12/3/2013

TATA MOTORS

NANO – LEADING THE TRANSFORMATION OF INDIAN DRIVING CULTURE

Table of ContentsExecutive Summary.....................................................................................................................................2

Tata Motor’s Pain: Lackluster performance of the Nano.....................................................................2

Tata Motors History and Fundamental Strength: Strategic alliances...................................................2

Section 1: Main Issue...................................................................................................................................3

Section 2: Analysis.......................................................................................................................................3

2.1 Market / Industry Analysis.............................................................................................................3

2.2 Tata Market Strategy Current – The Nano.....................................................................................4

2.3 Competitive Analysis......................................................................................................................5

Section 3: Recommendations.....................................................................................................................7

APPENDIX....................................................................................................................................................8

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Executive SummaryThis report is prepared for Tata Motors with the main objective of providing analysis, insight and ultimately recommendations for its current and future strategies to secure the fast growing and evolving market of passenger vehicles in India. The Indian market can be characterized as developing at its infancy stage with complex political, economic, environmental and societal challenges. The average Indian consumer is just beginning to realize the potential of owning a motorized passenger vehicle, and Tata Motors has the opportunity to reap the benefits of being ingrained into this imminent Indian auto culture.

Tata Motor’s Pain: Lackluster Performance of the NanoIn 2009 Tata Motors has launched an entry-level vehicle – the Nano - into the Indian market with the ambition of capturing 30 million new Indian drivers, but the performance has been lackluster. The current strategy of providing the lowest cost option to enter the driving culture for the average Indian has failed based on the lower than expected sales figures. This report will identify the main issues, provide analysis on the market and provide recommendations for the short-term and long-term,

Tata Motors History and Fundamental Strength: Strategic alliancesTata Motors, a division of the Tata Group, has a history of successful collaboration, partnerships and bold acquisitions that began in 1945. It began as a manufacturer of steam rollers in partnership with Marshall Sons, and has ventured into partnerships with many established players such as Daimler Benz AG, Hitachi, and Daewoo in the commercial vehicles, trucks, industrial excavators and engines. Tata has also expanded into different geographical markets and industries through bold acquisitions for the Brazilian bus manufacturer Hip Carrocera and premium brand passenger vehicles such as Land Rover and Jaguar. By executing on their strategy thus far, Tata Motors Company has achieved status as India’s leading automobile company by revenue, the number one commercial vehicle manufacturer, and the number three passenger vehicle manufacturer in India in 2012. It is also the world’s fourth largest medium and large-sized bus manufacturer, and fourth largest truck manufacturer in the world. Tata Motors has manufacturing operations across the globe and is part of India’s largest corporation – Tata Group - owning more than 90 companies spanning across seven business sectors. In 2012, Tata Group Corporation had operations in 80 countries and had gross revenue of $83.5 billion in 2011 and employs over 450,000 employees across the world.

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Section 1: Main IssueThe main issue in Tata Motor’s current strategy of capturing the average Indian driver with a low-cost entry-level vehicle – the Nano - is that Tata Motors is independently pioneering the transformation of current Indian state to a driving culture. The two main issues can be summarized as follows:

1. Nano is the first-mover into this new low-cost entry-level segment market – Untested Market;

2. Tata Motors is entering this untested market independently without any proven partners.

Tata Motors has proven success globally in manufacturing and selling a variety of vehicles from commercial vehicles, light trucks to luxury passenger vehicles. The records show that Tata has achieved success through a series of Partnerships, Joint Ventures, and/or Acquisitions with established players in the respective markets.

However, compared to the approach of most previous endeavors, the Nano is an independently manufactured vehicle by Tata Motors being sold to a market segment that has not been fully tested. The Indian passenger vehicle industry is in its infancy stage with most of the population not ever having owned a vehicle in their lifetimes. The infrastructure to support a driving culture is not readily accessible to most Indians, and with most Indians never having invested a large sum of money into one’s own vehicle, this is a lifestyle transformation to a vehicle driving urban lifestyle from the traditional Indian way of life.

Section 2: Analysis

2.1 Market / Industry AnalysisIndia is a developing country with a relatively young and large population of 1.2 billion people at 26.2 years of average age. This makes India the second most populous country in the world with the 7th largest land size. The dispersion of the population is currently vast and dynamic, but it is estimated that by 2050, 700 million or 58% of the population will be living in urban centers. The country is going through an economic growth period with GDP growth outpacing inflation (at 7.2% and 6.6% respectively).

Unlike developed countries in North America, Europe and other parts of the world, the automotive industry within India is at its infancy stage with only a small percentage of the total population owning a vehicle. It is estimated that only 1.2% of India’s total population owns a vehicle compared to 43.9% of ownership in the United States as show in Appendix - Figure 1.

