Introduction

Tata Motors is the largest multi-holding automobile company in India and it is the fourth

largest truck producer in the world. In addition, Tata Motors is also the second largest bus

producer in the world, with the revenues of US$ 8.8 billion in the financial year 2008.

Since its establishment in 1945, Tata Motors has grown significantly in the past 60years

with the strategies of joint venture, acquisition and launched new products in different

market segments (i.e. passenger cars, commercial vehicles and utility vehicles). A

significant breakthrough for Tata was the development and commercialization of the

truly Indian cars and they are Tata Indica (1998) and Tata Indigo (2002). Tata Motors has

experienced many joint ventures with Daimler Benz, Cummis Engine Co. Inc., and Fiat

and successfully acquired Daewoo Commercial Vehicle Co. Ltd. In the year 2008, there

were two most significant events which have had a momentous impact on the scale of the

Company’s operations and its global image. The launching of Tata Nano, the world

cheapest car and the acquisition of Jaguar and Land Rover, the two iconic British brand

have made Tata Motors well known to the people in the world.

Tata Motors has proven excellence over the years through continuous strong financial

results, market expansion, acquisition, joint ventures and improvement and introduction

of new products, it seems to have a promising future. But it failed the expectation as the

company was in trouble right after the acquisition of Jaguar and Land Rover (JLR) in

June 2008 due to the arrival of global financial crisis. The bridge loan of US$ 3 billion

which used to fund the acquisition of JLR was due on June 2009 and yet at the end of the

year 2008, Tata was only able to repay the US$ 1billion. The declining revenues and a

tight credit conditions was hurting the company’s cash flow.

The questions arise is that whether Tata Motors able to repay the bridge loan? Will it be

able to build up investors’ confidence and increase sales in the future? Could Tata Motors

survive or going under bankruptcy? And we would analyze and discuss these further in

the report.

Before we look into the reasons behind Tata Motors acquired JLR, let us take a look on

what makes Ford Motors to make the decision to sell JLR to Tata Motors.

Reasons behind Ford Motor’s decision to sell JLR

In 2006, reports said that losses at Jaguar stood at USD 715 million. Jaguar was not

performing well as it was unable to provide any profit for Ford due to high manufacturing

costs in United Kingdom. The wellbeing of Land Rover's profit, on the other hand, was

boost up by the record sale of 226,000 vehicles, an 18% year over year growth in 2007.

"Bringing down production costs and turning around the company successfully will be

the challenge,” analysts said. It was a test that Ford failed. Ford is combining both the

brands since the products and manufacturing of vehicles for Land Rover and Jaguar is so

intertwined.

The table below shows the number of sales of JLR after acquired by Ford:

Numbers 2005 2006 2007

Jaguar 86,651 72,680 57,578

Western Europe 46,789 41,367 33,024 57%

America 32,131 22,136 16,836 29%

Rest of Word 7,731 9,177 7,718 13%

Land Rover 170,156 174,940 202,609

Western Europe 97,303 95,399 109,785 54%

America 51,634 53,638 57,092 28%

Rest of world 21,219 25,903 35,732 18%

Total 256,807 247,620 260,187

Western Europe 144,092 136,766 142,809 55%

America 83,765 75,774 73,928 28%

Rest of word 28,950 35,080 43,450 17%

From the table, we may see that the sales of Jaguar are decreasing dramatically from 2005 until 2007. After intertwined Jaguar and Land Rover, sales from year to year fluctuated without certainty of growth. This is one of the reasons that lead Ford’s decision to sell JLR to Tata Motor.

The table below shows the cost of production for JLR:

From the table, we may observe that Ford failed to reduce production costs as major proportion of cost is material cost and they unable to bought cheaper materials from suppliers. This however is very different if Tata Motor takes the ownership because they are utilizing country’s vast natural resources.

The rationale to acquire JLR

After the acquisition of the British Jaguar Land Rover (JLR) business, which also

includes the Daimler, Lanchester and Rover brands, Tata Motors had obtained numerous

benefits and advantages. Below are the reasons behind Tata Motors’s decision to acquire

JLR:

1. Long term strategic commitment to automotive sector which Tata Motors want to

become a major player in the international automobile market.

2. Opportunity to participate in two fast growing auto segments to fulfill part of

Tata Group’s ongoing strategy of internationalization.

3. Increased business diversity across markets and products.

4. Land rover provides a natural fit for Tata Motors’s Sport Utility Vehicle (SUV)

segment which attracted Tata Motor.

5. Jaguar offers a range of “performance/luxury” vehicles to broaden the brand

portfolio internationally.

6. Benefits from component sourcing, design services and low cost engineering by

obtaining intellectual property rights related to the technologies.

7. Improved corporation’s image and increased its public reputation.

Subsequent to the acquisition of JLR, Tata Motors benefited:

100% stake in Jaguar &

land Rover Business

Tata Motors has acquired the business & initially they will be

operated independently of the partner.

Three plants in UK Tata Motors will directly own these two well invested plants by

Ford.

Two advanced design &

engineering center

4000-5000 engineers engaged in testing, prototype design & power

train engineering, development & integration.

Twenty six National

sales company

Both existing national sales companies of JLR and also those that are

carved out of current Ford operation would be owned by Tata

Motors.

Intellectual property These covers all key technologies to be transferred to JLR &

rights perpetual royalty free license on technologies shared with Ford.

Capital Allowance Capital allowance with a minimum guaranteed amount of US $1.1

billion to be carried forward for future tax savings.

Support from Ford Motor

Credit

Ford Motor Credit will continue to support the sales of JLR for the

next 12 months

Pension Contributed by

Ford

Ford will contribute US$ 600 million of the Pension Fund to the

workers in United Kingdom

After analyzed the case study, we believe that the main reason influence Tata Motor’s

decision to acquire JLR is to go global by acquiring famous international brand to

increase its global image. By acquiring JLR, Tata Motors able to obtain intellectual

property rights related to the technologies from JLR at the meantime improve

corporation’s image and increase its public reputation. It is not wrong to possess such

ambitious corporate mission and vision with aggressive strategies and strong support

from the high working capital. However, there are always some questions being asked

which form a doubt feeling among public. The questions are sound like -- Have Tata

Motors make enough pre-acquisition jobs such as risk measurement and macroeconomic

study before acquisition of the British Jaguar Land Rover (JLR) business on a cash free

and debt free basis? Are there any problems company could face in financing

acquisition? Would Tata Motors face problems after the acquisition of JLR? We would

discuss these in the further sections.

