International Strategic Issue Of Tata Motors

Published Date: 02 Nov 2017

Nottingham Business School

CIISM (BUSI 42632) assignment

Critical analysis of the international strategic issue of Tata Motors Ltd. to set up a dealer network in entering the South African market.

Student ID: N0482541 Nottingham

Word Count: 4403 January 2013

Table of Contents

1. Executive summary .........................................................p.3

1.1 Limitations ...........................................................p.3

2. Critical literature review ...................................................p.4

3. Automotive industry in non Europe ....................................p.4

3.1 Overview ..............................................................p.4

3.2 History .................................................................p.5

3.3 Pillars of automotive industry ..................................p.6

3.4 Globalization drivers in automotive industry ..............p.6

3.5 Porter’s five forces analysis .....................................p.8

3.6 Future development of the industry ..........................p.9

4. Tata Motors Ltd. ..............................................................p.10

4.1 Overview and history .............................................p.10

4.2 Automobile market in India .....................................p.11

4.3 International strategy of Tata Motors ........................p.12

4.4 Competition ...........................................................p.13

4.5 SWOT analysis .......................................................p.14

4.6 Key success factors of Tata Motors ............................p.15

5. Evaluation of chosen strategic issue ....................................p.16

6. Recommendations and conclusion .......................................p.19

7. References ......................................................................p.21

8. Appendices ......................................................................p.23

1. Executive summary

The purpose of this report is to critically analyse the international strategic issue of the Indian automaker Tata Motors to set up a dealer network in entering the South African market. The report demonstrates knowledge and in-depth understanding of the international strategic issue confronting the company with the successful selling of its products on this particular market.

The report begins with the analysis of the automotive industry in non Europe. The author critically analyses the four globalization drivers according to Yip (1992) related to the industry. The report continues with the five forces analyse which determines and recognises threats coming from the different subjects on the market. Next part of the report discusses the marketing environment of Tata Motors. The author makes SWOT analysis of the company, recognises its main competitors and discusses the key success factors of the company. The author critically analyses the problem of setting up a dealer network in South Africa and the factors which led the company to the successful solution to this issue. In the last part of the report the author gives some recommendations to the company which can enhance its success in future foreign markets expansion.

From the report it becomes clear that the international strategy of Tata Motors is the right way to achieve future successes, to strengthen and maintain its competitive positions on each of the market it currently operates and to expand further into new ones.

1.1 Limitations

The limitations that occurred during the writing of this report are related to the lack of data from reliable source concerning Tata Motor’s place among its competitors. That is the reason why such data is not included.

2. Critical literature review

In the literature it is recognised that when going international companies have to be at least as good as local competitors in the current market or they will fail to sell their products. According to Faulkner and Campbell (2002) the key factor in operating globally is how to organise the company in order to compete with existing companies on the market in terms of both supply and demand. They also note that international corporate strategy is about investment in mergers and acquisition activity or participating in strategic alliances. Monti and Yip (2000) point out that these investments can take the form of sales offices, equity investments and then the company can leverage this advantage into foreign markets. Another way to succeed in international business is to start out with a strong competitive advantage, such as loyal customers, superior products or services. According to Lasserre (2003) the strategy of entering a market by partnership with local dealers is an economic way for companies to test new markets without making a huge investment. Grant (2005) acknowledges that tangible and intangible assets of the company as well as human resources have to work together in order to achieve organizational capability as a milestone of the supreme performance.

3. Automotive industry in non Europe

3.1 Overview

The automotive industry plays an important role in the development of the world economy. The automotive industry designs, improves, manufactures, markets, and sells motor vehicles, and is one of the earth's most important economic sectors by revenue. The author thinks this industry is important global driver of growth, employment, innovation, and income. Furthermore the automotive industry is the second most trusted industry with 69% behind the technology which leads with 81% (See Appendix 1). Actually, the automotive industry usually does not include repair shops and motor fuel filling stations whose services are used after delivering the vehicle to the customer.