The traditional method of motorized transportation in urban settings for Indians has primarily been two-wheeled or via public transportation such as buses and trains.

In recent years, there has been tremendous acceleration in domestic vehicle purchasing with sales doubling from 2005 to 2011 as shown in Appendix – Figure 2. This is linked to the

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increase in population growth and disposable income of the average household in India coupled with fast urbanization plus investment in infrastructure. The external factors affecting the market are shown in Appendix – Table 2.

The passenger vehicle market in India is dominated by three major players – Maruti (a sub-division of Suzuki), Hyundai and Tata in order as listed (Refer to Appendix – Figure 4). Auto sales had reached its highest level in Q1 2012.

2.2 Tata Market Strategy Current – The NanoThe Nano is aimed at capturing this largely untapped market of urban middle-income class drivers with an average household income of $4,500 per year. It is built and priced below $3,000 (at $2,500), and consequently is a no-frills option in this entry-level market. There are other vehicles offered in this market, but not within the same price range as the Nano. Based on this information, the Nano can further be classified into a sub-segment of the entry-level market of its own.

The Nano, since its launch in 2009, has significantly underperformed versus the minimum acceptable and expected figure.

Table 1 Nano Sales Figures (2009 to 2011)

2009 2010 2011

Expected Sales 200,000 200,000 200,000

Actual Sales 59,567 70,432 74,527

Growth % -- 18% 6%GAP 140,г 129,568 125,473

The growth % of sales of Nano does not align with the domestic vehicle sales in India from 2009 to 2011.

Table 2 Indian Domestic Vehicle Sales Figures (2005 to 2011)

2005 2006 2007 2008 2009 2010 2011

Total (in Thousands) 7,897 8,906 10,123 9,654 9,724 12,295 15,513

Growth Rate -- 13% 14% -5% 1% 26% 26%

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2.3 Competitive AnalysisThe biggest competitors for Tata Motors in the Indian passenger vehicle market are Maruti and Hyundai as shown in Appendix – Figure 4 with 41.6% and 15.48% of the market share respectively. Tata Motors is in third place in terms of market share with 12.48%. With the established status not only in the Indian market, but in their respective domestic markets and globally, the incumbent leaders have an advantage in the overall product and market perception as shown in Appendix – Figure 3. These incumbents pose the greatest threat to future growth in Tata Motors as they enjoy the existing status as leaders in technology, quality and general perception.

One other special case of competitive force that has an exceptionally strong effect at least in the short-term is the presence of substitutes. In the current Indian state, there exists a strong culture of motorized two-wheel transportation and public transportation. The reality of the market shows that owning and operating a vehicle for most Indians will be a new concept from the traditional way of life. It will be a significant lifestyle change for most Indians, and not adopting this new method of transportation could be a more practical decision. Shifting this mindset will be a challenge for anyone looking to enter this market at this point.

There are existing and new options from different auto manufacturers for entry-level passenger vehicles. However it is important to note that these alternative vehicles are not competitive in terms of the entry price level as the Nano. The price differentials for entry-level base models in alternative vehicles range from $4,500 to $5,995, which is more than one year’s salary of the average income of Tata’s target market.

Table 3 Nano Competitive Price Points

Competitive Model Base Model Price Competitor Price Delta(Price diff. between Nano and competitors models)

TATA NANO $2,500 $ -Ford Figo $7,000 $ 4,500Volkswagon Polo $8,495 $ 5,995Renault Pulse $7,850 $ 5,350Nissan Micra $7,650 $ 5,150Mauruti Ritz $7,500 $ 5,000Chevy Beat $8,030 $ 5,530

It is important to note that the Indian population generally is well-educated and informed about the marketplace and base their decisions upon research. With more alternatives presented and information available, winning the decision of the average consumer will continually be more challenging. Although the income gap between citizens of developed countries and the average Indian may be wide, the education and expectations on standard of life may not be as wide in the current state with the access to information readily available. Tata’s vehicles including the

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Nano may be priced at a much lower level than other close alternatives, but this may only strengthen the perception that quality and value are not comparable to the established players in the world stage.

As with many industries, the players in the auto industry may source from the same or similar supply chain as one another, and this may pose a problem to Tata, and especially the Nano. The market leaders likely exert a stronger buyer power onto the common suppliers of parts and labour in the market, and without building up Tata’s demand, less favorable terms and conditions will result.

Figure 1 Five Competitive Forces

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Section 3: RecommendationsTata Motors has made significant investment into securing a stronghold in its domestic market of India. The Nano was a testament to their commitment to this market with an investment off $400 million dollars so far in development and design. Currently the minimum acceptable sales figure at $2,500 per vehicle to make up the investment is 200,000 vehicles per year. Given that an average car model lasts about 5-6 years without a major makeover, the current Nano has a significant gap to close, or approximately 268,000 vehicles per year in the next three years. There are tremendous challenges, but the reward will be great if Tata can act and capitalize on the Indian market.