Problems a company could face in financing acquisitions

Complexity in raising fund

Normally, before the financing acquisition take place, company would have problem in

raising fund. The most common finance method is directly applying loan from the

commercial banks or investment banks. However, banks would have to go through some

of the details and documentations of the company before the loan is approved. Basically,

banks would have to analyze company’s performance, equity, current ratio, liquidity ratio

in order to determine the ability of the company to pay back the loan. Company which is

not doing well or having higher liquidity ratio probably may face more challenges if

raising fund from applying loan from banks. Therefore, company may need to have an

extremely well strategic plan in order to convince the bankers to approve the loan for

them. On the other hand, company itself has to go through some process too before the

finance acquisition actually take place. In most of the case, company may have to analyze

the fees and costs of the finance, make comparison between different finance methods, in

order to find out which finance method is the best for the finance acquisition activities.

These activities are complex and time consuming since it has to go through a lot of

process and do a lot of analysis. Indeed, company will face a great challenge if they wish

to do the finance acquisition.

Incur higher cost

Furthermore, bidder should understand and realize that the interest rate will be penalized

toward the maturity of the debt taken. The compounding of interest rate could increase

the financing acquisition’s expenses incurred by the acquirer relatively. Fundamentally,

the longer the maturity of the debt, the higher the interest expenses will be incurred and

vice versa. Therefore, the interest rate on debt in financing the acquisition became a

burden for the bidder indirectly and that is not a simple decision to be made on whether

financing the acquisition is the right method to achieve.

Uncertainty

In the whole process of M&A, it involves many uncertain factors which should be

concerned by the bidders. Normally, it comes from macro environments and also micro

environments. Marco environments include the changes of national economy policy,

periodic fluctuation in economy, fluctuation of interest rate and inflation rate as well as

the exchange rate. Meanwhile, the micro environments involve the changes of

management condition, fund raising and condition, price of purchasing, technology,

management in culture and harmonization after acquisition.

All these changes could differentiate company’s value before the acquisition and after the

acquisition toward the goal planned. Uncertain factors are objectively created and rise up

the cost of the company in order to implement the changes. Therefore, this high cost of

implementation could lead the possible loss affected by the volatility of the outside and

inside factors, which restrict the decision makers’ to make their judgments.

Fundamentally, bidders should consider and analyze what is the current change toward

the environment in current situation and the changes in future time as well before making

the decision to take control over another party. The basic changes that could distort the

decision making in financing acquisition are the interest rate. Therefore, bidders should

aware and make a precise judgment toward their decision in acquisition activities

Increase of default risk

Default risk means the possibility of a company unable to pay back its debt. Financing in

term of borrowing will definitely increase company’s liabilities, which in turn lead to

higher default risk. Let make an assumption that company able to get loan for the finance

acquisition. After that, the problem that may concern by the company is that the

possibility of unable to pay back the loan if the stock price didn’t increased and acquired

company does not provide return as expected. Normally, this is even worse if economic

crisis happen right after the acquisition. For instance, global financial crisis hit the world

right after Tata Motors acquired the Jaguar Land Rover, which lead to Tata Motors faced

its first losses in 8 years. Indeed, this would be a problem to the company which acquires

other company through financing. High default risk will decrease the credit rating of the

company by the bank and may force it toward bankruptcy subsequently.

Problems faced by Tata Motors and its probable solutions

Problem 1: Lack of access to credit to repay the bridge loan of US$3 Billion

Tata Motors was facing problem in cash liquidity and have negative working capital after

the acquisition of JLR. Besides, the debt ratio had increased over the five years and they

have negative interest coverage which these shows that the company was having problem

in paying the bridge loan.

Subprime mortgage crisis has caused the demise of Lehman brothers which later lead to

the collapse of the global financial sector and further deepened the global financial crisis.

Consequently, the global line of credit is frozen which has cut the availability of financing

for companies throughout the global economic crisis.

Tata Motors was finding it difficult to access credit and raise fund from the stock market

due to the tight liquidity conditions, a gloomy and depressed stock market and lack of

investors’ confidence. Besides, lacking of working capital has caught them into trouble to

repay the bridge loan of US$ 3 billion which used to finance the acquisition of Jaguar and

Land Rover (JLR). The bridge loan was due on June 2009 and yet at the end of the year

2008, the company was able to repay only US $ 1 billion.

Solutions 1

i) Merge with Mahindra & Mahindra

The probable way to be cash-rich for Tata Motors might be merged with the other

company in the automobile industry. By merging with other cash-rich company, Tata

maybe can access to the working capital and get another piece of income from the

merged company to repay the bridge loan. To remain as the Indian owned multinational

company, we would suggest Tata Motors to merge with Mahindra & Mahindra (M&M)

as the company is one of the leading tractor brands in the world and it is also the largest

manufacturer of tractors in India (Wikipedia, 2010). During this global economic crisis,

the Asia countries were not hurt badly, so it is a possible move to merge with M&M, as

the merger requires no cash, and would have opportunity to gather fund through M&M.