3.2 History

During its evolution the automotive industry has been influenced by numerous innovations including fuels, manufacturing practices and infrastructure. It all started with the development of the engine in 1876 which led to the first motor vehicles in Europe and America. During the 1890s and early 1900s the development of other technologies, such as floor-mounted accelerator and the steering wheel made vehicles easier to use. Another major event in automotive history is Henry Ford’s famous assembly line in 1913, which allowed automobiles to be mass produced. Therefore, automakers started to merge with other companies (for example GM acquired Chevrolet in1918) and to expand to other markets. In the 1930s, new trends differentiated the American and European market. On one hand, consumers in the US market preferred powerful cars, while in Europe buyers preferred smaller and low-priced cars. With the End of World War II many European and Asian-Pacific countries such as Japan developed new production and business strategies. For example Toyota began to develop Just in Time (JIT) manufacturing strategy (See Appendix 2) which allowed improving return on investment by reducing in-process inventory and lowering carrying costs.

Next phase of the automotive industry is the 1950s and 1960s famous with technological innovations which brought to many changes like fibreglass bodies, heating and ventilation equipment, front seat belts. The environmental regulations and the oil crisis of the early 70s, led to the development fuel efficient vehicles. As a result, car manufacturing became more globalized as companies started importing vehicles from around the world. This continued with mergers of multinational companies. The global expansion of automaker led to low-cost entering into new markets. Due to environmental concerns and regulations the industry develops more fuel-efficient cars since year 2000.

3.3 Pillars of Automotive industry

The automotive industry can be divided into three business sectors:

Car and automobile manufacturers- includes manufacturing passenger cars, chassis for passenger cars, light and utility trucks, electric automobiles

Automobile sales and dealership- includes retailing of new and used motor vehicles mainly through dealerships, commission agents and car auctions

Auto parts and accessories manufacturers- includes manufacturing of motor vehicle parts and accessories other than engines, engines parts, batteries, tires, bodies and chassis

3.4 Globalization drivers in automotive industry

According to Yip’s theory (1992) there are four globalization drivers that identify the global strategy of companies as competitive advantage. The author analyses the four globalization drivers in relation to the automotive industry.

Market globalization drivers

The automotive industry is identified by the author with the following market drivers:

Common customer needs. Customers needs related to automotive industry are at great extend increasing their globalization tendency. The selection on vehicles is based more on the quality, reliability and price, than on patriotic base, climate and culture affect needs. For example, in countries like China and Russia are prone to show their social status and often use big, luxurious cars. In USA and Canada, for example, such cars are used because of quality and safety standards. On the other hand in Japan where the space is precious, cars with small, urban designs are preferred.

Transferable marketing. Transferable brand names and advertising require little local adaptation.

Leading countries in the industry make strategic partnerships- Example: Ford and Toyota announced on August 22, 2011, that they will jointly develop as equal partners a new rear-wheel drive hybrid system and component technology for light trucks and SUVs (Source: Media Ford website).

Cost globalization drivers

Economies of scale- high fixed costs in the industry. Competition leads the profit margins to lower levels.

Efficiency of sourcing- centralized purchasing of materials can contribute to lower costs

Product development costs- new technologies for development of fuel efficient vehicles are expensive.

Government globalization drivers

Legislation. In many countries, governments have imposed strict environmental regulations dealing with fuel economy and emissions control on auto manufacturers. However, the majority of manufacturers agree that the environmental regulations will benefit the industry as vast amounts of money are invested in promotion of the new-generation vehicles.

Favourable trade polices- Tax reduction depending on the efficiency of the new vehicle. Used cars are also eligible to price or tax reduction if they meet the standards. For example South Korea charges with 8 types of taxes on vehicles (taken into consideration their engine, fuel consumption, etc.)

Fuel efficiency and emission standards. For example, South Africa does not allow the import of used vehicles ( Source: South Africa government services)

Competitive drivers

Globalized competitors. Automobile manufacturers invest into production facilities in emerging markets in order to reduce production costs

Interdependence of countries. When activities such as production are shared among countries, a competitor’s market share in one country affects its scale and overall cost position in the shared activity.

3.5 Porter’s five forces analysis

The five forces analysis developed by Porter (1979) is an effective method used by the author to determine and recognise threats coming from the different subjects on the market such as new entrants, suppliers, buyers, competitors and substitutes.

Threat of new entrants

Very low in the traditional markets. Although the barriers to new companies are essential, companies are entering new markets through strategic alliances or through acquisitions or merging with other companies.

