Fiat's Strategic Alliance with Tata · Fiat's Strategic Alliance with Tata Observers lauded the tie-in stating that Fiat had the potential for more sales in the burgeoning Indian

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This document is authorized for use only by SHAHADAT KHAN . Copying or posting is an infringement of copyright. [email protected] or 617.783.7860.

This case was prepared by Jordan Mitchell, Research Assistant and Brian Hohl, MBA 2008, under the supervision of Professors Africa Ariño and Pinar Ozcan, within the joint project between the Center for Globalization and Strategy of IESE and KPMG on "Strategic Alliances and Joint Ventures", as a basis for classroom discussion and not an illustration of good or bad management in a specific situation. March 2008. The authors would like to thank KPMG for the funding provided. This case was written with the support of the Center for Globalization and Strategy, IESE. Copyright © 2008, IESE. To order copies or request permission to reproduce materials, contact IESE PUBLISHING via the website, www.iesep.com. Alternatively, call +34 932 534 200, send a fax to +34 932 534 343, or write IESEP, C/ Juan de Alós, 43 - 08034 Barcelona, Spain, or [email protected]. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means – electronic, mechanical, photocopying, recording, or otherwise – without the permission of IESE. Last updated: 6/6/08 1

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Fiat's Strategic Alliance with Tata

“I like the Tatas. I like the organization and the way they operate.1 Sergio Marchionne, CEO of Fiat Group

Introduction

On Oct., 11, 2007, firm handshakes between top executives of Italy’s Fiat Group and India’s Tata Motors were exchanged at the official ceremony to mark the signing of a joint venture (JV) to manufacture passenger cars, engines and transmissions for the Indian and overseas markets. Several executives from both sides had worked tirelessly on securing the agreement since the initial idea to collaborate had emerged in early 2005. From the first memorandum of understanding (MoU) signed in September 2005, the relationship had expanded substantially; in addition to the recently signed JV, the alliance encompassed an agreement to jointly manufacture pick-up trucks in Fiat’s Argentinean facility as well as a distribution arrangement between Fiat’s commercial vehicle subsidiary, Iveco, and Tata’s commercial division.

1 “Fiat offers technical tie up with Tatas in CV venture,” The Press Trust of India Limited, May., 3, 2007.

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2 IESE Business School-University of Navarra

IES202 Fiat's Strategic Alliance with Tata

Observers lauded the tie-in stating that Fiat had the potential for more sales in the burgeoning Indian market while Tata stood to gain technology and new export markets. While there was a lot to celebrate, Fiat and Tata executives had been given a clear directive that all contracts detailing different aspects of the companies’ collaboration such as engineering support were to be wrapped up by the end of the year. Fiat executives thought about the immediate road ahead of getting the final agreements in fewer than three months.

As the ceremony was coming to a close, one observer quipped: “You know, in India, the average joint venture with a foreign firm lasts three and half years.” The bittersweet remark gave Fiat executives pause to ponder: How could the Fiat team guarantee long-term success?

Section I: Background

Global Automotive Industry

Valued at US$1.2 trillion (€956bn2) in 2006, the global automobile market encompassed retail sales of new cars, light commercial vehicles3 and motorcycles.4 Including suppliers, spare parts and other strata of the auto industry, the entire sector was estimated to be worth over $2 trillion (€1.6 trillion), which was equivalent to the gross domestic product (GDP) of the United Kingdom, the world’s sixth largest economy.5 The market had grown by 5.2% over the previous year and since 2002, the value of the automobiles market advanced at a compound annual growth rate (CAGR) of 4.7%.

In 2006, 65.7 million automobiles and commercial vehicles (excluding motorcycles) were sold, representing an increase of 4% over the previous year.6 It was estimated that there were 900 million cars and light vehicles on the road in 2006; or, one automobile per seven people on a global basis. 7 Exhibit 1 shows volume and revenue growth between 2002 and 2006.

The leading revenue-generating region in the auto industry was the U.S. market, with 38.1% of the global value, followed by Europe with 29.3%, Asia-Pacific with 23.3% and the rest of the world with 9.1%. Much of the growth in recent years had occurred in the Asia-Oceania region, where production had surged forward by 9%. Other growing production regions included South America and Central/Eastern Europe. Exhibit 2 provides a breakdown of automobile production by region and company.

2 Different US Dollar to Euro exchange rates were applied depending on the time period.

3 ‘Light commercial vehicles’ are defined as light goods vehicles and small buses that do not exceed 3.5 tonnes and have capacity for up to 15 passengers. Source: www.OneMotoring.com, ‘Revised Speed Limit for Light Commercial Vehicles’, 2005.

4 Datamonitor, Automobiles Industry Profile Global Mar2007, March 2007, Reference code 0199-2011, p. 7

5 International Organization of Motor Vehicle Manufacturers, “The Auto Industry – A Key Player in the World”, 2006 Edition of the World’s Auto Industry Key Figures, p. 5

6 Source: Datamonitor, Automobiles Industry Profile Global March 2007, March 2007, Reference code 0199-2011, p. 3, 7

7 The Automotive Industry in the 21st Century, Toby Procter and John Constable, reference # 307-180-5, p. 5

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IES202Fiat's Strategic Alliance with Tata

There were 18 manufacturers that produced more than one million vehicles per year. The top five companies were responsible for almost half of the industry’s output, and the top 10 represented more than 68%.8 In terms of revenue, General Motors (GM) was the leader with a 17.3% market share. In volume, Toyota was about to overtake GM as the largest global player, even outselling GM in the U.S.9 See Exhibit 3 for global market shares. Most of the major automakers had been established in the late 1800s and early 1900s. Of the newer entrants (manufacturers that entered after World War II), only a handful had subsequently become high-volume producers – the most prominent were Korean brands: Hyundai and Kia.

In recent years, automotive manufacturers had been plagued by overcapacity. One estimate suggested that if combined, car makers had the capacity to produce 24 million more cars than could be sold each year.10 The oversupply caused car makers to engage in price wars, thus destroying margins and reducing profits.

In an attempt to lower costs, most major automotive makers had set up factories in emerging markets such as China, India, South America and Eastern Europe. While lower production costs were one incentive, experts also suggested that car makers could gain access to growing and fertile marketplaces.11 For example, retail sales in Asia-Pacific (excluding the mature Japanese market) increased 11.1%,12 while retail sales in China heaved forward with 26% growth in 2006.13 According to a 2007 study of the industry, 78% of auto manufacturer executives indicated that they would likely locate or expand operations in China in the next five years compared with 61% who indicated opening or expanding in Eastern Europe, 54% in India, and 52% in Latin America.14

All manufacturers with production greater than one million vehicles were involved in one or more alliances with other producers. Automobile manufacturers formed alliances for a variety of factors with the primary rationale being an attempt to reduce labor, energy, and raw material costs. Experts pointed to increased globalization, industry overcapacity and the rationalization of globally-marketed products as additional motivations for the formation of alliances.15

Significant capital outlay was required to enter into the automotive industry, such as the installation of complex and costly manufacturing systems and engineering know-how. The cost of the development of new car models was estimated at approximately $1-2bn. taking between three and five years. Each year thereafter, investments were

8 International Organization of Motor Vehicle Manufacturers, “World Ranking of Manufacturers”, OICA Correspondents Survey, 2007

9 Peter Day, “'Mr Toyota' is shy about being No 1,” BBC, June 25, 2007, http://news.bbc.co.uk/2/hi/business/6237110.stm, Accessed Aug., 12, 2007.

