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Case Analysis: Tata - Daewoo The Road to Gunsan Business World, August 9, 2004

Points to discuss

1. Examine the market implications of acquiring the Daewoo plant by Tata Motors
2. Analyze how new markets technology and policies are influencing Tata Motors Costs?

Presented by : PGDIBS , Team BKC Mumbai

Examine the market implications of acquiring the Daewoo plant by Tata Motors
Tata Motors inked an investment agreement in February 2004 to acquire the South Korean truck-major Daewoo Commercial Vehicle for $102 million. The acquisition marks the beginning of Tata Motors global expansion trail and is expected to help the company make headway in a number of other markets. e.g. TATAs can now target the biggest growing China , Italy , Spain CV market. Tata Motors aspires in long term basis major revenue of the organization will be achieved from overseas market. TATAs had planned to expand their global business from 5% to 20% by 2005-06.Tata Daewoo marks a significant milestone to achieve such ambitious mission. Wide product portfolio : TATAs will have wider product offering ranging from Small Tonnage (1 Tonne) to Sophisticated 10 Tonnes Heavy Duty Trucks.

At the time acquisition DAEWOO was utilizing 25% its installed capacity. This means that The plant was underutilized and Fixed costs were very high. Even after this company 22% of Market share. If this plan can be run with 100% installed capacity , then the Average cost would come down and become more competitive in the Market.

New markets technology influencing Tata Motors Costs?

1. Engineering Research & Development Cost.Substantial savings
High Product Development Cost : It involves huge cost in Product development phase. This involves mainly costs related to Design of components and Styling of automobile. This was avoided since DAEWOO already had a separate 3 storied Daewoo Technical Centre primarily designing global products. Technology Transfer : Daewoo has a product line up which compliments TATAs. DAEWOOS international experience can be used for making alterations in TATAs existing products. e.g. TATA NOVUS was designed with a joint collaborative team between India / Korean Engineers. In-house Designing : With a world class design center at Daewoo Tatas can look forward to more in house designing. Tatas can look forward to customizing the cabin interiors to exhibit more functional appeal. Regulatory Requirements : TATAs can now meet the regulatory requirements primarily Emission Norms such as Euro III onwards

2. Manufacturing Costs :
High cost to meet Regulatory requirements :Changes due to changes in Emission norms involves huge cost in some manufacturing assemblies to produce such engines. Make or Buy : The immediate alternative which can be thought of is to buy the aggregate such as Engine from OEMs ( TATA INDICA VISTA runs with FIAT Engine). However this will put constrains on profit margins, as Engine is one of the Major contributing aggregate to cost.

3. Sourcing Costs Better Sourcing prices of components : Tata's with a commanding 6th largest vehicle maker globally requires to source products at the best cost to maintain its optimum profitability. With the expansion of its CV business Tata's can look forward to obtain a good price from its vendors for bulk orders. With Tata Steel as part of the Tata group cost with steel can be optimized, but for other products like radiators, fasteners bulk ordering can fetched from China itself

Influencing Policy for Tata Motors

Tata have set a goal where overseas revenues will account for 25 per cent of turnover in three years. To achieve such revenues Tata identified four key markets, India, China, Latin America and Western Europe 1. Input Costs In 2003-04, raw materials and components formed approximately 68.5% of the Tata manufacturing and other expenses. Outlook of the steel industry is the rise in price. Similarly the costs of certain other inputs like rubber products are also on the rise. However, if these input costs continue to increase, margins and results of operations of the automobile industry would be adversely affected and the demand for vehicles would be impacted by any price increases that the industry would need to make. Tatas has been partly countering such increases through long term contracts, identification of alternative sources and through cost reduction in other areas.

2. Domestic Conditions

Its disadvantage is that a large market, Tatas own home market does not demand heavy CVs which it intends to sell globally. Hence Tata Motors is not producing these products for the Indian market because the Indian market today does not need them. And in so doing, even when it designed products for the international market that were different from those in India, it did not have the scale to produce them competitively. Commercial Vehicle (CV) business is cyclic in nature. The larger the market share of a company the more severe is the cyclical impact; also the more liberal the markets, the more pronounced is the cyclical impact. By the global operations of Tata Motors this cyclical phase is lagged across different geographies. Spreading the business to different countries will act as a hedge against cyclical trends because when the domestic CV business is in a slump, things will be looking brighter elsewhere. This is an excellent hedging strategy employed by Tata in long run of the business.

3. Exchange rate fluctuation

Between April 1, 2003 and March 31, 2004, the value of the rupee appreciated approximately 8% against the US$. In recent times, the rupee has depreciated against the US$. An appreciation of the value of the rupee can adversely impact Tatas exports and depreciation of the value of the rupee can influence the cost of borrowings denominated in currencies other than rupees and increases the cost of imports