High capital requirements

Necessity of high tech know-how

Need for sophisticated supply chain

Local manufacturers face an imminent threat posed by world manufacturers. Example: Indian car market is being penetrated by world car manufacturers

The bargaining power of suppliers

Generally very low

Suppliers are replaceable

Components have no other purpose

Car manufacturers have many suppliers

Considerable size of car manufacturers

Suppliers can influence the industry by changing the price of the raw materials.

The bargaining power of buyers

Very high. The buyer is the one who sets the price in the market

Cars are often a long-term investment

There is a variety of models to choose from

Traditional markets (US, Japan) – consumers have very high requirements

Competitors

High Fixed costs. To achieve the lowest unit costs a company must produce capacity.

Companies constantly under pressure

Competitions pushes profit margins down

Forces companies to innovation

There might be exceptions-Proton, Malaysia, State-owned, still pressured by imports

Substitutes

With regard to convenience and independence that cars provide there is no direct substitute

But alternative ways of transportation such as massive transport or bicycles are less costly.

3.6 Future development of the industry

According to the author future development of automotive industry will be led by product design and research, environmental regulations and increasing of consumers' requirements. Products are to great extend standardized. Electric vehicles provide solutions for air pollution issues and urbanization requires new design. Also government regulations stimulate R&D process and promote the new generation vehicles. All these factors direct manufacturers towards sustainable progress in automotive production. The appropriate strategy for the industry is Transnational (Bartlett & Ghoshal, 1989). Automotive products must be globally integrated but locally responsible at the same time. Transfer of innovations and best practices across borders is not only desirable but necessary. Building cost advantages and realizing economies of scale will be part of the future success in the industry.

4. Tata Motors Ltd.

4.1 Overview and history

Tata Motors Limited is the largest automobile company in India with consolidated revenues of USD 32.5 billion in 2011-12 (Source: Tata Motors official website). It is the leader in commercial vehicles with products in the compact, midsize car and utility vehicle segments. By volume the company is the world's fourth largest truck and bus manufacturer (Source: Tata Motors official website).

Tata Motors Limited, formerly known as TELCO, was established in 1945. The first Tata vehicle stepped on road in 1954. With its product range the company meets national and international transportation needs.

Tata Motors has a wide portfolio including heavy trucks and military vehicles, passenger cars like Tata Estate, Tata Sierra, Tata Indigo and Indica and the innovative Tata Nano.

It has 6 manufacturing bases in India- Jamshedpur, Lucknow, Pantnagar, Sanand, Pune and Dharwad, 3 in UK, and in Spain, Morocco, Korea, South Africa, Thailand.

In 2004 Tata Motors acquired South Korea's second largest truck maker- Daewoo. Two-thirds of heavy commercial vehicle exports of the country are from Tata Daewoo. Following a strategic alliance with Fiat in 2005, it has set up an industrial joint venture with Fiat Group Automobiles at Ranjangaon (Maharashtra). In 2008 Tata acquires Jaguar Land Rover, the two iconic British brands whose best performance by volume compared to the previous year is in China (See Appendix 3). However, there is a challenge related to the technology changes in the new entity and Ford’s technology will help in the emerging emission standards with development of hybrid and green technology. According to Faulkner and Campbell (2002) the investment in mergers and acquisitions build the corporate international strategy of the company. The author analyses that these international movements that Tata Motors achieved are a huge step to its successful emerging of new markets.

4.2 Automobile market in India

India is the tenth largest in the world with an annual automobile production of approximately 2 million units and is expected to become a major global manufacturer in the coming years (See Appendix 4). With the economic reforms of 1991 and the resulted relaxed restrictions and increased competition the Indian automotive industry has demonstrated sustained growth (Source: Info Shine).

Moreover India is emerging as a strong automotive R&D developer alongside with foreign players like Suzuki, Hyundai, and General Motors. This move is supported by the Government through centres for innovation and development. (See Appendix 5)

But the sector has shown a sluggish growth of 12 percent in 2012. This trend is likely to stay with a 10 percent growth outlined for 2013 including high costs (fuel costs, road tax, costs of registration) and slow income growth (Source Info Shine). Consumer purchase decision is affected by demand for higher fuel efficiency.