However, we would disagree that this is the best solution as merger will make Tata hard

to make decisions for the future planning due to the conflict of objectives between the

two companies and finally caused the disruption in running the business.

ii) Divestment

To raise capital to repay the bridge loan, there is another possible move which is

divestment and this could mean that the company could sell part of its subsidiary or

assets. Many would think that forgo a profitability subsidiary or assets will cause the

company lose the future benefits from that subsidiary. Hence, this should be done with

proper investment analysis to identify which one to let go. If possible, sell the subsidiary

to the Tata group as an intra-group transaction, so it would benefit only the group

member and this move will give chance to Tata Motors to buy it back in the future when

there is a right timing.

ii) Combination of raising funds from public and refinance

Raising funds from public could be a good idea as the debt market is frozen and Tata

Motors actually had taken this step to raise fund and repay the bridge loan. Tata Motors

offered the 11 percent annual interest on three-year bond to raise money from the public

whereas government bond with same maturity offers a 6.97 percent yield. (Anand, 2008)

Besides, Tata Motors could think of refinancing to cover the bridge loan which is comes

to the due date maybe by using the long term loan to cover the short term loan. Under the

tight credit conditions, Tata Motors may accept the loan with a slightly higher interest

rate in order to get the money from the banks. Offer a higher interest means it will

increase company debts, but we believe that Tata Motors is able to survive under the

worldwide recession as they have good strategic planning and strong financial results

over the years since their establishment. The rationale behind these is to extend the debt

repayment period by settling the short term debt first and during the extension period, the

company is able to earn money from the launched of Tata Nano, the cheapest car in the

world to fight with the global economy crisis. As the time gone, the crisis will then ended

and the demand for the cars will increase and here comes the cash to settle the long term

debt.

Problem 2: Global financial crisis has severely impacted the global automobile

industry especially the luxury cars segment

The automobile sector in India was severely impacted by the global financial crisis in the

Indian and global business environment. GDP growth slowed down substantially from 9

% in year 2008 to 6.7% in year 2009. Followed by high inflation and high material cost

which lead to higher vehicle prices and fuel prices, unavailability of finance or higher

cost of finance as well as gloomy economic conditions had slumped the demand badly.

(Annual Report 2009) These factors have tremendously pressured both Tata Motors’

commercial and passenger vehicle industry which lead to sales declined. Jaguar and Land

Rover faced severe demand contraction due to the negative wealth effect. As the fuel

price and interest rate increase plus the continuing credit squeeze, consumers would buy

low cost and low fuel consumption car rather than luxury and high fuel consumption car

like JLR. So, the problem occurs as the JLR could not generate working capital to Tata

Motors and the recessionary trends deepened the domestic vehicle sales. The industry

performance in the domestic market during FY08-09 and the Company’s share is given

below:

Source: Society of Indian Automobile Manufacturers report and Company Analysis* including Magic and Winger sales # including Fiat branded cars

The Company’s exports also declined by 38.6% during the year 2009, due to the

meltdown in major international markets and the consequent swings in foreign exchange

rates.

The graph below shows the dropped of sales which affected the net profit margin:

Solutions 2

In order to survive in this sluggish economy condition, Tata Motors only has few options

which are laid off workers, cut productions, cut cost and boost sales with cheaper cars.

i) Lay off workers and cut productions

In fact, Tata Motors laid off 850 employees at JLR and stop production for few days to

stop pilling up the inventories in order to cut cost as JLR was hardly to generate revenue

at this point of time. Here the debatable ethical issues raised as the workers were jobless

because of the company’s action to survive.

ii) Launch low budget cars in the developing countries

There is a need for Tata to launch the low budget cars in developing countries to boost up

sales and generate working capital. The Asia countries have less impacted by the

recession, so it could be the opportunity for Tata to boost sales. This effort should be led

with innovative models like Nano (the world cheapest car).

iii) Focus on new product development and continue to introduce new

products in the marketplace

While the financial stimulus announced by the Government, particularly for

commercial vehicles, has had a positive impact. Hence, Tata should focus on new

product development in the commercial vehicles in order to grab the first bite of

revenue when the demand for commercial vehicles starting to increase. Besides,

introducing new products into the market would grab the attention of consumers and

they would buy the cars if they are affordable.

Problem 3: Increasing materials and fuel prices have slow the demand of vehicles

Due to the impact of tighter money supply with higher interest rate, there will be

meteoric rise in fuel and materials (e.g.: steel, tyres) price. High fuel price has caused

Tata Motors to feel the heat of slowing demand. Decrease in sales volume and

increase in cost as well as bearing the increment of short term debt would easily kill

Tata Motors. Therefore, a probable solutions would keep them survive and grow.

Both graphs above show the steel and fuel price pattern from the years 2007 and 2000

until 2010.

Solution 3:

i) Hedging or Joint Venture with the materials suppliers

It would be good if Tata Motors could have a forward contract with the suppliers to

hedge their exposure to the price of steel and tyres. This would definitely help Tata to

save a large amount of money if compare to the competitors. By using forward

contract to avoid the price fluctuation, Tata is able to reduce the cost and offer a car

which is more competitive in price. Joint venture with steel companies would also

help Tata Motors to get a slightly cheaper steel price than other competitors and this

would then to introduce low budget car which might help in boosting sales.

ii) Launch new products with fuel economy

In the consumer point of view, they will postpone purchase when the fuel price is

high if the cars in the market are not fuel economy. Hence, it would be a probable

solution to deal with the high fuel price if Tata Motors could launch new product with

fuel economy.

iii) Continuous research and development in developing vehicles that

running on alternative fuels

If Tata is able to be the first who developed the cars that running on alternative fuels

like CNG, LPG, and bio-diesel, ethanol blending or developed vehicles fuelled by

hydrogen. Tata would soon be the leader in the global automobile industry as the

sales of vehicles will increase tremendously.

Problem 4: Share price dropped drastically and affect its global image

As the debt market was frozen, Tata Motors turn to the equity market to raise fund.

After the issuance of ordinary shares with right basis where existing shareholders

could get one ordinary shares for every six shares held, the earning per shares of the

company dropped. This is due to the company earnings dropped (effects of the global

economic crisis) and the number of shares outstanding increase. The dropped of

shares price and EPS caused the investors and public losing confidence on Tata and

later it had affected its global image. Now, everybody is in doubt whether Tata

Motors able to survive and increase the EPS in the future and would think twice

before investing in Tata Motors.

The share price of Tata Motors dropped drastically after the issues of ordinary shares on

the right basis.

