Tata Daewoo Deal

(i) Examine the market implications of acquiring the Daewoo plant by Tata Motors. Tata Motors inked an investment agreement in February 2004 to acquire the South Korean truck-major Daewoo Commercial Vehicle for $102 million. The acquisition marks the beginning of Tata Motors global expansion trail and is expected to help the company make headway in a number of other markets. Tata Motors is the largest company of the Tata Group of companies. Poised at a Global growth mission where it aspires that in long term basis major revenue of the organization will be achieved from overseas market. Tata Daewoo marks a significant milestone to achieve such ambitious mission. The Global Tata Motors The most important advantage is that Tatas top line and bottom line will go up. International business accounted for less than Rs 400 crore of Tatas turnovers in fiscal 2003. Meanwhile Daewoo itself recorded a turnover of Rs 1200 crore in the fiscal year 2003 and is a profit-making company. Daewoo's manufacturing plant was operating at only a quarter of its capacity, yet it commanded a 22 per cent market domestic share in the 8tonne-plus segment. This will be further strengthen to 25% and increase it by another 5% to 7%. Tatas have set a goal where overseas revenues will account for 25 per cent of turnover in three years. After identification of four key markets, India, China, Latin America and Western Europe, which are at different stages of growth and maturity. Tatas with there current competencies, including the Daewoo CV, are equipped to enter the stage I and II markets. Cyclic Nature of Commercial Vehicle Business: Commercial Vehicle (CV) business is cyclic in nature. The larger the market share of a company the more severe is the cyclical impact; also the more liberal the markets, the more pronounced is the cyclical impact. By the global operations of Tata Motors this cyclical phase is lagged across different geographies. Spreading the business to different countries will act as a hedge against cyclical trends because when the domestic CV business is in a slump, things will be looking brighter elsewhere. This is an excellent hedging strategy employed by Tata in long run of the business.

Global Business For the Global business of Tata Motors in CV market, Tatas needed the correct portfolio of products in its range. Predominant by light commercial vehicles developed for India and selling at few countries in Africa they lacked the higher tonnage of CV portfolio in above 4 tonnes. Is requires millions of dollars to develop and launch product of such scale, and more importantly establishing a brand name in such category especially if the company is from India. Daewoo at $102 million offered the right match where its product portfolio was marked by heavy CVs specifically designed for more advanced markets which have such infrastructure to support the movement of such heavy CVs. Tatas can now go to the international markets with a range of products to cater to every segment. Daewoo will be used as a manufacturing hub for exports to India, South Africa, Russia, China and Latin America. Tata Motors struck out of India to get a foothold in the developed world and compete against the advanced products in Europe and Asia. At the same time while Tatas are introducing its Daewoo CVs globally, the Tata range of 1tonne pickups could find a new market in Korea and the rest of the region. Daewoo isn't present in that segment yet and this is one of the biggest segments of the market. This gives a new break for 1-tonne CVs in South East Asia, which was previously unexplored. Because of this bulk purchase Tatas are more likely to receive quantity discounts in purchasing raw materials and other intermediaries. Also they can now put tenders on global scale for better receipt of offers. Entry into Worlds fastest growing economy Tatas had made an ambitious entry into China, the world's fastest growing CV market. With their expressway system in plan, the Chinese markets can be forayed by sophisticated trucks, Daewoo makes, which are with payloads of 8 tonnes and above. The Tatas can now enter all the big, sophisticated markets with a full product range. Also they have the skills to enter the Western European Markets. Market Ready for India This is further fuelled by Indias Golden Quadrangle Project, which when ready Tatas will be ready with heavy tonnage vehicles for transportation of goods. Also there position is strengthen against competitor Volvo, where now Tata has come up with there brand new product Novus aggressively priced at 40.5 lakhs against a 54 lakhs Volvo. Further with due conformance for stricter norms of Euro III in times to come, Tatas will be product ready. This will be enhanced by multiple offering of tractor trailer & multi axle trucks.