According to McKinsey Report – "Auto Components Industry: Vision 2015’’, India’s automotive components manufacturing industry has the potential to grow total revenues to US$ 33-40 billion by 2015 including exports and domestic consumption. According to McKinsey the industry could be worth $375 billion by 2015, up from $65 billion in 2002. McKinsey also assumes that India could take $25 billion of this amount. 80 percent of Indian suppliers have the ISO 9000 certificate—the international standard for quality management. With over 7.5 million Tata vehicles on Indian roads, Tata Motors is the country's market leader in commercial vehicles.

According to the author product innovation and the segmentation of the market will produce growth. Alternative fuels based automobiles will become attractive for both consumers and auto makers.

That is the reason why Tata Motors is focussed on environment-friendly technologies in alternative fuels. It has developed electric and hybrid vehicles both for personal and public transportation.

4.3 International strategy of Tata Motors

Tata Motors exports vehicles since 1961. The company's commercial and passenger automobiles are already being marketed in several countries in Europe, Africa, South Asia, Russia, the Middle East and South America. According to the author exports demonstrate healthy growth trend with 16% in 2012 (See Appendix 6).

The company's growth is a result of the ability to translate the customer needs into customer-desired products achieved by R&D. Established in 1966, the company's Engineering Research Centre, has enabled pioneering technologies and products with the help of over 4,500 engineers and scientists. Annual expenditure on R&D is approximately 2% of their turnover. In January 2008, Tata Motors introduced its People's Car, the cheapest car, the Tata Nano, which India and the rest of the world are expecting. This is a result of the cost cutting techniques of Tata Motors. The company allowed the suppliers to be creative and innovative which led to huge cost savings in raw materials. According to Ratan Tata (chairman of Tata Group), Nano will enter the European and US market in 2015. Also Tata Motors has a large network of dealers all across the globe in 3500 touch points and uses DMS (dealer management system) technology for efficient cooperation between these dealers. Focused efforts in select ASEAN and Africa markets helped international exports to grow by 8.6% to 63,105 units in the 2011. The Company exported 55,079 commercial vehicles and 8,026 passenger vehicles with a growth of 9.6% last year. According to the author Tata Motors continues to focus on expanding its global presence and is targeting new product entries to international markets.

4.4 Competition

In the coming years, Tata Motors’ dominant position in commercial vehicles will be challenged by the entry of international brands like Volvo, Mercedes-Benz, and Navistar in India (Source: 67th annual report of Tata Motors). According to the author Tata Motors will face even greater competition in passenger cars. With the introduction of new passenger car models by Skoda Auto, Volkswagen, Mahindra and Mahindra Ltd, Nissan Motor Co Ltd and Suzuki, the share of Tata Motors declined to 13 per cent on 2011 from 14 per cent in 2009-10. (Source: 67th annual report of Tata Motors). The author assumes that in order to deal with rising competition from global rivals the company is developing a new line of fuel efficient vehicles.

Tata Motors has entered into the world of high quality and luxury brands with the acquisition of Jaguar Land Rover (JLR) from the Ford Motor company in 2008. On the other side Tata Motors has introduced the cheap Nano. As a result, the decision to compete in both the luxury and economy markets is a challenge for the company. If proven successfully, this strategy would provide the company with high volume (Nano) and high margin (JLR) revenues. Both revenue streams could limit the risks.

Direct competitors to Tata Motors are:

Suzuki- Apart from its global presence, through its subsidiary Maruti Suzuki, the company is launching family cars to undermine the Tata models.

Toyota- Japanese multinational auto manufacturer. It dominates the market through innovation in hybrid vehicles.

Hyundai- the Korean manufacturer is popular in emerging markets like India and China. It plans to develop new models with technology that competition do not have.

M&M (Mahindra and Mahindra)- The company has a JV with ITEC(North American leader in heavy trucks)

4.5 SWOT analysis

The author analyses the main strengths, weaknesses, opportunities and threats of Tata Motors.

Strengths

Strong domestic player. In the author’s opinion this is the main strength of the company. Tata Motors is the largest automobile manufacturer by revenue in India

Steady revenue growth since 2010

Customer oriented and demand driven

Variety of products- passenger cars, trucks, military vehicles

Global presence- acquires foreign brands to increase its global presence( Jaguar Land Rover, Daewoo)

Strong Research and Development activity- over 4,500 engineers and scientists

Weaknesses

Tata Motors products are not considered as luxurious (except for Jaguar Land Rover). The products are targeted generally for economy class.