10 Gabriel Kahn, Stephen Power, Alessandra Galloni, “Separation Anxiety: Once a Dream Couple, GM, Fiat May Face Messy Breakup…,” The Wall Street Journal, Jan., 24, 2005, p. A1.

11 Labor costs represent about 9% of wholesale price of the average car in Europe. In Central Europe, for example, the costs are lower, and labor’s proportion of the wholesale price is trimmed by as much as 40%. [Source: “Global Automotive Review”, Deutsche Bank, Gaetan Tolemonde and Jochen Gehrke, Dec., 2006, p. 5]

12 International Organization of Motor Vehicle Manufacturers, ”World Motor Vehicle Production by Country”, OICA Correspondents Survey, 2007

13 Hoovers Online, GM Corporation overview, 2007

14 "Innovation in emerging markets: 2007 annual study", Deloitte Global Manufacturing Industry Group, 2007.

15 Datamonitor, Automobiles Industry Profile Global Mar2007, March 2007, Reference code 0199-2011, p. 8

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required for engineering changes to annual models. Nearly all manufacturers operated with profit margins of under 3%.16

A vehicle consisted of up to 15,000 separate parts, and the material costs could reach about 70% (including both suppliers and assemblers) of the automobile’s wholesale value. The sourcing of parts usually involved 30 direct suppliers as well as 70 or more indirect suppliers (who served the direct suppliers). Automobile manufacturers usually established long-term relationships with their suppliers and involved suppliers in the development of new models. As part of their own initiatives, suppliers sought opportunities to increase margins by developing proprietary technologies that would add value to the manufacturer and the automobile. See Exhibit 4 for an approximate breakdown of the automotive value system.

Automobiles in India

The automobile industry in India was valued at over $23bn (€18bn) in 2006. Unit sales in the same year exceeded 1.5 million passenger cars (commercial vehicles accounted for an additional 547,000 vehicles).17 It was estimated that seven in 1,000 Indians owned a car; by 2010, this statistic was expected to climb to 11 in 1,000.18 India’s total population was 1.1 billion people. By means of comparison, the U.S. had the highest penetration of automotive owners in the world with one out of two people owning a car. The majority of Indians used motorcycles and three-wheel diesel-powered rickshaws or non-motorized means such as walking, bicycles and cycle rickshaws. Public transport such as trams, trains and buses were also commonly used.

The first imported car arrived on Indian soil in the 1920s, and by the 1940s, cars were being manufactured in the country.19 During the 1950s, the Indian government permitted only those companies who were manufacturing to operate in the automotive sector (opposed to those that were solely importing); seven Indian firms were given licenses to continue (foreign companies were not given licenses), among them, Tata Motors (then called Telco), Hindustan Motors, Premier Automobiles and Mahindra & Mahindra (M&M). One of the most symbolic cars of this period became Hindustan Motors’ Ambassador, a model that had been based on the UK’s Morris Oxford. As of 2007, it was still being built and was one of the country’s hallmark automobiles, reinforced by the fact that it was the country’s most common taxi.

The Indian government launched its own company, Maruti Limited, in an effort to develop and manufacture the “People’s Car.” To bring the “People’s Car” to market, the government of India entered into a 50:50 JV with Japan’s Suzuki Motors in 1982. The venture produced the Maruti 800, outselling all other passenger cars. In commercial vehicles, Tata began producing light commercial vehicles in the 1980s, quickly becoming the largest commercial vehicle manufacturer in the country (and the fifth

16 Procter Toby and Constable John, The Automotive Industry in the 21st Century, Reference # 307-180-5, p. 9

17 “New Cars in India,” Datamonitor, October 2006 and “Trucks in India,” Datamonitor, Nov., 2006.

18 Jorn Madslien, “India prepares for automotive boom,” BBC, April, 3, 2007, http://news.bbc.co.uk/2/hi/business/6521909.stm, Accessed Aug., 11, 2007.

19 Auto India Mart Website, Events and Milestones, Indian car history, http://auto.indiamart.com/cars/events.html, Accessed Aug., 11, 2007.

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largest in the world). The liberalization policies in 1991 opened up India to new import and export possibilities.

As of 2007, the top players in the domestic passenger car market were Maruti Udyog with 48.8% market share, Tata with 20% and Hyundai with 19.0%.20 The market was divided into four primary segments: compact cars (A), midsize cars (B), premium cars (C), and sports-utility vehicles (SUVs) (D).

The market for commercial vehicles was dominated by Tata Motors with 65%, followed by Ashok Leyland with 15.1%, Isuzu with 3.3%, and M&M with 2.2%. See Exhibit 5 for more information on the Indian automotive market.

India’s automotive sector had attracted international attention for both its manufacturing capabilities and blooming market potential. Nearly all international automotive players had ownership stakes in a manufacturing facility in India. Over the past five years, the number of new car sales had grown at a CAGR of 19.2% while the number of trucks had posted a CAGR of 24.3%.21 Over the next decade, future growth was expected to exceed 10% year on year. One industry analyst projected that India’s annual volume would reach 3.5 million cars by 2015.22

To add to the excitement of an explosive marketplace, Tata was in the process of developing the 1-lakh rupee (US$2,500, €1,750, 1 lakh=100,000 rupees) car for 2008. Many predicted that the car would dramatically change the Indian automotive landscape considering that it would cost half as much as the least expensive car currently available.23 Renault had announced that it too would pursue the development of an ultra-low cost vehicle to be ready in as little as three years. Renault was planning a plant to produce 400,000 units in its JV between M&M and Renault’s division, Nissan.24

Background on the Fiat Group

Established in 1899 by Giovanni Agnelli and a group of investors in Turin, Italy, Fiat Group was Italy’s largest car maker and one of the country’s dominant industrial groups. The Fiat Group posted net revenues of €51.8 billion and net profits of €1.1 billion in 2006. The group comprised five business areas:

• Automobiles (49.3% of net revenues); including Fiat, Lancia, Alfa Romeo, Maserati and an 85% ownership stake in Ferrari

• Agricultural and Construction Equipment (20.3% of net revenues) under the company CNH;

20 “New Cars in India,” Datamonitor, Oct., 2006.

21 “New Cars in India,” Datamonitor, Oct., 2006 and “Trucks in India,” Datamonitor, Nov., 2006.

22 Source: ‘Tata and Fiat: Small is Big in India’, BusinessWeek Online, Jan., 2007.

23 Thomas Ryard, “Renault Plans New US$3,000 Car,” Global Insight Daily Analysis, June, 14, 2007.

24 Ibid.

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• Trucks and Commercial Vehicles (17.6% of net revenues) under the Iveco brand;

• Components and Production Systems (23.9% of net revenues) under Fiat Power Train, Magneti Marelli, Teksid and Comau; and,

• Other businesses (3.1% of net revenues)25 including services, publishing and communications such as the ownership of Italy’s La Stampa daily newspaper and holding companies.

Refer to Exhibit 6 for Fiat Group’s financial statements and divisional performance.