Importantly will be the integration of the Daewoo platform trucks into Indigenized Jamshedpur factory for Tata Motors for CVs. This is already proven by the new product for India the Novus. Changing the outlook of Indian Industry The acquisition had significance for the whole manufacturing in India. This was the first test of whether India could graduate from making low-cost, low technology products for developing markets to making products for developed markets as well. Daewoo acquisition also showed that Indian manufacturers could make the transition to a truly international mindset. While most firms prefer to export and sell, instead of thinking about local manufacture-assembly-and selling. Tata Motors accepted the challenge of making and selling components/products under their brand name in a foreign market to local customers and demonstrated visible success as a representative of the industry/country concerned. All these efforts of diversification and consolidation the aim of Tatas is to arrive at an optimum scale of operations of overseas operations and Indian markets. Tata Daewoo Merger: Risk Mergers and acquisitions involve risks, including: Unforeseen contingent risks or latent liabilities relating to these businesses that may only become apparent after the merger or acquisition is finalized; Integration and management of the operations and systems; Retention of personnel; Co-ordination of sales and marketing efforts; Management of a larger business; and Diversion of managements attention from other ongoing business concerns. At the same time it gives Tata the opportunity to leverage the global skill and experience of Daewoo. The success of the Tata- Daewoo group can be stated by the launch of the next generation Truck Tata Novus. A brief report is taken from the Tata website and is presented as an attachment to this report.

(ii) Analyse how new markets technology and policies are influencing Tata Motors Costs? Influencing Policy for Tata Motors Tatas have set a goal where overseas revenues will account for 25 per cent of turnover in three years. To achieve such revenues Tatas identified four key markets, India, China, Latin America and Western Europe, which are at different stages of growth and maturity. Input Costs In 2003-04, raw materials and components formed approximately 68.5% of the Tatas manufacturing and other expenses. Outlook of the steel industry is the rise in price. Similarly the costs of certain other inputs like rubber products are also on the rise. However, if these input costs continue to increase, margins and results of operations of the automobile industry would be adversely affected and the demand for vehicles would be impacted by any price increases that the industry would need to make. Tatas has been partly countering such increases through long term contracts, identification of alternative sources and through cost reduction in other areas. Domestic Conditions Its disadvantage is that a large market, Tatas own home market does not demand heavy CVs which it intends to sell globally. Hence Tata Motors is not producing these products for the Indian market because the Indian market today does not need them. And in so doing, even when it designed products for the international market that were different from those in India, it did not have the scale to produce them competitively. Commercial Vehicle (CV) business is cyclic in nature. The larger the market share of a company the more severe is the cyclical impact; also the more liberal the markets, the more pronounced is the cyclical impact. By the global operations of Tata Motors this cyclical phase is lagged across different geographies. Spreading the business to different countries will act as a hedge against cyclical trends because when the domestic CV business is in a slump, things will be looking brighter elsewhere. This is an excellent hedging strategy employed by Tata in long run of the business. Exchange rate fluctuation Between April 1, 2003 and March 31, 2004, the value of the rupee appreciated approximately 8% against the US$. In recent times, the rupee has depreciated against the US$. An appreciation of the value of the rupee can adversely impact Tatas exports and

depreciation of the value of the rupee can influence the cost of borrowings denominated in currencies other than rupees and increases the cost of imports. Technology & other Influencing costs for Tata Motors Design & Customization Cost During Initial product development phase huge costs are associated with design of both components & exteriors styling. Tatas can cheer with the three-storied Daewoo Technical Centre. Where, 80-odd engineers are working on designs that will make the existing Daewoo products suitable for new international markets. Daewoo has a product line-up that neatly complements the Tatas'. By tweaking existing models, Tata believes it can take the Daewoo products globally. Also a joint collaborative team with India Engineers will help to modernize the ageing fleet of Tatas India truck, which is exhibited by there new product Novus. Tatas can look forward to customizing the cabin interiors to exhibit more functional appeal. With a world class design center at Daewoo Tatas can look forward to more in house designing. Manufacturing Costs: Tatas to compete in the global markets will be required to conform to stringent Euro III norms. This calls for huge R&D costs along with change in some manufacturing assemblies to produce such engines. This would be achieved by either procuring engines from other, but reduces the margins on profit as an engine constitutes a bulk of the cost of a vehicle. By the Daewoo acquisition Tatas will we upgrading to Euro III engines but will also gain into the production insight of the same. Sourcing Costs Tatas with a commanding 6th largest vehicle maker globally requires to source products at the best cost to maintain its optimum profitability. With the expansion of its CV business Tatas can look forward to obtain a good price from its vendors for bulk orders. With Tata Steel as part of the Tata group cost with steel can be optimized, but for other products like radiators, fasteners bulk ordering can fetch good price.