In the immediate/short-run, Tata Motors has to increase its sales figure to a profitable level. There should be no reason why at the current price-level, the lowest in the market, it should be out-competed, especially in a market where consumers will be investing in their first vehicles. Marketing efforts should be revamped to reach the 30 million target market keeping in mind that additional steps need to be taken to in transitioning the non-driver to a driver. The Nano is the lowest risk investment in terms of price for the average Indian transitioning to the driver culture. Within the revamped marketing strategy, Tata’s commitment to quality and value must be emphasized to reassure the drivers of Nanos that they are not spending their money on an inferior product in the market.

In the medium-term, Tata motors, upon building up stronger demand in the market, has to make the vehicles more accessible to the Indian public. This may be achieved through opening up more dealerships or re-selling through established distribution channels.

In the long-term, Tata motors has to continually deliver on its commitment to quality and value. Higher variants of the Nano could be considered as an option to be introduced into the market based on how the market evolves. Alternative fuel vehicles or more luxurious variants would be the next stage if Tata Motor’s independently-manufactured vehicles. Tata should also keep a watch on possible beneficial partnerships technology or market leaders as it has successfully done in its history. This would give access to leading technology and brand value to be enjoyed by the Indian consumers; however this would be only feasible when Tata can offer collateral such as a strong market base in India. Partnerships with the right players would also bring a wealth of knowledge in standard practices of the passenger vehicle industries in important areas such as safety features to reassure the Indian consumers.

In conclusion there are tremendous opportunities in the Indian passenger vehicle market, and the Nano may be the key to unlock the potential. The Nano is the lowest priced/risk option for an Indian driver to evolve into the lifestyle of developed countries. Tata Motors can use this opportunity to ingrain itself into the very fabric of evolving Indian life. As other successful auto manufacturers have accomplished, customer loyalty can last for the lifetime of the customer as long as the company can deliver the expected quality, value and evolve with the customer throughout his/her lifetime.

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APPENDIXFigure 2 Indian Passenger Vehicle Market Potential

Vehi cl es per 1000 peopl e

1256

178

439

0

200

400

600

I ndi a Chi na Brazi l Uni ted States

Figure 3 Indian Vehicle Sales Growth (2005 to 2011)

Annual Domest i c Vehi cl e Uni t Sal es

9, 724

15, 513

9, 65410, 1238, 9067, 897

12, 295

0

4, 000

8, 000

12, 000

16, 000

20, 000

2005 2006 2007 2008 2009 2010 2011Year

Unit

(in

thou

sand

s)

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Table 4 Selected Tata Group Financial Results (In 10 Million Rupees)

　 Year Ending Mar.31, 2012 Year Ending Mar.31, 2011

Sales Revenue 170,677.58 126,414.24

Cost of Goods Sold 121,766.03 88,351.05

Total Debt 36,492.44 24,374.36

Total Asset 145,382.64 101,014.18

Year Ending Mar.31, 2012 Year Ending Mar.31, 2011

Gross Profit Margin 29% 30%

Total D/A Ratio 0.25 0.24

Table 5 Macroenvironmental Factors and PESTEL Impact

Macroenvironmental Factors

Potential Impact on Industry PESTAL Impact

Land Size-Large Positive impact on market size;

Negative impact on market distribution.

Environmental

Population Size-Large Positive impact on market size. Social

Demographic-Average age in India is 26.2 years

Average age is relatively young in India, potentially affecting income level. Industry may need to target on young age group.

Social

Income Level-$3,700 per capita GDP in 2011

Income level is low, large portion of poverty (1.3%). Negative impact purchasing power and product demand.

Economic

Per capita GDP Growth Rate-7.2%/year

Ranked at 26th in the world, reflecting potential in native market is limited.

Economic

Domestic Demand-High Recovered well from global recession. Economic/Social

High Interest Rate and Inflation

Limit the economic group and industry development.

Economic

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Government Subsidizing Diesel

Raised up crude price, limiting industry development

Political

Corruption Scandals Affect legislative work, limiting industry development.

Political/Legal

Poor Infrastructure Positive impact on road construction- i.e. indicate potential of industry development;

Negative impact on current market demand.

Social

Lack Non-Agricultural Employment

No significant impact on industry Social

Low Dependency Ratio and High Saving Rate

Reflect low investment rate, negatively impacting industry development

Social

Well Educated Labor and R&D investment

Positive impact on Industry Technological

Figure 4 Tata Motors Competitive Strength Assessment in Indian Market

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Figure 5 Strategic Group Map of Indian Passenger Vehicle Industry

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