Although Fiat had been credited as the first successful automaker to build a “global car” with the Palio model in the mid-1990s26, most commentators agreed that the past 10 years had been rough for Fiat, especially in its ailing auto division. Market share in Italy fell from 60% in the mid-1980s to 30% by 2006.27 Within Europe, Fiat’s share dropped from 13.8% in 1990 to 6.5% in 2005.28 Between 2001 and 2004, the company overall lost nearly $12 billion (€10 billion).29 Several reasons were seen to contribute to Fiat’s difficulties including its low-margin mix of smaller cars, languid new product introductions and the onslaught of more Japanese cars in Italy due to the abolition of quotas on foreign imports.30

In 2003, the company’s management began taking steps to reduce costs and sell non-core divisions. The period was also marked by a series of changes in top management. Long-time chairman, and grandson of Fiat’s founder, Gianni Agnelli died in 2003; Umberto Agnelli assumed the role of chairman until his death in 2004. Ferrari’s CEO and long-time Agnelli acquaintance, Luca Cordero di Montezemolo was appointed as the chairman, John Elkann (Gianni Agnelli’s grandson) as vice-chairman and Sergio Marchionne as CEO. Marchionne, an Italian-Canadian, had been recruited from the top post of SGS (Société Générale de Surveillance; a Swiss certification company partially owned by the Agnelli family). Marchionne set out to perform “radical surgery” by reducing Fiat’s management, firing underperformers and refinancing the bank debt. He continued with the former management’s plan to sell off non-core assets and breathe new life into the frail auto division through new product introductions.31 The company recruited a number of high profile auto executives, including top design talent from Rolls-Royce and BMW to infuse a nimble culture of design and innovation into the company. 12,000 jobs were shed across the entire group, including a large proportion outside of Italy; the company chose not to close its national plants to avoid a clash with

25 Fiat Annual Report 2006, Dec., 31, 2006, p. 26. Note that eliminations account for the other -14.2%.

26 Lakshman Nandini, “Fiat Makes a New Friend in India,” Dec., 15, 2006.

27 “Working with Fiat: Rising Star ties up with old world Titan,” The Economic Times, Sept., 7, 2006.

28 Edmondson Gail, “Fiat's Comeback—Is It for Real?” Business Week, July, 25, 2006, http://www.businessweek.com/globalbiz/content/jul2006/gb20060726_749437.htm?chan=search, Accessed Aug., 8, 2007.

29 Edmondson Gail, “Fiat's Turnaround Takes Root,” Nov., 10, 2006, http://www.businessweek.com/globalbiz/content/nov2006/gb20061110_334864.htm, Accessed Aug., 12, 2007.

30 Edmondson Gail et. al, “Fiat: Running on Empty,” Business Week, May, 13, 2002, http://www.businessweek.com/magazine/content/02_19/b3782014.htm?chan=search, Accessed Aug., 8, 2007.

31 Kahn Gabriel, “Fiat CEO says major surgery drives revival,” The Wall Street Journal Europe, Nov., 4, 2005.

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Italy’s powerful unions.32 To spur on a change of mindset, Fiat’s management set targets of growing volume from 1.3 million units in 2006 to 1.9 million units by 2010.33

Alliances at Fiat

The GM-Fiat Alliance

In 2000, GM and Fiat signed an agreement to exchange 20% of Fiat Automobiles shares with 5.1% of GM shares, both valued at $2.4bn (€2.6bn). The companies formed two JVs: Fiat-GM Powertrain and GM-Fiat Worldwide Purchasing. The JVs were aimed at developing engines and transmissions and creating a common purchasing organization. 34 The intention of the agreement was for GM to gain supply chain savings with its European operations and Fiat hoped to strengthen its overall position in light of recent automotive consolidation while not compromising its position within Italy and Europe. Many observers believed that if Fiat Automobiles were sold to a European carmaker (in early 2000, DaimlerChrysler had reportedly offered about €12bn in cash for Fiat Auto), Fiat would be merged into the European operations of the buyer.

The Fiat-GM arrangement included a put option 35 whereby GM could purchase the other 80% of Fiat at fair market value beginning in 2004.36 To service its high debt level, Fiat sold a number of assets including its stake in GM. Fiat asked GM for more cash in a round of financing. When GM refused, Fiat sought additional financing from other sources (including a capital injection from the Agnelli family).37 GM’s share in Fiat was subsequently diluted to 10%. With continuing financial troubles at Fiat, GM wrote down their investment in Fiat to zero.38

Fiat then began negotiating with GM to exercise the put option (something which was previously seen to be included in the original contract as a type of “insurance”). In early 2005, the two sides negotiated a break-up fee of $2bn (€1.55bn) paid to Fiat by GM. Both joint ventures were subsequently dissolved. Fiat Powertrain was then formed to design and produce transmissions and engines for passenger and commercial vehicles.

A Fiat executive gave one viewpoint on the GM-Fiat relationship: “One of the complications with GM was with mutual ownership participation. We needed to go to them and ask them when we wanted to do something and vice-versa.” Another Fiat executive stated: “[GM] did a classic financial due diligence, when in reality, the

32 Mackintosh James, “Interview: Sergio Marchionne, Chief Executive of Fiat. The impetus behind a move into higher gear,” Financial Times, May, 22, 2006.

33 Ciferri Luca, “Marchionne: Fiat will push its rivals,” Auto News Europe, Dec., 11, 2006, p. 17.

34 “GM and Fiat sign separation agreement,” Press Release, Fiat Group, Amsterdam, Detroit, Turin, May, 13, 2005.

35 A put option gives one party the right to sell its shares (or other securities) to another party usually at an agreed-upon price by a specific date.

36 Edmondson Gail et. al, “Fiat: Running on Empty,” Business Week, May, 13, 2002, http://www.businessweek.com/magazine/content/02_19/b3782014.htm?chan=search, Accessed Aug., 8, 2007.

37 Kahn Gabriel, Power Stephen, Galloni Alessandra, “Separation Anxiety: Once a Dream Couple, GM, Fiat May Face Messy Breakup…,” The Wall Street Journal, Jan., 24, 2005, p. A1.

38 Ibid.

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situation was much more complicated, and required understanding the strategic, political and social situation of the company.”39

Other Alliances

Despite the break-up with GM, Fiat sought a number of partnerships in an effort to increase efficiencies and reduce costs. In 2005, Fiat signed a deal with Ford to collaborate on the development and manufacturing of a common platform for Fiat’s retro Cinquecento and the next generation of Ford’s Ka. The building of both cars was to take place at Fiat’s plant in Poland.40 Later in the year, Fiat reached an agreement to license its JTDi 1.3 litre diesel engine to Suzuki for production at its Maruti plant in India.41 It also renewed a contract for a 10-year period to license transmissions from PSA Peugeot-Citroën to be manufactured in Fiat’s factory in Córdoba, Argentina.42 In the summer of 2006, Fiat signed three agreements for joint projects: the production of heavy trucks in China with Chinese firms Saic Motor Corporation and the Chongging Heavy Vehicle Group; the production of Fiat’s Ducato van line with Russia’s Severstal Auto; and, the creation of Fiat Auto Financial Services with French bank Credit Agricole to assume the role of Fiat’s financing arm previously managed by Fiat’s wholly-owned company, Fidis.43 In the summer of 2007, Fiat agreed to supply 80,000 light-duty diesel engines to Japan’s second largest truck maker, Mitsubishi Fuso (majority owned by DaimlerChrysler).44 See Exhibit 7 for a list of Fiat’s major joint ventures as of the end of 2006.

Fiat’s Operations in India

Credited as helping to “motorize Mumbai,” Fiat appointed Bombay 45 Motor Cars Company as its national sales representative in 1905, long before the first car arrived in the country. By the 1920s, Fiat cars were being imported from Italy. In 1951, Fiat licensed its passenger car, the Fiat 1100, to the Indian firm Premier Automobiles. Renamed as the Premier Padmini, the model quickly became a product hit as it was associated with sturdiness and value for money.46 Premier Automobiles later released a car with the body of the Fiat 124 and an engine and transmission from Nissan.47 Premier Automobiles marketed versions of the Padmini until 2000. See Exhibit 8 for a photo history of Fiat’s major models in India.

