly to falling interest rates, which have spurred on private buying and investment. Recovery in the truck sector has come largely from strong growth in construction and infrastructure expenditure, and intercity road building is also promoting internal trade.

Tata Motors’ presence in the passenger car sector is weaker, however, and limited to the low-margin entry-level segments. It sold around 140,000 passenger vehicles in the last fiscal year, of which 100,000 where Indigo and Indica models and the rest were utility vehicles. This gives the company a 16% share of the combined car and utility vehicle market. The Indian car segment is nevertheless not an easy segment in which to compete. It is extremely price sensitive, which makes economies of scale very important. Tata Motors has done well to get where it has, considering that it launched its first car in India some 5-6 years ago. But the company remains far behind the likes of Maruti Udyog and Hyundai Motor India. Its position in the utility vehicle segment is also weak and is coming under significant pressure from Toyota and GM-Isuzu products derived from Indonesia.

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Deal with MG Rover will help strengthen car business
Tata Motors will benefit substantially from supplying customized versions of the Indica model to MG Rover for sale in Europe. In the current fiscal year alone, Tata Motors is expecting to supply 40,000 cars to the UK company. The proceeds should combine with previous efforts to reduce break-even levels at the plant to strengthen its overall car business. Although the long-term future of this tie-up is far from certain, given MG Rover’s weak position in the European market, the additional sales in the short-term will provide very useful additional funds for its car programme if it so chooses. It may also learn useful ways of improving product quality. India is one of the most promising of the world’s developing markets and Tata is unlikely to want to remain a passive observer in this segment if it can be helped.

Greater strength is in commercial vehicles
But a more coherent and sustainable strategy is emerging in the truck and bus sector. The completion of its acquisition of Daewoo Commercial Vehicles earlier this year is significant not just in terms of the additional volumes – which have failed to recover significantly since Daewoo Motor was declared bankrupt in the late 1990s. The acquisition also offers substantial opportunity for additional growth and cost-savings. Tata Daewoo Commercial Vehicles Ltd, as it is now called, made just over 4,700 trucks of 8 tons GVW and over last year, compared with around 8,000 made by Hyundai. Its share of the domestic market for these trucks is around 25%.

The acquisition of Daewoo Commercial Vehicle comes at an interesting time in the South Korean truck and bus sector. The only other significant domestic manufacturer, Hyundai Motor, has abandoned plans to spin off its truck operations into a joint venture with DaimlerChrysler following a cooling down of relations between the two companies. This leaves Hyundai Motor’s truck sector strategy a bit up in the air and forces the company to dedicate more resources to a segment for which is has limited enthusiasm. Given the opportunity, Hyundai Motor would prefer to concentrate exclusively on light vehicles.

Some in the industry believe that Tata Motors will have a tough job winning over the hearts and minds of the South Korean truck and bus buyers and that nationalism will cost the company some domestic sales. But one major plus is in the potential to share development costs and generate economies of scale in parts production.

The takeover so far appears to have gone well, with a new 8-ton truck model, the Novus, which meets Euro III emission standards, launched on the South Korean market this month. The engine is equipped with Bosch’s diesel common rail technology and electronic engine management, and will be very useful for Tata in helping it meet increasingly stringent emissions standards elsewhere.

Tata Motors’ LPT 1615 TC
Turbo Heavy-duty Truck

Another significant advantage of the acquisition is in that fact that the South Korean company has a small bus plant in China, which has a very substantial truck and bus market. This could provide Tata Motors with a springboard for other product launches in this market. The company has said that it is in talks with a number of potential partners in China.

Expansion in other developing CV markets
Another significant expansion project that Tata Motors has announced in recent months is the tie-up with Russia’s Automobil Motory Urala, a major Russian truck-maker. The target is to make around 5,000 Tata trucks a year at the plant, after certain parts have been localized. Initially, however, its target is more modest, with 400 truck expected to be assembled this year. Eastern Europe is a substantial a growing market for trucks. Following the accession of a large number of eastern European countries to the EU, trade and ultimately demand for road cargo transportation capacity is likely to accelerate significantly.

South Africa is also one of the markets for which Tata Motors has high hopes. It has launched its full line up in this country in a strategic partnership with local distributor Imperial Group. In other countries in Africa, Tata’s trucks are well represented in the market and this partnership is likely to help strengthen the company’s position in this region.

South-east Asia is a region largely untapped by Tata, so far at least. The company recently announced plans to set up a one-ton pick-up truck plant in Thailand and is likely to look at assembling heavier vehicles in the region in the future.

Overall, Tata Motors has taken on a major international dimension in the last year or so, particularly in the commercial vehicle sector. But such rapid expansion does not come without risks. Asia and other developing regions are highly susceptible to oil price movements. Furthermore, significant competition could emerge from elsewhere – particularly from China following its entry to the World Trade Organisation. Perhaps it is because of these threats that Tata Motors feels it must internationalise its business. But looking closer to home, truck demand is too cyclical by far for a company to rely so heavily on a single market.

Tata Motors has the opportunity to establish itself as a major supplier of commercial vehicles to the world’s developing markets and it looks like it is going about it in the right way. It has done a lot in the last year, but there still is a lot left to do before its potential is realized. One major hurdle to overcome will be to convince these developing markets that India can make quality as well as low cost products.