Solutions 4

i) Boost sales and increase company’s earnings

In order to boost sales, launch new products with fuel economy and low budget cars as

mentioned above will help to achieve the target of sales increase. When the sales

increase, the earnings will increase and hence the EPS will increase. Besides, when there

is a sign of revenue growth, the public will have their confidence on the company

increase and finally they will build up again its global image.

ii) Expose the future strategic strategies through media release

Smart investors will do a company analysis before they invest in that company and

normally they will get information from the annual reports, newspaper, and electronic

devices. Hence, it is a probable way to build up investors’ confidence through media

release to announce the company future profitable plans. Tata Motors always have good

plans to provide the best value of money to its shareholders and customers where it can

be proven from its past sales history. They always make the good decision in acquisition

the right firms and joint venture with the high technology-based auto-maker firms.

Hence, investors would be convinced to pump in fund to the company and it would also

help in gaining trust from the financial institutions to lend Tata a huge loan for

refinancing.

Problem 5: Relocation of Nano’s factory from West Bengal to Gujerat

The factory of producing Tata Nano was set up at West Bengal in order to launch the

product on October 2008 but due to the violent political agitation in West Bengal over the

land issue, Tata Motors was forced to relocate their prestigious Nano project to Gujerat.

This has eventually delayed the launching of Tata Nano in October and increase the cost

of setting up factory and facilities to produce Nano.

Solutions 5

Due to the political issues problem, Tata Motors has no power to control this external

factor environment. Therefore, Tata Motors can only change its internal variable and

reallocate its resources in order to continue its operation for Tata Nano project.

Therefore, the factory which uses to produce Tata Nano had shifted to Gujerat at the end.

Reasons of global financial crisis and its impact on the economies of

developed and developing countries

Bursting of housing bubble, drastically drop of stock price, large financial institution

collapsed, government intervention to bail out the financial system, slowdown of Gross

Domestic Product (GDP) and so on are the serious issues that indicate the economic

recession which cause by the global financial crisis 2007-2010. Although it started at

United State American, the negative effect of financial crisis sweep away around

different regional’s economy no matter developing or developed countries due to

dependence of those economy system on the USA’s financial condition.

Between year 1997 to 2006, the price of typical American house increased by around

124%. This housing bubble and low trammel of borrowing requirement, incite those

home investors refinancing their home loan with lower interest rate (some even lower

than market interest rate) by taking out second mortgages secured by price appreciation.

However, when interest rate start raise and housing price began drop moderately in year

2006-2007 sweep around U.S., housing bubble busted and refinancing become more

difficult. Such condition resulted in homes worth less than the mortgage loan and lead to

foreclosure epidemic which happen in late 2006 continuously drain wealth from

consumers and erodes the financial strength of financial institution. Moreover, defaults

and losses on other loan type had significantly expanded the crisis from housing industry

to other part of the economy especially the banking industry which incurs huge number

of subprime mortgage loan. The financial crisis 2007-2010 culminated on September

2008 with Lehman Brother filing for bankruptcy. In the beginning state, global financial

crisis was resulted by the insufficient of regulation and monitoring implement by the

government and financial institution in the housing industry and banking industry.

After the bursting of housing bubble and bankruptcy of Lehman Brother, the U.S. was in

bear market. The U.S. stock market drop drastically. U.S. Nasdaq index and S&P 500

index were drop around 25% from year 2007 to 2008 and it went worse in year 2009

(decrease around 11% again). Besides that, the import and export of U.S. also decrease

seriously. All this bear market effect will influence the GDP of U.S. and continuously

influence other economic system and countries.

Since U.S. is the largest economic system and operate huge international trade with other

countries (U.S. ranked as the biggest international trader by WTO). The table shows

information about the top partner of U.S. for international trading. Any bad performance

of U.S. economy includes the decrease of GDP and stock price will pressure the

economic performance of those countries no matter developed or developing countries.

The global financial crisis started at U.S. will reduce the purchasing power of U.S.

international traders and also investors who loss confident with the economy. This will

resulted in declining of U.S. foreign direct investment in other countries and also the drop

of import and export of U.S. Reducing of that capital or income will affected the income

of those countries which directly depreciate the value of GDP and companies’ stock

price. As the result of it, the global financial crisis had created the recession for the

world’s economy. This also the reason for how financial crisis in U.S. globally affected

other economic systems.

The global financial crisis go worse when the import and export of other countries

declining and pull down the stock value of the countries. This will further reduce the

purchasing power of consumer and investment quantity of investors. And these reduce or

slowdown the GDP growth of those countries. For the first quarter of 2009, the

annualized rate of decline in GDP was 14.4% in Germany, 15.2% in Japan, 7.4% in the

UK, 18% in Latvia, 9.8% in the Euro area and 21.5% for Mexico. This is the reason of

how the world suffering recession cause by the U.S. financial crisis. The following graph

shows the some decreasing of GDP growth of Asia and Pacific.

The following graph shows the GDP performance of Latin America countries as a total.

According to the Overseas Development Institute, the global financial crisis affects the

developing countries in two possible ways. First there could be financial spillover and

contagion for stock markets in emerging market. For example, India stock market

declined by 8% in one day as the Brazil and U.S. plunged; the Russian stock markets had

stop trading twice. Those examples clearly show that, no matter developing or developed

countries, the stock market across the world had dropped substantially since May of

2008. Second impact is due to the worse condition in developed countries which

influence the developing countries. It could be in severe ways:

1) Trade and trade price

Recession will cause inflation and reduce the real value of currency. This will

cause the commodities price increase especially those items like oil, copper, and

so which highly demanded by China and India. The graph shows the increasing of

price of commodity and petroleum during year 2007 to 2008.

2) Remittances

Since condition in developed countries is in recession, fewer migrant will move to

developed countries. For instance, less job available in England during the

recession cause a lesser amount of people from Turkey and East Europe seeking

work in England. This kind of situation will reduce the remittance to developing

countries (which reached a record $251 billion in 2007, but have fallen in many

countries since).