39 Kahn Gabriel, Power Stephen, Galloni Alessandra, “Separation Anxiety: Once a Dream Couple, GM, Fiat May Face Messy Breakup…,” The Wall Street Journal, Jan., 24, 2005, p. A1.

40 Edmondson Gail, “Fiat's Comeback—Is It for Real?” Business Week, July, 25, 2006, http://www.businessweek.com/globalbiz/content/jul2006/gb20060726_749437.htm?chan=search, Accessed Aug., 8, 2007.

41 Nandini Sen Gupta, “GM may drive in its small car with Fiat diesel engine,” The Economic Times, Aug., 10, 2006.

42 Newton Paul, “Fiat-Tata Alliance Considers Investing US$100 mil. in Argentine Plant,” Global Insight Daily Analysis, Aug., 7, 2006.

43 VB, “Fiat cements alliance with India’s Tata,” ANSA - English Media Service, July, 25, 2006.

44 Reed John and Michaels Adrian, “FT.com site: Fiat agrees DaimlerChrysler engine deal,” Financial Times (http://ft.com), June, 19, 2007.

45 Mumbai was officially called Bombay until 1995.

46 Lakshman Nandini, “Fiat Makes a New Friend in India,” Dec., 15, 2006.

47 Ibid.

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The Indian government’s liberalization plan in 1991 paved the way for Fiat to establish a wholly-owned subsidiary, Fiat India, in 1995. Fiat India and Premier Automobiles formed a joint venture (51:49 in Fiat India’s favor) to produce Fiat’s compact car, the Uno, in Premier’s plant in Kurla, Mumbai. At the time, Premier Automobiles also had a joint project with Peugeot. Demand for the Uno initially grew, but after minimal promotional efforts and inconsistent dealer service, the model did not reach its expected level of sales. 48 Fiat India upped its participation in the joint venture, eventually assuming control of the Kurla factory. Throughout the tie-in with Premier, the plant endured troubles with the labor force including a long-strike in 2001. (Peugeot’s joint venture also suffered from labor setbacks, causing it to leave the country). To boost sales, Fiat India tried its hand at releasing other models including the Siena and the globally-formatted Palio, and signed an agreement between Fiat’s Fidis and Sundaram Finance to offer consumer auto financing. Palio sales were given a boost and in preparation for future predictions, Fiat started the construction of a second production facility at Ranjangaon, Maharashtra. However, sales slowed after consumers complained about fuel efficiency and poor dealer service. Fiat’s other products failed to provide sufficient volumes to justify the completion of the construction of the second plant.

In the early years after 2000, Fiat India was loss-making and its Kurla plant was operating under capacity. In an attempt to turn Fiat India into a profitable division, Paolo Castagna was named as the head of the affiliate in March 2005. Castagna had worked within Fiat Group since 1988 and had extensive international experience previously as the managing director of a Fiat Group company in Austria and Germany.49

Plans for a turnaround were set back when Fiat India’s Kurla plant suffered a work stoppage for six months due to severe damage caused by flooding.50 Throughout 2006, Fiat India instigated a voluntary retirement scheme and a relocation program to reduce its workforce at the 53-acre Kurla plant as the company planned to eventually close it and consolidate all production activities at the newer 200-acre Ranjangaon facility.51 In addition to realizing savings through the consolidation, the Kurla plant was deemed unsuitable for large-scale production after the damage from the floods in 2005.52

The company was faced with a decision of whether to close down the Indian operation or look for an alternative such as finding a local partner. Michele Lombardi, a Fiat Group manager today responsible for strategic alliances in Fiat Powertrain Technologies, explained the impetus for a local partner:

48 Ibid.

49 “Castagna to head Fiat India,” S Corporate Bureau in Mumbai, May 31, 2005, http://www.rediff.com/money/2005/may/31fiat.htm, Accessed Feb., 18, 2008.

50 “Fiat’s golden handshake for Kurla unit employees,” The Economic Times, 22 Aug., 2006, http://economictimes.indiatimes.com/News/News_By_Company/Companies_A-Z/F_Companies_/Fiats_golden_handshake_for_Kurla_unit_employees/rssarticleshow/1914113.cms, Accessed Nov., 15, 2007.

51 Ibid.

52 “Kurla fetches Fiat Rs 608 cr.,” The Telegraph, Nov., 3, 2007, http://www.telegraphindia.com/1071103/asp/business/story_8506341.asp, Accessed Nov., 16, 2007.

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You can’t just go it alone – well, some companies like Toyota do. However, we are not large enough to do it alone. When the GM joint ventures ended, we identified three specific areas for focused alliances: product technology, industrial know-how and scale and geographical markets. Alliances are definitely the right way for Fiat as they can provide incredible efficiencies and knowledge.

Even with our direct market presence, our market share was quite low. So in India, we began looking for a partner. We wanted that partner to be local since they needed to understand the market, the customer and the complicated value chain.

Fiat Group executives initially short-listed two potential partners. While both candidates had several years in the automotive sector, neither party seemed to possess the competencies or the commitment Fiat Group was after. Lombardi commented:

One of the partners was willing to put down a financial commitment but we were uncertain whether they would be able to support us in identifying the right product, determining the appropriate pricing, marketing to the right customer and building the right distribution. With the other partner, we did not get the sense that management was in it for the long-term. We decided that we needed to have a much more committed player who would really provide a benefit from an entire market level. We had had a relationship with Tata from a group level perspective and that enabled us to initiate a conversation about a potential partnership.

During early 2005, Marchionne and other Fiat Group senior executives first approached Tata Group’s chairman Ratan Tata and his senior managers about potential collaboration.

Brief on Tata Group

Tata Group was one of India’s foremost industrial conglomerates with ownership interests in automotive, engineering, steel, energy, chemicals, information technology, consulting, food and beverages, consumer products, hotels, publishing, financial services and several other lines of business. See Exhibit 9 for more detailed information on the Tata Group.

Tata Motors

Tata Group’s automotive division, Tata Motors, was India’s largest automotive producer (when taking into account all types of vehicles) with sales of €4.5bn. The division was the world’s fifth largest commercial vehicle manufacturer. It had acquired Korea’s second largest truck maker from Daewoo in 2004, purchased a 21% stake in the Spanish bus manufacturer, Hispano Carrocera, in 2005 and signed a joint venture (51:49 in Tata Motors’ favor) with Brazilian bus maker Marcopolo to open a bus factory in India.

Tata Motors had initiated the production of passenger vehicles in 1991 with the hybrid car-truck, the Sierra. Tata Motors followed with several models such as the Estate in 1992, a sports utility vehicle (SUV), the Safari, and a compact economy car, the Indica in 1998. The Indica was seen as a technological breakthrough for Indian industry as it included an in-house developed diesel engine and several features such as air

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conditioning and power steering, which were only available in up-scale models. Development costs were estimated to be €400m, far below the average €1 billion-plus development cost of a new car. The Indica captured 22% market share in the compact segment within five years and was one of the top three selling cars in the country.53 See Exhibit 10 for more information about Tata Motors and Exhibit 11 for selected photos of Tata Motors’ models.

