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AN ANALYSIS OF OPPORTUNITY
Tata Motors Explores FDI into Romania
Mark BaginTim DuBoff
Khurram HasanEugene Pangalos
Jeff Steckmest
STRT 571May 3, 2010Section 44
Tata Motors Overview
Who is Tata? Maker of passenger cars, buses, trucks and tractor-trailers Largest Indian car manufacturer, maker of Tata Nano, which is the cheapest
car in the world (priced at approximately $2,500) Consolidated revenues of Rs.71 thousand crores (USD 14 billion) in 2008-09 Acquired the Jaguar and Land Rover brands from Ford for about $2.3 billion
What are Tata’s key strengths and weaknesses? Strong position in its core Indian market Strong R&D capability and industry leader in low-cost car design and
production Saddled with a large debt load from its recent acquisition (high debt-to-equity
ratios vs. industry) Lack of significant manufacturing base in any country outside India
Tata’s strategy and reasons for FDI Two-tiered strategy of competing in the luxury cars segment (acquisition of
Jaguar - Land Rover) and the low-cost cars segment Expansion into global markets beyond the core Indian market. Tata has already entered into distribution alliances and acquired brands or manufacturing facilities in countries such as UK, Spain and Thailand. Planned introduction of Nano Europa in Europe in 2012
Current Distribution Network
EU Auto Market and Romania
Where should Tata sell and produce?
Demand increasing for small passenger cars in the EU Production in Romania has many advantages:
Low labor costs $2.23 per hour Romania vs. $2.75 for Tata motors In EU (geographic advantage) Immunity from tariffs (10% for firms producing outside of EU)
How could Tata take advantage? Build a new auto plant in Romania Manufacture cars in Romania and export to the EU
Nu
mb
er
of
Un
its
Sold
* (i
n M
illi
on
s)
*EU 15 and EFTA
Cars Sold in Europe 2006-2009
On Euro
Current Possibilities Implications
CurrencyRisk
Leu (have not started ERM 2)
Adopt euroIncrease in aggregate price levels with euro accession; however currency exchange risk eliminated
Leu devalued Low cost of inputs and wages
Political Risk
Low (relative to non-EU Eastern Europe)
Acceptably low – political crises have minimal long-term impact on domestic business environment
Euro accession may increase political risk (Greece). Per capita income level of $11,000 and EU membership mitigate this concern
LaborMajor cost advantage
Labor costs increase w/euro adoption; increased unionization
Euro accession decreases labor cost advantage
CurrentFree Capital
Flow
Pegged ExchangeRate
Sovereign Monetary Policy
Romania’s Trilemma
The Overall Picture
Unfavorable Business Considerations Investment Scale Exceeds Current Capability:
Inability to purchase any existing auto production plants will force Tata to invest in a brand-new facility costing ~$600 million
Large debt load will makes it unfeasible to undertake such a large FDI at this point
Long Timeframe to Recoup Investment: NPV analysis reveals an unreasonably long-time frame of 12 years to recoup investment
Unproven Demand for Tata: While the overall European demand for low-cost cars is increasing, Tata’s brand is unproven in Europe
Recommendation Although Romania remains a favorable political and macro-
economic environment, analysis of business factors reveal a different picture
Recommendation is to NOT pursue FDI in Romania at this point until European demand solidifies and Tata finances improve
Recommendation Although Romania remains a favorable political and macro-
economic environment, analysis of business factors reveal a different picture
Recommendation is to NOT pursue FDI in Romania at this point until European demand solidifies and Tata finances improve