3) Equity investment and foreign direct investment (FDI)

Effects of recession incite the drop in confident level of investors with

investment. Unstable economic environment had refrained investors putting in

their money in stock market or any fund investment due to high risk in real value

of currency. Investors would tend to invest in assets such as gold and other. This

resulted in less working capital and credit availability in the market. Developing

countries will face credit crunch. The following graph shows the decline of

investment in India during the global financial crisis.

4) Commercial lending

Since bankruptcy of Lehman Brother and the financial collapse of Iceland due to

high debts, banking industry of developed countries was under pressure in not be

able to lend as much as they done in past. U.S. banks losses were forecast to hit

$1 trillion and Europe banks is around $1.6 billion. Under such condition, low

credit availability will force companies in both developed and developing

countries into trouble of insolvency and further slowdown or postpone the

projects or investments.

5) Unemployment

High commodities price and low investment rate as well as low credit availability

had reduce the income and profit of many companies and force them to reduce the

working capital by layoff the employees. This type of strategic will increase the

unemployment rate of the countries and further deteriorate the economic

circumstance. It will also incite more crime, weaker health systems and higher

poverty which will construct an unstable social condition bring negative impact

on economic recovery.

The impact of global financial crisis on the developing and developed countries will vary.

It is depend on the respond of those countries’ government in deal with the crisis. The

government has to modify the policies and regulation as well as changing the fiscal

policy and monetary policy to reduce the effect of financial instability and recover the

economic condition.

Impact of global financial crisis on the automobile industry

Worldwide slumping in Automobile’s sales and production

The global financial downturn was primarily affected the American automobile

manufacturing industry followed by the European and Asian automobile markets in

October when the sales of the automobile industry slummed in year 2008. However, in

2007, the signs of the economic crisis started to reveal. All was begun by the sales

dropped incurred in Japanese and US motor vehicle from 2006 until 2007.

The pressure of the global financial crisis totally distracts the automobile markets finally

when this industry faced negative growth rates in sales and production for 2009. The

economic downturn boiled over in 2008 from the North countries of the world and

continues spread to the South countries in 2009. Furthermore, global production and sales

in the automotive industry is expected to fall in 2009 (table: -21.5% and -16.4%

respectively).

The sales of the South America were most affected by the crisis which is dropped from

3.2% to -29.6%. While, Japan were more severely affected in productions downturn

incurred a slumping percentage from -0.3% to -32.5% in 2009 and this relates to the

export surplus that has been involving for the NAFTA area. Western Europe, Africa

(Middle East) and Asia-Pacific (excluding Japan) is assumed to have least affected areas

in terms of the car sales and incurred a minor decrease in vehicle production

Japan

In December 2008, Japan’s fourth biggest car manufacturer-Suzuki Motor Corporation,

announced that it will cut their production in Japan in about 30,000 units due to failing in

demand. Nissan, another leading Japanese car manufacturer, declared to slashing

production of its output by 80,000 vehicles in the first quarter of 2009. Beside,

Bloomberg reported that Mitsubishi Motors move to reduce planned output by 110,000

vehicles in the year ending of March 2009 because of tumbling sales in Japan, the US and

Europe

With a weak US economy and high gas prices in the summer of 2008, Toyota reported a

decline in sales for the month of June, as well as same figures reported by the Detroit Big

Three. Toyota claimed that, these were attributed mainly to slow sales of its Tundra

pickup, as well as the shortages of its fuel efficient vehicles such as Prius, Corolla and

Yaris. On December 22, 2008, Toyota slashed profit forecasts in sales and their sales in

TableWorld car sales and production by sub-regions 2007-2009

( change in %, year on year basis)

Source: Automotive World Automotive Passenger Car OEM Quarterly Data Book, Q2, 2009. Reclassified data calculated from rounded off data Note: #) NAFTA and South America figures (include light trucks)

the United State were down 34% and were drop 34% in Europe as well for the year

ending in March 2009.

France

The French automobile manufacturer, PSA Peugeot Citroen, foresee the falling of sales

volumes by at least 10% in 2009, following a 17% drop in the last quarter on 2008. The

European domestic sales fell 4% and the world wide sales drop by 7%, which is forcing

Renault to abandon their 2009 growth targets.

South Korean

Despite a global economic slowdown, Hyundai-Kia, the South Korean automakers, have

been successfully managed its rapid growth in 2009. It is unusual for Hyundai-Kia’s

continued success when most automakers facing in sales falling. Hyundai-Kia took

significant advantage of the crisis by creating affordable and high quality with well

designed vehicles while indirectly attracts the customer confidence to invest in their

markets. Nonetheless, South Korean automakers were not completely immune to the

crisis and Hyundai Motor Company had begun reducing production in US, China,

Slovakia, Turkey and India since the demand of motor vehicles was badly affected by the

financial crisis.

India

The pressure of global downturn affects the State Bank of India to reduce the interest

rates on automotive loan in February 2009 citing falling production quantities. Tata

motors conducted a widespread marketing campaign toward the Tata Nano, which is

classified as “the people car”, while the manufacturer hopes this low cost product will

encourage customers to purchase the vehicle in the credit crisis period.

2008 and 2009 - The bad period for automobile manufacturer

General Motor (GM) and Chrysler faced the reducing cash flow and falling in

profitability during the automotive industry crisis in the late of 2008 due to the global

financial downturn. Consequently, the huge negative impact faced by both giant

automotive manufacturers (GM and Chrysler) in USA was bringing about bankruptcies

and bankruptcy protection claims under the US Chapter 11 clause. While, another well

known automotive manufacturer-Ford, managed to stay in an independent condition due

to the previous debt restructuring process.

Capital restructuring with a condition of high possibility for being unable to pay debt, the

external government intervention, supplier defaults and falling in customer confidence

extremely affect the automotive industry in the midterm and long term period.

Subsequently, through reduced in R&D investment, slumped the capacity and capability

of the organization will lead to falling in competitiveness and further decline in the

automobile markets performance.

Automotive firms’ actions

The economic crisis generally affected the automakers and auto-parts suppliers within the

entire global countries to implement the standard crisis management. Obviously,

interrelated between the automobile manufacturers around the world is widely conducted.