Section II: The Fiat-Tata Relationship

Fiat and Tata’s Initial Meetings and Agreements

After conversations between top level Fiat and Tata executives, negotiating teams from both sides were put in place. At Fiat, a team of four members was constructed: Alessandro Nasi and Michele Lombardi represented Fiat Group at corporate level, Ezio Barra from Fiat Automobiles and Giovanni De Filippis from Fiat India. Later, other managers such as Roberto Grazioli from Fiat Powertrain were brought on to the team. All team members had previous experience with alliances. Additionally, De Filippis had worked on projects at Fiat India since 2003. Tata Motors’ negotiating team included the following executives: the CFO, the head of exports, head of domestic sales, head of business development and strategy and other experts.

In the first meeting, the two sides signed a non-disclosure agreement and briefly outlined their strategic priorities and interests in working together. As further initial meetings unfolded, the two sides found common ground in the distribution and manufacturing of cars. De Filippis described the process:

We started with a blank white board and talked about where we saw potential opportunities. As more meetings took place, we saw that we shared a common set of values. Even if two companies have common values, they may not cooperate. However, we were very fast in finding common ground.

We were very confident in Tata since they are a large company that can deliver. In the past, we haven’t had good experiences with small partners. You feel like you can’t control it and many times, they cannot invest. We’ve been in situations where we had no car delivery and no spare parts. We were sure that this would not happen with Tata.

Lombardi commented on his initial impressions:

Going in, we knew that Tata had great products, a respected history, and an excellent domestic and international reputation. From the meetings, we saw that they really had a great commitment for the long term. We concluded that their management has a similar spirit to ours.

Memorandum of Understanding (MoU)

53 Tata Motors Annual Report 2003-2004, March, 31, 2004, pg. xxix.

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The teams came together throughout the spring and summer of 2005 in India at Tata’s head office and began drafting up a memorandum of understanding (MoU) to document the relationship. On Sept., 22, 2005, both companies announced that the MoU had been signed with the following purpose: “to analyze the feasibility of cooperation, across markets, in the area of passenger cars that would encompass development, manufacturing, sourcing and distribution of products, aggregates and components.”54 In the press release, Marchionne stated:

The possible strategic cooperative agreement with Tata Group represents another step in our clearly defined strategy that calls for targeted alliances across the automobile value chain. It is consistent with successful ventures established with premier partners including PSA Peugeot Citroen and Suzuki, and the recently announced signing of a MoU with Ford Motor Co. I want to thank the Tata team, especially its chairman, Mr. Ratan Tata, for the outstanding work shared with us.55

Ratan Tata commented:

We are delighted to be in dialogue with the Fiat Group on the range of possibilities between the two corporations. Fiat is a globally respected corporation, with a long-standing presence in automobiles. Both companies will benefit from this alliance in terms of possible joint product development, shared platforms and aggregates.56

After the signing of the MoU in September 2005, Giovanni De Filippis, who had been involved in the negotiations and the drafting of the MoU, took over as the head of Fiat India from Paolo Castagna. As De Filippis explained: “I was sent to manage the Indian affiliate for two purposes: to restructure Fiat India and get the joint venture signed with Tata.”

The Agreement for Tata to Distribute Fiat cars in India

In January 2006, the two sides signed an agreement for dealer network sharing in India. The agreement called for Tata Motors to manage the marketing and distribution of Fiat’s Palio and Palio Adventure via existing dealers in 11 cities throughout the country from March 2006 onwards. Two Fiat models would be displayed alongside Tata’s five main passenger cars and the Fiat logo would be showcased beside Tata’s on the dealers’ exteriors. As part of the agreement, the dealers would offer service, spare parts for Fiat cars and consumer financing through Tata Motors Finance. The dealer network included a total of 28 dealers; 25 were Tata Motors dealers and three were Fiat India’s. At the time of the announcement, Marchionne said: “This agreement is a milestone in our presence in India. It enables us to increase our customer base in the country and to provide superior quality service and facilities to our existing customers. The joint team is doing an excellent job and I am confident that our cooperation with

54 “Fiat and Tata Groups explore strategic alliance opportunities,” Fiat-Tata Press Release, Sept., 22, 2005.

55 Ibid.

56 “Fiat and Tata Groups explore strategic alliance opportunities,” Fiat-Tata Press Release, Sept., 22, 2005.

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Tata will further expand in the areas of product development, manufacturing and sourcing.”57

The Road to the Joint Venture

During the summer of 2006, several key actions signaled the strengthening of the relationship between the two entities. In May 2006, Ratan Tata was appointed to Fiat Group’s board of directors. As one observer noted: “The appointment of Ratan Tata to Fiat’s board is telling the world that Tata is truly a partner.” A month later, Fiat India began using excess capacity at its Kurla plant by painting 3,000 to 4,000 Tata Motors pickup truck bodies. At the time, Fiat was producing between 250 and 300 of its own cars.

On July 25, 2006, both groups announced two additional cooperation agreements. The first involved the signing of another MoU to establish an industrial joint-venture to manufacture passenger cars, engines and transmissions for both the Indian market and overseas. The second agreement was a 60-day study to explore the possibility to use Fiat’s facility in Córdoba, Argentina, to produce both Fiat and Tata utility vehicles and pickups for sale within Latin America and export markets. See Exhibit 12 for a description of the companies’ other agreements. Lombardi talked about how the scope of the relationship broadened:

At the beginning, it was only cars. Then, as the conversations continued, the idea for producing engines and transmissions came up. Tata was particularly interested in the joint engine production because they have expressed interest in a “new generation” engine for their vehicles. The way that we discussed further collaboration is very much in line with the spirit of the relationship to look for new opportunities.

After identifying that the two sides were interested in manufacturing powertrains, they thought that a possible structure could involve the formation of two separate companies: one focused on powertrains and the other for the manufacturing of cars or two companies with different shareholding patterns between Fiat and Tata. However, after additional discussions, the teams decided that they would view all projects as an equal split as it was felt that both sides were contributing equal knowledge and resources.

During the second half of 2006, the two sides jointly developed a business plan with targets for the demand of cars and powertrains. The directive was to achieve a project payback of eight years and at least €30m in net present value. 58 Roberto Grazioli explained the process:

When developing the business case for a joint venture, we start by defining the key strategic terms. In this first phase the basic principles are determined such as the location, the types of products, the range of volumes and the approximate price points. Then, different scenarios are constructed to explore alternatives such as building the plant from scratch or only assembling instead of manufacturing the powertrain and the car together.

57 “Fiat cars to be available in India through Tata dealers from March 2006,” Fiat-Tata Press Release, Jan., 13, 2006.

58 All financial details have been disguised to protect confidentiality.

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In the development of the plan, you then need to translate those strategic and financial discussions to the technical side. For example, you might have target prices for engines and you need to work with the technicians to figure out a way to reduce the cost of the engine.

Typically, there are different plans developed – one internally for each company and then the joint venture business plan. The reason for the internal plans is not because the partners want to hide anything, but there may be corporate level plans such as the introduction of a new model that have not been internally approved yet. When the time comes, the information is shared with the partner and it is worked into the plan.