Safety problems- fire accident with a brand new Tata Nano in 2010

Although Tata Motors is presented in many countries it has managed to create large consumer base only in India, Sri Lanka, and Bangladesh.

Tata products are not considered world class

Opportunities

With the purchase of JLR the company has a chance to market vehicles in the luxury segment

To increase its global presence through introducing Tata Nano to the UA and European market

High populated countries such as India, South Korea and China need low-cost passenger and commercial vehicles

The use of sustainable and environmental-friendly technology in the manufacturing can help the company to have a better image in society.

Threats

A fast growing economy could mean more competitors. At the same time, high demand of products could bring inflation that affects the budget of the company’s potential clients.

Low safety standards could damage public trust

The rising prices of raw materials like steel and aluminium could put pressure on production costs

4.6 Key success factors of Tata Motors

Grant (2005) discusses the link between key success factors, resources and capabilities, in gaining competitive advantage on the market. He identifies that tangible and intangible assets as well as human resources have to work together in order to achieve organizational capability as a milestone of the supreme performance. The author of this report identifies the following key success factors:

Commitment to quality. The company is dedicated to a consistent recruitment programme at engineering which ensures a steady stream of high quality. Tata Motors provides on-the-job industrial training of young specialists with the partnership of the University of Pretoria. With the acquisition of Jaguar Land Rover the company constructs an image of high-quality brand and earns the trust of the customers.

Products with the correct market specifications. The company has an advantage in the developing of products which are strict to the regulations and emission norms of market specifications (launched the fuel efficient Tata Nano).

Competitive prices. Without doubt Tata Motors grabbed the attention of the world with the lowest cost passenger car in the world. Creating a new segment in the passenger car industry Tata Nano is a key factor for the upcoming success of the company.

Good and efficient after sales service. Tata Service Centres are located every 50-70 km along highways in India. The company is connected with customers through contact programmes organised at channel partners and receives feedback to improve its services.

Ability to satisfy customer needs through desired products and R&D practices. The author considers that technological leadership is a significant factor for the continued success of the company.

5. Evaluation of chosen strategic issue

Barlett and Ghoshal (1989) developed the "Integration/Responsiveness framework" which defines four multinational strategies – Global, Transnational, International and Multi-domestic – based on the benefits of world-wide integration and the needs for local responsiveness. According to that Tata Motors’ strategy can be identified as Transnational as the company is expanding its production throughout the world and enters new markets. Tata Motors has recognised its major strengths and competences in its domestic market and developed a strategy, based on the customization of its approach to each foreign market.

The author analyses the strategy of Tata Motors in entering South Africa and the occurred issue with setting up a dealer network in this market. The problem was that when entering the market the big dealers were already aligned with well-known names like Volkswagen, Ford and Toyota. The standard of living in South Africa is compared to any European country so when the products of Tata Motors were not considered world class at the beginning of their approach of the market, it takes a lot of effort to convince the dealers that future partnership is worth taking. This analysis aims to identify how the company managed to deal with this problem and build a network of 32 dealers in South Africa to sell its vehicles successfully in each part of the country.

According to Lasserre (2003) the strategy of entering a market by partnership with local dealers is an economic way for companies to test new markets without making a huge investment. The author says that Tata Motors used this strategy in order not to make a huge risk by entering this market.

Tata Motors entered South African market in 2004 with intention to open two production facilities but the author assumes that its intention was to take advantage of FTA (European Union’s Free Trade Agreement). In this way Tata motors would export its vehicles to European markets. South Africa is the most economically advanced country on the continent with a population of 46 million and a literacy rate of over 85 per cent. While the main competitors Volkswagen and Toyota are leading a battle to be the dominant player in the country, Tata Motors is offering its small passenger vehicles to meet the demands of the South African customer segment.

Tata Motors entered the South African market by introducing Indica (its first passenger car). The author suggests that this compact and affordable vehicle is suitable for the South African market beating models of Renault and Kia. Because of the lack of dealers in the beginning of its presentation there are about 1,000 Indicas on road today. Tata Motors intends to increase its number to 7,000 next year (Source: Tata Motors official website) relying on its successful partnership with dealers. Alongside with Indica the company also exports four other passenger vehicle models — Tata Indica Vista, Tata Indigo, Tata Indigo SW and Tata Safari. What’s more, the company exports over 20 commercial vehicle models such as busses and pick-ups.