While the reputation and performance in the automotive markets should be well manage

in order to maintain the standard and quality of the organization.

However, the insufficiency of working capital to face the global financial crisis lead to

planning in reduction of output(parts, vehicle) management by most automakers in order

to survive from lack of ability to funding the business activities. Decreasing in production

lead the management of the company turn to reorganize the human resource management

involving internally eliminating shifts of working hours, reducing overtime, performance

based bonuses, temporary worker layoffs and contract employees.

Furthermore, the automakers also manage the external’s relationship by way of

managing the upstream value chain (business services, suppliers) and downstream value

chain (dealers, transport, after sales services, logistics vehicle financing and insurance as

well as recycling).

Finding Alliances and other alternatives

Some of the automotive manufacturers attempt to consolidations, mergers and

acquisitions within the same industry’s parties while finding alliances to back up the

automotive industry. The global financial crisis lead the automobile manufacturers to

renegotiation of existing contracts, loans and credit lines as well as the company

restructuring system. These could slightly assist the company to stabilizing and balance

up the ability to continue the business activities.

The negative impacts and massive distraction caused by the global economic crisis

critically repositioned the automakers’ capability to growth in the global markets. If we

realize that, DaimlerChrysler disbanded, Suzuki and Fiat (potential acquisitions) was

abandoned by General Motor (GM), and Ford has been reduced its engagement in

Mazda.

Subsequently, these changes exposed for new formations including the alliance taken by

Chrysler with Fiat, Suzuki and Volkswagen (VW) are becoming allies acquiring equity

from each other, and Mitsubishi Motor Corporation is linking up with PSA in the year of

2000 due to the global financial crisis effects.

Development of new trend has been introduced where, automakers from the South

countries seeking foreign direct investment of automobile capital in the North countries

to undertake their asset. For instance, South Korean (Ssangyong) has been acquired by

Chinese (SAIC) in 2004. In 2008, Indian Tata Motors also acquires Jaguar Land Rover

from Ford. Meanwhile, General Motor (GM) has sold the Hummer to Chinese Sichuan

Tengzhong Heavy Industrial Machinery Company in 2009. Furthermore, Ford also trying

to selling its subsidiary, Volvo, by negotiating with Chinese Geely.

Get support from government

Consequently, the impacts of the economic crisis blow up the car manufacturers’

intention to have the reinforcement from the government in order to stable the

momentum in consumer demand of motor vehicles. The President of the automobile

industry’s trade association, ACEA, and the CEO of PSA Peugeot Citroen, Christian

Streiff has claimed his statement in a press release subsequent to an ACEA board meeting

in Paris at the motor show. He mentioned that the governments should respond and

stimulate the economy while, remove the credit crunch in order to restore the consumer

confidence. This can be the method to let the consumers have the confidence to buy and

invest indirectly in new vehicles produced. Meanwhile, the secretary general of the

automobile industry’s trade association, ACEA, Ivan Hodac, added, due to the regulatory

requirements strengthening actions, the global downturn adds to an extensive pressure on

car production in Europe.

The influence of macroeconomics environment on business

Macroeconomics is one of the general fields in economic which deal with the structure,

performance and behavior of the whole economy of a country even the regional and the

whole world. Understanding the macroeconomics environment is necessary for a

business to be success in what they are doing because macroeconomic factors can be

obstacles for business but sometime it can also be the opportunity for business to

success.

Gross domestic product (GDP), unemployment rate, and prices indices are some of the

important aggregated indicator in macroeconomics’ study. It build up models to explain

the relationship between factors such as consumption, unemployment, inflation,

investment, saving, national income, national policies and international trade. Those

factors will significantly influence the successfulness of a business no matter locally or

go international.

First, we will focus on how inflation rate influence the business. Inflation is an increase

in the universal level of prices of goods and services in an economy over a period of time.

This means that, inflation will erosion in the purchasing power of money, each unit of

currency can buys fewer goods or services. So, the weakness of purchasing power will

increase the cost of production (the cost of materials, transportation cost and so on) cause

the price of goods and services become higher. Moreover, sales of goods and services

will also decline due to the high selling price and low purchasing power of consumer.

With the same income level, consumers have to become more careful in purchasing and

avoiding any luxury goods and services. This effect of inflation will lead to drop in both

revenue and profit of business. In such condition, company has to be cautious with the

economic changes.

The following graphs show the decline of industrial production, retail sales and also

world trade in between year 2008 and year 2009. It also includes the consumers’

confident level about the market.

Besides decreasing of real value of currency and other monetary items, inflation also

discourage the investment and saving due to uncertainty of future real value of monetary

items. This negative effect will possibly lead to decline in investment of productive

capital and saving in non-producing assets. For instance buy gold and sell stock. Low

investment and saving rate also influence the loan or debt availability in the market.

Consequently, company will become harder to gather the working capital from neither

borrow from financial institution nor raise fund from public and at the same time, their

value of companies fall due to high underselling transaction of stock. Without the

necessary working capital, company cannot operate well and miss those opportunity of

good investment. This will deteriorate the profit and earnings per share (EPS) of business

which had been reduce in fall of sale and high production cost. This condition will

become worse when investors lost confidence with the market and business. Companies

will go bankrupt if they don’t handle it well.

Basically, in order to avoid going bankrupt, companies normally will try to reduce their

working capital. The most common way is to layoff their employees ethically or

unethically which will raise the unemployment rate all around the economy (The

following graph reflects the negative employment rate during year 2008 to year 2009).

Unemployed individual are unable to earn money to meet financial obligation. Increasing

of unemployment rate mean that people become poorer in purchasing power which mean

less goods or services they will consume. It cause consumption fall and deteriorate

companies’ sales. Besides that, some social issues may occur due to high unemployment

rate such as illegal immigration, crimes, and so on. This will create an unstable business

environment which restrains the foreign direct investment and stock prices. It goes worse

when the social problem boost become political issue include president resign and lost

power of current government. This unstable political condition will destroy the whole

economy of the country and influence the growth of business. So, companies have to pay

attention on the unemployment rate in a country before they step in the market.