By the end of 2006, the business plan called for the JV to produce both Fiat and Tata vehicles including the Fiat Palio and Adventure as well as premium cars for the B and C segments, such as the Fiat Grande Punto and the new Fiat Linea sedan. The first completed cars were scheduled for early 2007. Other products included the Fiat 1.3 liter multi-jet diesel, the 1.4 liter diesel engine, a new 1.2 liter gasoline engine and Fiat transmissions. Initial volumes were planned at 100,000 cars and 200,000 engines and transmissions. Average prices were estimated at approximately €6,000 for cars and €1,400 for powertrains (including both engines and transmissions).59 Typical margins in the industry ranged from 12 and 16% for cars and 15 to 20% for powertrains.60 Using the initial volumes, the teams estimated the required investment to reach capacity. It was determined that the investment would be made in phases and would reach a total of €665m. 61 As part of the accord, Fiat would contribute its factory at Ranjangaon, Maharashtra, which would be managed by both parties. Fiat would also license certain cars and powertrain technology to the joint venture and inject cash in the form of equity and loans. Tata’s contribution would be in the support provided by its sales distribution network as well as cash injection in a combination of equity and loans.

On Dec., 14, 2006, the companies announced to the press that they were working towards the signing of a single 50:50 joint venture agreement. Several press reports at the time pushed the scope beyond what had been declared, speculating that Fiat would contribute its expertise to the 1-lakh automobile project,62 which turned out to be incorrect.

The Joint Venture Agreement (JVA) Negotiations

With regular meetings occurring once per month (typically for four days in a row) for over a year (from autumn 2006 to autumn 2007), the two negotiating teams hammered out the details of the JVA.

The discussions revolved around several issues such as the value of the Fiat’s assets at the Ranjangaon plant and the exit clauses for both sides. In negotiating the value of Fiat’s assets, Fiat’s team first presented a list of assets with market values backed by an independent assessment. The two sides then negotiated for approximately a six-month

59 All financial details have been disguised to protect confidentiality.

60 Case writer estimates.

61 “Fiat, Tata plan to produce low cost car for Indian market in 2008,” AFX Asia, Jan., 25, 2007.

62 Ullatil Parvathy, “Fiat to power Tata's Rs 1-lakh car,” The Economic Times, Nov., 8, 2006.

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period on the value of those assets. In the situation of the exit clauses, there were two main aspects: the rights of both companies in the case that one company exited; and, the continuity of other contracts (such as the distribution deal of Fiat cars in India) if the JV was terminated. Grazioli talked about overcoming challenges in the negotiations:

Since I’ve been involved with the negotiations, there has not been a roadblock or one big issue to face. The overriding issue was getting through the volume of work in the specified time period.

Obviously, there are difficult moments in any negotiation. During negotiations we might face particular challenges with a detailed negotiation point. If the negotiating teams are not capable of resolving the issue, we have put in place structured escalation procedures, which gradually move the issue up the decision ladder. To date, this process has worked nicely.

Fiat’s Team

Fiat’s team comprised the business specialists and legal experts. On the business side, there was the core negotiation team (Nasi, Lombardi, Barra, Grazioli and De Filippis) who coordinated other participants for certain issues. In negotiating the JVA, there were over 50 employees involved from Fiat’s side. Those employees included representatives from each function such as quality, supply chain, purchasing, diesel and gasoline engine engineering, transmissions engineering, finance and warranty. On the legal side, a dedicated legal manager was involved in most of the negotiations. There were also local Fiat and Tata lawyers dealing exclusively with Indian law and Fiat’s top legal counsel was involved for key decisions. Grazioli commented on the interplay between the business and legal side in the negotiations:

In the course of the negotiation, we also had specific moments when the two teams preferred to have ad-hoc sessions without the legal people involved, in order to be more focused on the “business issues”. The legal aspects were addressed at a later stage, when the “open items” were discussed and solved.

Meetings and Cultures

Most of the negotiations were held at Tata’s head office in Mumbai. Given that Fiat executives had 10-hour flights from Italy to India, the Fiat team requested alternative locations such as Fiat’s head office or a relative mid-way point such as Dubai, UAE. Indian citizens entering Europe required a week-long waiting period, which usually meant that the meetings were in India. One Fiat executive commented on the timing of some of the meetings:

It is always difficult going to the other company’s offices as they still have other work to attend to. So, we might have a meeting scheduled to start at 10am, which then starts at 11am and might end up being regularly interrupted by other issues. We also tried phone conversations, but there’s nothing like the face-to-face contact where you can see body language and reduce the number of distractions.

Another Fiat executive talked about the differences in cultures:

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There are two layers of culture. The first is Italian and Indian culture and the second is the difference in company culture. Even with another Italian company, Fiat can be very different.

In past experiences such as the GM negotiations, I saw that the Americans were step by step. They may take 10 days to decide, but when they do, that’s their position and they don’t budge. I would say that Fiat works on trying to speed up the process. We might have one position and three days later, the position is different. Also, we were given a lot of autonomy in our decisions. I got the sense that perhaps at Tata, the decisions need to be escalated up higher into the organization.

Making the JV operational

In making the JV operational, due diligence on all financial values was carried out by KPMG. Fiat and Tata formed a 10-person board of directors for the new company with five directors from each company. Tata Motors Managing Director, Ravi Kant, was made chairman and the CEO of Fiat Powertrain Technologies and senior vice-president business development of Fiat Group Automobiles, Alfredo Altavilla, was made vice- chairman. The remaining directors were from top-level positions and were matched equally on both sides; for example, the CEO of Iveco and the CEO of Tata Commercial Vehicles were included on the board. The board of directors also set up committees including an Audit Committee and an Organization and Compensation Committee.

For the CEO of the newly formed company, the board of directors recruited Rajeev Kapoor from motorcycle manufacturer Hero Honda, where he had held the position of vice-president of manufacturing (Hero Honda manufactured 1.5 million motorcycles per year).63 The CFO, currently a Fiat representative ad interim, would be nominated by Tata, while the industrial managers of the cars and powertrain divisions were nominated by Fiat. Fiat and Tata’s respective human resource departments were responsible for defining the organization structure together and hiring the other managers.

Plant Operations

In late 2006, the companies commissioned the assembly line at the Ranjangaon plant for the Fiat Palio and Fiat Adventure. An operations manager from Fiat Powertrain was designated as launch manager and set up the new assembly line by organizing the configuration of the new machinery, dealing with suppliers and coordinating the labor flow. Responsibility for plant operations was then passed to the newly installed plant manager.

In total, the plant was expected to involve 4,000 direct and indirect employees. Positions at the plant were filled by current workers at the Ranjangaon and relocated workers from the Kurla plant. De Filippis commented on the work ethic of the employees:

63 Ciferri Luca, “Rajeev Kapoor to lead Fiat-Tata Indian joint venture,” Automotive News Europe, Oct., 12, 2007, http://www.autonews.com/apps/pbcs.dll/article?AID=/20071012/ANE01/71012004/1170/rss03&rssfeed=rss03, Accessed Nov., 15, 2007.

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When I arrived in 2005, the employees were not very clear on the future of the affiliate. We had 700 employees, and we were in crisis. There was a flood at the Kurla plant. We were not sufficiently supplying to the market. By restructuring and seeing the results quickly, we created a good and positive feeling amongst everyone. The dedication was tremendous since many people worked long hours to turn around the affiliate. They were motivated to do so because they are very proud of being part of Fiat.

Conclusion: Looking Toward the Future

The relationship between Tata and Fiat had garnered considerable press and many were curious if the partnership would be a long-term success. The first agreement for the distribution of Fiat cars through Tata’s dealerships had already provided quantifiable benefit – Fiat’s sales in India had spiked by 51% in the first quarter after the accord had been put in place. 64 Cars, engines and transmissions would soon roll off the production line at the joint venture plant, according with the target plan, and other opportunities such as potential collaboration in commercial vehicles would be imminently pursued.