With the emerging of Tata Motors to the market and expanding its global presence and popularity the company constantly began to gain trust in dealers of South Africa. The author analyses the strategy that Tata Motors used in order to build reliable partnerships with dealers and increase its sales. The key decision that Tata made was to start a training program for dealers and acquaint them with reliability of its vehicles which are suitable for the demand of this particular country.

Tata Automobile Corporation SA (Pty) Limited (TACSA) holds the distribution and marketing Tata cars. It spends a lot of time training its dealers in service practices and sales and also started providing dealers with uniform in terms of signage and brand visibility. In 2005 1,400 vehicles were sold in the heavyweight segment with 18% market share (Source: Tata Motors official website). The author considers this performance on the market successful as the leaders Toyota and Mitsubishi are operating in the country for 60 years.

As Tata Motors becomes a well known brand in South Africa through marketing techniques it becomes easier for dealers to sell the company’s vehicles. All sales in the country are through dealers. TACSA sells directly only to the government. The company has so far exported over 32,000 commercial vehicles and 31,000 passenger vehicles to the country.(Source: Tata Motors official website)

Tata has an already established a technical training centre in Germiston, Johannesburg, operating since 2006, for skill development of dealer mechanics in South Africa and various other countries on the continent. In order to provide customers with good and quick service the company also has a central distribution centre to ensure that dealers have the needed parts. According to the author the investment that Tata Motors made in training centres in partnership with dealer network was a key step to the enlargement of this network. The centres provide training in various areas such as troubleshooting, diagnostics and aggregate overhauling. The success of these training centres is based on their work with local workers which are trained in local languages and are geared to local conditions. In South Africa training sessions and tips helped drivers and technicians how to maintain and service the trucks in a more efficient way. In South Africa Tata Motors has equipped the Imperial Training Centre with aggregates and vehicles that help apprentices with the practical training.

6. Recommendations and conclusion

In relation to the presented analysis of Tata Motors the author makes recommendations for the following short and long term perspective of the company. First of all, the company should continue its focus on emerging markets. With the customization of its approach to each foreign market the company lowers the risk of failure in entering. According to Faulkner and Campbell (2002) the key issue in operating globally is the ability to organise the company in a way that is possible to compete with local companies in terms of both supply and demand. The author also suggests that the company should continue its focus on technology and innovations through investing more than 2% if its revenue in R&D practices. Tata Motors should maintain the strategy it applied in South Africa by investing in new facilities to support its product development needs. By enlargement its dealer network through training centres and new partnerships the company will ensure easy access to its product line.

As a conclusion the author notes the strategy of the company to change with the environment and promotes products that the current market desires. The future presents challenges and opportunities for the company in equal measure both domestically and internationally. Even there are many questioners like the future performance of Tata Nano on the US and European market in 2015, Tata Motors looks well positioned to capitalize on these opportunities and take on the world.

References

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Appendices

Appendix 1

This is a research part of the 2011 Trust Barometer and included results from 5,075 people in 23 countries.

Source: http://www.autoblog.com/2011/02/03/study-auto-industry-second-most-trusted-behind-tech/

Appendix 2

"Just-in-Time" means making only what is needed, when it is needed, and in the amount needed. For example, to efficiently produce a large number of automobiles, which can consist of around 30,000 parts, it is necessary to create a detailed production plan that includes parts procurement.

Source: http://www.toyota-global.com/company/vision_philosophy/toyota_production_system/just-in-time.html

Appendix 3

Retail volumes by region full year- Land Rover, Jaguar

Source: Tata Motors official website http://www.tatamotors.com/investors/events/download-presentations-details.php

Appendix 4

Strong growth in Indian passenger cars expected over next 10 years (Source: Investor presentation Tata Motors official website)

Source: Tata Motors http://www.tatamotors.com/investors/events/download-presentations-details.php

Appendix 5

Top three countries by sales and production. KPMG’s global automotive executive survey

Source: http://www.kpmg.com/GE/en/IssuesAndInsights/ArticlesPublications/Documents/Global-automotive-executive-survey-2012.pdf