When the high inflation rate and unemployment rate occur in an economy as mention

above, the economy will go down and economist named it as recession. During the

recession, GDP of the country will fall and affect it import and export of goods, the

currency exchange rate, and inflation of stock price and so on. This will influence other

countries or region like the economic crisis 2007-2010 at United State of American

which cause decline of USA’s GDP had badly effect the countries all around the world.

In order to recover the economy from recession, government will change their fiscal

policy and monetary policy. Fiscal policy is use of government expenditure and revenue

collection to influence the economy. Where monetary policy is the centre bank of the

country which is controls the supply of money, often targeting a rate of interest. The

graph below is showing the deficit in the fiscal balance for those developing and

developed countries and also the public debts. It clearly stated that government increases

their expenditure during the financial crisis period. Changes of both policies above will

influence the business. As business borrows money from financial institutions all the

time, increase in interest rate will influence the business. Higher interest rate means

companies have to incur higher costs to repay loan. Besides that, higher interest rate also

reducing the individual loan appetite and indirectly decreasing the demand of goods and

services at market. Furthermore, government also may increase the taxation rate for

certain aspect to increase government income. This will let government has more money

to increase the government expenditure which will raise the aggregate demand of the

country and raise up the GDP. So, companies will force to follow the tax rate incurred

and force to follow pattern of resource allocation which designed by government in

budget. This all negative effect of macroeconomics’ factors will require companies pay

attention on it to survive and success.

However, if a business can take advantage of the changes of macroeconomics’ factors,

they will be success even in the recession. For instance, while inflation rate increase, the

stock price of some companies will fall drastically. This is the golden opportunity for

those big and wealthy companies to acquire those companies with low cost through

acquisition or merge. This will benefit the companies in long-term. Moreover, when

government increases their expenditure through the budget, companies may have change

to raise their sale and profit if they get those chances.

So, in short, macroeconomic ‘environment will influence the business in both positive

and negative ways. There is necessary for businesses to understand what happen around

them, response to those macroeconomic factors, and grasp those opportunities and at the

same time avoid threads.

The importance of global business environment for the success of organization

Nowadays, there are many multinational companies (MNC) which operate in different

regions and countries. In order to operate effectively and efficiently, these multinational

companies definitely could not be run away from understanding the global business

environment, especially on the environment of the countries which they are operating.

Understanding business environment is crucial as it will give a significant impact on the

success of an organization. Whatever it is, organization will not be able to control the

external factors which caused by business environment. The only things that organization

can do to ensure its success in business is that to adapt the external environment by

changing its internal variables, such as resources, policies and business strategies. Thus, it

is vital for an organization to analyze the business environment in their prospect countries

before they start their operations in that particular countries as different countries would

have different economic, currency, cultural, politic, law, regulations, and technological

environment. Organizations can only success if they have well planned strategies and

well allocate their limited resources to face the threat and grab the opportunities when it

comes.

Importance of global business environment for the success of organization would further

be discussed in more details as follow:-

Economic Development

Before an organization starts its operation in another country, it is vital to understand the

economic development of that particular country. The level of economic development

will indirectly tell the organization the affordability of consumers. From there, they can

estimate and expect how many units product can sell and what reasonable profit can be

made. Basically, level of economic development which reflected by standard of living

can be measured by evaluated Gross National Income (GNI) per capita. It will generally

show the citizen’s share of national income. Table 1.1 below shows the Gross National

Income per capita at purchasing power parity. From that information, organization can

roughly predict which country is suitable for them to sell their products by looking at the

purchasing power of the citizens. It is very clear that citizens in United States have the

highest purchasing power among the five countries. If Tata Motors want to sell their

Jaguar and Land Rover cars, probably they will tend to focus on United States instead of

China or India. On the other hand, if their product is economical car like Tata Nano,

probably, they will tend to focus on China and India as well.

List of countries by Gross National Income per capita at purchasing power parity in

2009:

Table 1.1

Country US$

United States 46,730

Japan 33,280

Malaysia 13,530

China 6,710

India 3,230

Source: Wikipedia

Currency Valuation and Exchange rates

Currency and exchange rates would have a great effect on the organization especially for

those who import vast raw materials or products from foreign countries. The cost of

products may vary due to the changes of currency value. For instance, Tata motors buy

engine from its subsidiary, Land Rover which based in UK. The exchange rate for 1 GBP

is 73.3696 INR. If Tata Motors buy engine from Land Rover which cost 10000 GBP,

therefore it has to pay Land Rover for INR 733,696. What if Tata Motors delay its

purchases for two weeks and the exchange rate at that time are 72.5980? Let’s just make

a simple calculation again. It will cost INR 725,980 for Tata Motors if delay for two

weeks of purchases. From a simple calculation above, it show that currency and exchange

rates would have effect on success of the organization through affect its product cost. In

reality, every company is trying to minimize their cost and maximize its profit. Indeed,

analyze the currency and exchange rates is important before expand its business to other

countries. Graph 1.2 below shows the exchange rates of Indian Rupees with US Dollar

from year 2008 until July of 2010. Exchange rates are fluctuated from time to time.

Apart from that, organization has to evaluate those factors that conducive to economic

growth. For instance, is that particular country has reliable banking system and a strong

stock market. Besides, does the government have policies that encourage investment and

does it has strong infrastructure such as telecommunication system, transportation, energy

and social facilities. These are those factors that contributed to economic growth through

attracting more investors. Indirectly, it will affect the success of an organization.

Cultural problem

Normally, when dealing in another country, the major problems that would be faced are

language, time and sociability and intercultural communication problem. These problems

are mainly due to the problem of different culture among the people who come from

different countries and have different background. It is important for an organization to

ensure their success in foreign countries if they could understand and adapt to the culture.