Now that the manufacturer joint venture had been signed, observers in and outside of the automobile industry asked: What could be learnt about how the two companies had approached the alliance? How could the two teams guarantee future success?.

64 “India: Fiat working on low-cost car with Tata,” Automotive World, Sep., 5, 2006.

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Exhibit 1 Global Automobile Market Size

Source: Global Automobile Manufacturers, Datamonitor March 2007, pp. 10-11.

GLOBAL AUTOMOBILES - VALUE (USD $)Year $ billion % Growth

2002 980.22003 1011.9 3.2%2004 1061.2 4.9%2005 1118.8 5.4%2006 1176.9 5.2%

CAGR: 2002-2006 4.7%

GLOBAL AUTOMOBILES - VOLUME (Units)Year Unis million % Growth

2002 57.22003 58.4 2.1%2004 60.5 3.6%2005 63.1 4.3%2006 65.7 4.1%

CAGR: 2002-2006 3.5%

GLOBAL AUTOMOBILES - VALUE (USD $)Year $ billion % Growth

2002 980.22003 1011.9 3.2%2004 1061.2 4.9%2005 1118.8 5.4%2006 1176.9 5.2%

CAGR: 2002-2006 4.7%

GLOBAL AUTOMOBILES - VOLUME (Units)Year Unis million % Growth

2002 57.22003 58.4 2.1%2004 60.5 3.6%2005 63.1 4.3%2006 65.7 4.1%

CAGR: 2002-2006 3.5%

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Exhibit 2 Production by Manufacturer: Vehicle Type and Region

Source: International Organization of Motor Vehicle Manufacturers, 'World Motor Vehicle Production', OICA Correspondents Survey, 2006

Note: The above figures refer to production and not sales.

2006 Production by Manufacturer by Type (Vehicle Units)% to Total Total Cars Light

Commercial Vehicles

HeavyCommercial

Vehicles

Heavy Bus

Total 100.0% 68,340,304 51,953,234 13,187,688 2,850,233 349,149

1 GM 13.1% 8,926,160 5,708,038 3,156,888 43,838 17,3962 Toyota 11.8% 8,036,010 6,800,228 1,049,345 122,569 63,8683 FORD 9.2% 6,268,193 3,800,633 2,386,296 81,2644 VOLKSWAGEN 8.3% 5,684,603 5,429,896 219,537 29,175 5,9955 Honda 5.4% 3,669,514 3,549,787 119,7276 PSA 4.9% 3,356,859 2,961,437 395,4227 Nissan 4.7% 3,223,372 2,512,519 570,136 134,874 5,8438 Chrysler 3.7% 2,544,590 710,291 1,834,2999 RENAULT 3.6% 2,492,470 2,085,837 406,633

10 Hyundai 3.6% 2,462,677 2,231,313 966 145,120 85,27811 FIAT 3.4% 2,317,652 1,753,673 450,544 89,071 24,36412 Suzuki 3.4% 2,297,277 2,004,310 292,96713 DAIMLERCHRYSLER 3.0% 2,044,533 1,275,152 378,278 340,296 50,80714 Mazda 2.0% 1,396,412 1,169,640 223,995 2,77715 Kia 2.0% 1,381,123 1,181,877 197,060 2,18616 B.M.W. 2.0% 1,366,838 1,366,83817 Mitsubishi 1.9% 1,313,409 1,008,970 296,431 8,00818 Daihatsu 1.6% 1,084,721 905,932 166,667 12,12219 AVTOVAZ 1.1% 765,627 765,62720 Fuji 0.9% 587,274 507,552 79,72221 Tata 0.8% 561,081 190,468 196,389 174,224

2006 Production by Manufacturer by Type (Vehicle Units)% to Total Total Cars Light

Commercial Vehicles

HeavyCommercial

Vehicles

Heavy Bus

Total 100.0% 68,340,304 51,953,234 13,187,688 2,850,233 349,149

1 GM 13.1% 8,926,160 5,708,038 3,156,888 43,838 17,3962 Toyota 11.8% 8,036,010 6,800,228 1,049,345 122,569 63,8683 FORD 9.2% 6,268,193 3,800,633 2,386,296 81,2644 VOLKSWAGEN 8.3% 5,684,603 5,429,896 219,537 29,175 5,9955 Honda 5.4% 3,669,514 3,549,787 119,7276 PSA 4.9% 3,356,859 2,961,437 395,4227 Nissan 4.7% 3,223,372 2,512,519 570,136 134,874 5,8438 Chrysler 3.7% 2,544,590 710,291 1,834,2999 RENAULT 3.6% 2,492,470 2,085,837 406,633

10 Hyundai 3.6% 2,462,677 2,231,313 966 145,120 85,27811 FIAT 3.4% 2,317,652 1,753,673 450,544 89,071 24,36412 Suzuki 3.4% 2,297,277 2,004,310 292,96713 DAIMLERCHRYSLER 3.0% 2,044,533 1,275,152 378,278 340,296 50,80714 Mazda 2.0% 1,396,412 1,169,640 223,995 2,77715 Kia 2.0% 1,381,123 1,181,877 197,060 2,18616 B.M.W. 2.0% 1,366,838 1,366,83817 Mitsubishi 1.9% 1,313,409 1,008,970 296,431 8,00818 Daihatsu 1.6% 1,084,721 905,932 166,667 12,12219 AVTOVAZ 1.1% 765,627 765,62720 Fuji 0.9% 587,274 507,552 79,72221 Tata 0.8% 561,081 190,468 196,389 174,224

2006 Production by Manufacturer and RegionTotal Vehicle Units (all types)

Company Africa Americas Asia EU Europe Oceania TOTAL1 GM 5,197,949 1,769,436 1,762,074 68,301 128,400 8,926,1602 Toyota 142,750 1,777,632 5,285,674 543,259 171,480 115,215 8,036,0103 Ford 397 3,397,728 256,515 2,203,457 320,896 89,200 6,268,1934 Volkswagen 128,080 1,026,188 619,782 3,910,553 5,684,6035 Honda 1,473,780 1,986,086 189,998 19,650 3,669,5146 PSA 10,176 189,302 452,542 2,695,859 8,980 3,356,8597 Nissan 44,695 1,150,700 1,520,777 507,200 3,223,3728 Chrysler 2,454,494 90,096 2,544,5909 RENAULT 21,444 175,967 162,248 1,853,556 279,255 2,492,470

10 Hyundai 236,773 2,207,359 18,545 2,462,67711 FIAT 7,130 569,402 53,559 1,517,075 169,324 1,162 2,317,65212 Suzuki 12,474 2,113,928 170,875 2,297,27713 DaimlerChrysler 42,975 455,764 178,710 1,352,175 14,909 2,044,53314 Mazda 20,560 81,520 1,294,332 1,396,41215 Kia 1,381,123 1,381,12316 B.M.W. 54,782 105,172 1,206,884 1,366,83817 Mitsubishi 9,420 115,530 1,099,495 82,544 6,420 1,313,40918 Daihatsu 1,078,321 6,400 1,084,72119 AVTOVAZ 765,627 765,62720 Fuji 104,991 482,283 587,27421 Tata 561,081 561,081

