Figure 1: Relative positioning of automobile segments
In the CV segment TATA Motors has a share of 59% and in the Passenger Car segment a share of 15.5%. This makes the commercial vehicle segment a cash cow and the passenger car segment a question mark for TATA Motors. Therefore money from the CV segment should be used for the development of the passenger car business.
Figure 2: BCG Matrix
Figure 3: Strategy framework
The Company has distinctive competencies in the CV segment and will have to defend its position in this segment by strengthening existing competencies. This will happen by way of a changed product mix. Also the exports of commercial vehicles will help the company to leverage its existing competencies to exploit newer markets.
In case of the passenger car segment, the company will have to develop new markets which will happen in the form of Zing – The Rs 1 Lakh Car.
Launch of Rs 1 Lakh Car
The Company should go ahead with the launch of Zing - “Common Man’s car”. However the car should be a new development and not a strip down version of an existing product. Given that the car will have to be developed from scratch, the appropriate time to launch the car is in the next 3-5 years.
With a price tag of Rs 1 Lakh, the target markets for the car will be
- Buyers who want to migrate from the two-wheelers to the four-wheelers
- Top-of-the-line two-wheelers buyers
Product Mix
MAVs
The initiatives taken by the government in infrastructure (especially road) development has pushed the demand of the higher tonnage vehicles. As a result these cost efficient vehicles are continuously increasing there share in the total CV sales. The company should according change its product mix to cater to this market demand.
LCVs
There’s a new transport policy doing rounds which talks about a hub-and-spoke model. This model will push the demand of CVs to higher levels thus providing an opportunity to the company to strengthen its position.
Export of Commercial Vehicles
The growth figures of the last decade have demonstrated the cyclical nature of this Industry. There is a high co-relation between the GDP growth rate and the sales growth rate of CVs. The company should focus on exports to reduce dependence on domestic sales. The Company can Leverage on Cost Advantage and can target fast growing developing countries. Some of the countries the company can look at are South Africa, Sri Lanka, Malaysia, CIS countries and some nations in the Far East.
Other Alternatives Considered
Launch of passenger car in higher segments
TATA motors plan to launch a car “MAGNA” in the upper C or D segment. The project is estimated to cost Rs750 crores, which is significantly less than the ZING project. This is because it essentially builds on Indigo, reaping synergies in R&D, plant set-up, machines etc. The expenses will be required over 4 years.
Magna is expected to sell 10000 units annually while market grows at 10% (luxury segment is growing faster than industry). The cash-flow projections are shown in Appendix 4 & 5. The NPV of Magna is (Rs19.79 cr.). Hence it is not worth pursuing further.
Other reasons for discontinuing Magna are:
- Extremely small market
The target segments account for only 11% of market by value and even less in terms of units. Hence, size of the market is not lucrative.
- Fierce competition from Foreign Players
Recently many foreign players have entered the market like Hyundai, Honda, Mitsubishi, Opel, Toyota, etc. All of them operate in the luxury segments except Hyundai. They have technologically superior offerings and there is intense competition, putting margins under pressure.
- Presence of Indigo
TATA motors already have Indigo in the lower C segment. Magna in upper C segment may lead to cannibalization, as Indigo has penetrated the upper segments consistently. Thus, the benefits of Magna are not significant.
- Inconsistent with Generic Strategy
Finally, luxury cars are marketed on technology and differentiation. Customers are price insensitive and differentiation is basis for market share. Magna does not gel with TATA Motors’ strategy of cost leadership and brand image.
Launch of Vehicles in the MUV Segment
TATA Motors entered the car market through the MUV segment, which still accounts for approximately 15% of revenues. An opportunity exists for them to strengthen their market position, hit by new entrants like Toyota Qualis and Mahindra Scorpio.
However the option is unattractive due to:
- Multiple offerings
TATA motors have multiple in this segment with Sumo, Safari, Estate and Seirra. Another car will only lead to cannibalization and minimal extra sales.
- Luxury MUV not attractive
A segment where TATA Motors do not have an offering is the luxury segment. However this segment stresses on quality features etc. where TATA Motors cannot match foreign players like Toyota, Honda and Hyundai.
- No Niche available
All segments of the MUV market have offerings and there is no niche available like the one for ZING.
- Not a thrust area
Finally, the MUV market has seen no new products from TATA Motors in the last 5-6 years, despite introduction of Qualis and Scorpio. It is no longer a thrust area for them as they concentrate on passenger car market with Indica and Indigo.
Plan for Implementation
Business Level strategy
Tata Motors is an overall cost leader. The diagram below represents strategies for TATA Motors as well as some of its competitors
Functional Level Strategies
The functional level strategies evolve from the business level strategy of Overall cost leadership.
Product and Marketing Strategy
Tata Motors should adopt a marketing strategy aimed at low key promotion. There shouldn’t be any celebrity endorsements (Like Shahrukh Khan for Santo).Also it should offer only standardized features (especially in the lower segment cars) to cut down on costs.
Production and Operations Strategy
Tata Motors should buy modern technology to reduce cost. Even though one time fixed costs will be incurred, long term cost reduction and increased production efficiency will be possible. Also, the company should make aggressive use of proper inventory management techniques.
Engineering and R&D strategy
The engineering and R&D departments should emphasize process innovation. Steps should be taken for redesigning products to obtain better quality and lower production costs. This is an area of strength for the company and further advancements can be made in developing low cost technologies both for the commercial as well as passenger car segments.
Organization and Control Strategy
The company should aim for a lean structure .In the Last few years Tata Motors has come out with a VRS scheme. It should continue such schemes till the workforce is reduced to an optimum level. At the same time tight budgeting and control procedures should be established. Steps should be taken to minimize wasteful administrative expenditures.