Language

As we know, the international language in business is English. However, some countries

like Japan and China take pride in their own languages and cultures. Only those who are

English educated would know how to speak in English. But in reality, we are commonly

dealing with those people who cannot speak English. Therefore, it has made the business

communicational process harder. Maybe they have to employ translator, which in turn

make the business not efficient since it is not direct effective communication which will

cause misunderstanding in certain meaning of word or lost of information when

translating the language. Sometimes, it will create misunderstanding due to the different

culture problem. For instance, a manager from US misinterpret message delivered by a

Japan manager due to language’s misinterpretation.

Time and sociability

Meeting that discuss business issues normally will start and end on time for the Europe

countries. Those people from these countries appreciate time very much and think that

“time is money”. However, some Middle East countries would have different culture in

term of time perspective. For instance, they tend to come late for the meeting.

Intercultural communication

Intercultural communication means the way of someone is talk, distance during

communication and how direct when someone is speaking or delivering their messages.

For some people especially Middle Easterners like to use body language, hand gestures

and even raise their voice while talking to somebody. This is different from Northern

Europeans who less raising their voice or have hand gestures while talking to somebody.

Besides, some people tend to talk in a foot distance. But, American would prefer to have

personal space while talking to others. In addition, the way of deliver message would be

different for those people who come from different countries. For instance, American and

Chinese tend to deliver their message in a more direct way compare to Japanese.

It is very important to understand others’ culture especially in the countries that

organizations are operating. Through understanding their culture, an organization can

adapt itself to the culture environment in order to get more business. At the end, it will

ensure the success of an organization.

Legal and Regulatory Environment

Different countries would have different sets of law and regulation. For those

multinational companies which operating in foreign, it has to understand and abide with

the foreign countries’ laws and regulations. It is vital to do so as it will give a significant

impact to the organization which violates the laws and regulations. Worst to worst, an

organization may shut down its operation or leave the country if they fail to comply with

the laws and regulations. In order to solve the legal and regulatory issues in foreign

countries, an organization may employ some lawyers in order to give proper advice. For

instance, Tata Motors which currently has its operation in UK, South Korea, Thailand

and Spain would have to abide those countries’ laws and regulations too in order to

survive and continuously grow in their operation.

Technological Environment

Technological environment refer to the materials and machine used in the production,

receptivity of an organization to the new technology and last but not least, the adoption of

technology by the consumers in a country. All of these factors would affect an

organization’s productivity and volume of selling of its product. For instance, Tata

Motors sell luxury cars like Jaguar and Land Rover which require high technology to

manufacture in India, probably it may not achieve the expected revenue as most of the

citizens in India are middle low income. They cannot afford to buy Jaguar or Land Rover

which cost US$ 67000. Moreover, the technologies in India still not so advance compare

to United Kingdom which can produce high end car like Jaguar and Land Rover. Indeed,

organization who wishes to expand abroad has to analyze the technological environment

also before they start its business over there. Definitely, it is one of the external

environment factors that will affect the success of an organization.

Is acquisition the right method to go global?

Right Method at the Right Timing

Referring to many acquisition cases and conceptual theory, we believe that acquisition is

a right method to go global if it is at a right timing. Acquisition to go global is a right

method if it would yield the benefits like increase the company’s global image, learn

from the acquired company in the form of highly invested research and development,

own the facilities and assets without set up cost, have the intellectual property rights, and

etc.

For instances, General Motor under the control of William C. Durant (1908) and Alfred P.

Sloan (1923) has over the years acquired numerous automobile companies worldwide

namely Oldsmobile, Cadillac, Elmore, Oakland in 1909. Also in 1909, GM acquired the

Reliance Motor Truck Company of Owosso, Michigan, and the Rapid Motor Vehicle

Company of Pontiac, Michigan, the predecessors of GMC Truck. GM operated 150

assembly plants by 1980s. GM had brought the record of led in global sales for 77

consecutive years (1931 to 2008) before the latest financial crisis, longer than any other

automaker.

Acquisition must be made at the right timing in order to get the benefits mentioned

above. We clarify that the right timing is the economy boom or when there is economy

burst but the company does not get hurt and able to finance the acquisition without

calling for default after the acquisition. If the acquisition happens in the right timing, it is

truly a right method to go global.

Acquisition to go global could be a wrong method

Acquisition to go global could be a wrong method if it does not create the above

mentioned benefits. For instances, a small company is about to acquire a big company

with huge financing and unable to pay the debt afterwards, poor risk management and no

detail analysis on the target company. Consequently, the company would overpay for the

acquisition and yet could not gain the desired benefits.

Is buying Jaguar and Land Rover to go global a good move?

In our opinion, we would say that it is a right method for Tata Motors to acquire JLR to

go global simply because Tata Motors has recognized that these two British iconic

brands, Jaguar and Land Rover, needed to retain their identity, design and technical

independence as also their image in the marketplace, while at the same time integrate

with the management of Tata Motors, and find synergies in the capabilities and facilities

between the two companies. Considerable progress has been made in identifying sources

of components from India, recognizing engineering and Computer Aided Design

capabilities within Tata Motors and marketing synergies in various geographies. Tata

Motors on the other hand has recognized the high level of technology and skills

embedded in JLR which could be of great value to both companies.

Conclusion

According to Tata Motors’ annual report for the year 2008- 2009, the year under review

would be viewed as in great despondency. The Company faces a major decline in

demand across its product range; it must bear the burden of the major acquisition of JLR,

and faced with a major collapse in vehicle demand in Western Europe and the U.S. But to

many in the Company this is yet another year of challenges with the excitement of

meeting such challenges head-on.

“The spirit, commitment and dedication of the whole Tata Motors team at all its locations

and across all levels are truly phenomenal and this continues to be the company's greatest

asset. I feel confident that if we can sustain our operations through this difficult period,

taking whatever steps we need to take to see the year through, we could overcome all the

obstacles in our path. I feel strongly that in later years we can look back on the JLR

acquisition and say to ourselves that this was a very worthwhile strategic acquisition and

one which has brought us considerable technology and global presence” Reported in

Chairman’s Statement by Mr. Ratan N Tata.

We believe that Tata Motors will surely rebound since it has the great leadership under

Ratan Tata who has successfully managed to sail through many adversities in the past and

bring Tata Motors to the global stage.

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