Budget and Financial Projections
Net present Value of Project ZING
Costs
ZING, to be launched in 2007, needs Rs1060 more to be invested over next 4 years. This estimate is based on Indica, which was also designed from scratch. Adjustments have been made for inflation and R&D synergies of ZING and Indica.
Revenue
ZING aims to create a new market for itself, consisting of the customers of Maruti 800 and high-end motorcycles. The Maruti 800 market will be 300000 units in 2008 and that of motorcycles will reach 80 lakhs. ZING aims at 50% share of Maruti i.e. 150000 units. Though sales normally pick up gradually, the trend (Indigo, Santro, and Alto etc.) shows that new entrants reach their stable sale levels in the second year itself. Customers from motorcycle segment are ignored to create buffer and it is assumed that ZING will only sell for ten years. Thus, the revenue figures are pessimistic.
Net Present Value
We discount projected cash flows using cost of capital of 10%. This is brought down by external borrowings in foreign currency at low interest rates. The NPV from ZING is pessimistically pegged at 267 crores. A summary of detailed workings (Appendix 6) is shown in the table below.
Funds requirements to meet recommendations
The final recommendations, for which funds need to be arranged, are three pronged:
- Launch of Rs1 Lakh Car - ZING
- Product Mix – Thrust on MAVs & LCVs
- Export of Commercial Vehicles
The cost of project ZING is estimated at Rs 1700 crores out which Rs640 crores have been invested so far. It will require another Rs1060 crores over the next 4 years. Funds are also needed to maintain competitive position and for dividends. Funds requirements are immediate for MAVs while LCVs will be funded after 2 years. Exports of CVs will need approx. 100 crores annually. Detailed requirement of funds are given in Appendix 7.
Funds shall be generated through internal accruals and borrowings. TATA Motors has additional funds after investing to maintain its competitive position. This is supplemented by external borrowings, especially a $500 million loan negotiated recently for next 4 years. Debt-equity ratio, which had fallen sharply as profits drove up equity, will be restored to its long-term average with this loan. The detailed funding is attached in Appendix. 8.
Timetable
The Time-Table for the recommendations, we have made, should be as follow:
- The materials cost for ZING have been brought down to $1200 already
- For the small car, ZING, the launch should be in the year 2007. This seems to be the earliest possible launch date considering the complexities involved in such a project.
- The focus of the Company should be on MAVs in the next 2 years. This should include launching of higher tonnage vehicles.
- The LCVs should be focused at a couple of years. This will give some time to the new transport policy to mature. Meanwhile the existing products in this segment can be continued to be pushed.
- The exports should be in a phased manner – one geographical region at a time out of those identified. This will give the company flexibility to change the region in case of any unforeseen circumstances.
- Once a foothold has been gained in one market, the company should move to another region.
Possible Objections to recommendations
- ZING – No guarantee of success:
ZING might not be the huge success it aims for. There might be a design-actuality gap, which can cause the plan to off-track and result in a failure. The price may overshoot Rs1 lakh being targeted currently.
- Slow down in the economy:
Since the CV industry is cyclical in nature, an economic slowdown might disrupt the planned flow of events. This can lead to reduction in expected sales followed by confusion with respect to the future course of action.
- Slow infrastructure growth:
The industry is heavily dependent on the state of the existing infrastructure. Infrastructure is prone to change primarily according to the government’s policy. Given the instability in governments, the growth of infrastructure is very volatile. If infrastructure growth stagnates, it will create in a gap where infrastructure falls short of the requirements of newly designed vehicles.
- Volatility in International markets:
The export plans might not be sustainable in the face of volatility in international markets, due to fluctuating growth rates, unpredictable trade policies, their competitive structure etc.
Contingency Plan
- ZING: Even if reality does not meet expectations, and the price overshoots one lakh mark, the lost sales would only be the sales expected from the two-wheeler market. The sales from potential Maruti 800 buyers will still remain. Sales projections have taken this into consideration.
- Slow down in the economy: Exports will reduce the company’s dependence on the domestic growth rates. Thus exports will hedge a certain amount of risk arising from the industry’s cyclical nature. A slowdown might also spur sales of the low-priced ZING.
- Slow infrastructure growth: Infrastructure plays a tremendous role in the development and growth of the automobile industry. Thrust on the CV market in a phased manner will give buffer time to realign strategy. This will allow TATA Motors to respond to the dynamic external environment.
- Volatility in International markets: By thrusting on one geographical region at a time, we reserve the benefit of choosing the best market to enter. This is crucial in helping us determine the appropriate time to enter a market and the strategy to deploy there.
Appendix
Appendix 1: Porter for CV Segment
Appendix 2: Porter for Passenger Car Market
Appendix 3: TOWS Analysis for TATA Motors
Appendix 4: Calculations for the project MAGNA
Appendix 5: NPV Calculations for launch of car in C & D segment
The table below gives detailed projected cash flows. For the first full year the sales are 10000 units, which result in a profit of Rs100 crores in the year 2008. This grows at the segment rate of 10% annually. Cost of capital is calculated at 10% for the project. Sales are projected based on total market and market share for TATA Motors.
Appendix 6: Cash Flows from ZING for 10 years after launch
Appendix 7: Requirements of funds for the various projects for the next 4 years
Appendix 8: Procurement of funds over the next 4 years to meet requirements
Appendix 9: SWOT Analysis of Competitors
Mahindra & Mahindra
Ashok Leyland
Swaraj Mazda
Volvo India