2006 Production by Manufacturer and RegionTotal Vehicle Units (all types)

Company Africa Americas Asia EU Europe Oceania TOTAL1 GM 5,197,949 1,769,436 1,762,074 68,301 128,400 8,926,1602 Toyota 142,750 1,777,632 5,285,674 543,259 171,480 115,215 8,036,0103 Ford 397 3,397,728 256,515 2,203,457 320,896 89,200 6,268,1934 Volkswagen 128,080 1,026,188 619,782 3,910,553 5,684,6035 Honda 1,473,780 1,986,086 189,998 19,650 3,669,5146 PSA 10,176 189,302 452,542 2,695,859 8,980 3,356,8597 Nissan 44,695 1,150,700 1,520,777 507,200 3,223,3728 Chrysler 2,454,494 90,096 2,544,5909 RENAULT 21,444 175,967 162,248 1,853,556 279,255 2,492,470

10 Hyundai 236,773 2,207,359 18,545 2,462,67711 FIAT 7,130 569,402 53,559 1,517,075 169,324 1,162 2,317,65212 Suzuki 12,474 2,113,928 170,875 2,297,27713 DaimlerChrysler 42,975 455,764 178,710 1,352,175 14,909 2,044,53314 Mazda 20,560 81,520 1,294,332 1,396,41215 Kia 1,381,123 1,381,12316 B.M.W. 54,782 105,172 1,206,884 1,366,83817 Mitsubishi 9,420 115,530 1,099,495 82,544 6,420 1,313,40918 Daihatsu 1,078,321 6,400 1,084,72119 AVTOVAZ 765,627 765,62720 Fuji 104,991 482,283 587,27421 Tata 561,081 561,081

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Exhibit 3 Global Market Share (Based on Revenues)

Source: Global Automobile Manufacturers, Datamonitor, March 2007.

Exhibit 4 Revenue in the Automotive Value System

Source: Toby Procter and John Constable, The Automotive Industry in the 21st Century, Reference # 307-180-5, p. 10

Global Market Share

General Motors17.3%

Toyota15.9%

DaimlerChrysler15.9%Ford

15.9%

Other35.0%

Revenue Share For Participants in the Automotive Value System

Recommended Retail Price 100%

Dealers 20%Marketing/Logistics 10%Assemblers 10%Suppliers 60%

Revenue Share For Participants in the Automotive Value System

Recommended Retail Price 100%

Dealers 20%Marketing/Logistics 10%Assemblers 10%Suppliers 60%

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Exhibit 5 Indian Automotive Market

Source: New Cars in India and Trucks in India, Datamonitor, October 2006.

NEW CARS IN INDIA - VALUE (USD $) TRUCKS IN INDIA - VALUE (USD $) TOTAL - VALUE (USD $)Year $ billion % Growth Year $ billion % Growth Year $ billion % Growth

2002 6.3 2002 3.7 2002 10.02003 8.6 36.5% 2003 5.2 40.5% 2003 13.8 38.0%2004 12.7 47.7% 2004 6.7 28.8% 2004 19.4 40.6%2005 14.7 15.7% 2005 7.4 10.4% 2005 22.1 13.9%2006 18.1 23.1% 2006 8.2 10.8% 2006 26.3 19.0%

CAGR: 2002-2006 30.2% CAGR: 2002-2006 22.0% CAGR: 2002-2006 27.3%

NEW CARS IN INDIA - VOLUME (Units) TRUCKS IN INDIA - VOLUME (Units) TOTAL - VOLUME (Units)Year Units 000s % Growth Year Units 000s % Growth Year Units 000s % Growth

2002 541.5 2002 191.1 2002 732.62003 696.2 28.6% 2003 260.7 36.4% 2003 956.9 30.6%2004 955.2 37.2% 2004 319.2 22.4% 2004 1274.4 33.2%2005 1028.8 7.7% 2005 351.5 10.1% 2005 1380.3 8.3%2006 1160.8 12.8% 2006 385.6 9.7% 2006 1546.4 12.0%

CAGR: 2002-2006 21.0% CAGR: 2002-2006 19.2% CAGR: 2002-2006 20.5%

NEW CARS IN INDIA - VALUE (USD $) TRUCKS IN INDIA - VALUE (USD $) TOTAL - VALUE (USD $)Year $ billion % Growth Year $ billion % Growth Year $ billion % Growth

2002 6.3 2002 3.7 2002 10.02003 8.6 36.5% 2003 5.2 40.5% 2003 13.8 38.0%2004 12.7 47.7% 2004 6.7 28.8% 2004 19.4 40.6%2005 14.7 15.7% 2005 7.4 10.4% 2005 22.1 13.9%2006 18.1 23.1% 2006 8.2 10.8% 2006 26.3 19.0%

CAGR: 2002-2006 30.2% CAGR: 2002-2006 22.0% CAGR: 2002-2006 27.3%

NEW CARS IN INDIA - VOLUME (Units) TRUCKS IN INDIA - VOLUME (Units) TOTAL - VOLUME (Units)Year Units 000s % Growth Year Units 000s % Growth Year Units 000s % Growth

2002 541.5 2002 191.1 2002 732.62003 696.2 28.6% 2003 260.7 36.4% 2003 956.9 30.6%2004 955.2 37.2% 2004 319.2 22.4% 2004 1274.4 33.2%2005 1028.8 7.7% 2005 351.5 10.1% 2005 1380.3 8.3%2006 1160.8 12.8% 2006 385.6 9.7% 2006 1546.4 12.0%

CAGR: 2002-2006 21.0% CAGR: 2002-2006 19.2% CAGR: 2002-2006 20.5%

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Exhibit 6 Fiat Group Financial Statements

Source: Fiat Annual Report, December 31, 2006, p. 86.

Source: Fiat Annual Report, December 31, 2006, pp. 87-88

millions EUR 2006 2005

Net revenues 51832 46544Cost of sales 43888 39624Selling, general and administrative costs 4697 4513Research and development costs 1401 1364Other income (expenses) 105 -43Trading profit 1951 1000

Gains (losses) on the disposal of investments 607 905Restructuring costs 450 502Other unusual income (expenses) -47 812Operating result 2061 2215

Financial income (expenses) -576 -843Unusual financial income 858Result from investments: 156 34- Net result of investees accounted for using the equity method 125 115- Other income (expenses) from investments 31 -81

Result before taxes 1641 2264

Income taxes 490 844Result from continuing operations 1151 1420Result from discontinued operationsNet result 1151 1420

Attributable to: Equity holders of the parent 1065 1331Minority interests 86 89

Basic earnings per ordinary and preference share 0.789 1.250Basic earnings per savings share 1.564 1.250Diluted earnings per ordinary and preference share 0.788 1.250Diluted earnings per savings share 1.563 1.250


Net revenues 51832 46544Cost of sales 43888 39624Selling, general and administrative costs 4697 4513Research and development costs 1401 1364Other income (expenses) 105 -43Trading profit 1951 1000

Gains (losses) on the disposal of investments 607 905Restructuring costs 450 502Other unusual income (expenses) -47 812Operating result 2061 2215

Financial income (expenses) -576 -843Unusual financial income 858Result from investments: 156 34- Net result of investees accounted for using the equity method 125 115- Other income (expenses) from investments 31 -81

Result before taxes 1641 2264

Income taxes 490 844Result from continuing operations 1151 1420Result from discontinued operationsNet result 1151 1420

Attributable to: Equity holders of the parent 1065 1331Minority interests 86 89

Basic earnings per ordinary and preference share 0.789 1.250Basic earnings per savings share 1.564 1.250Diluted earnings per ordinary and preference share 0.788 1.250Diluted earnings per savings share 1.563 1.250


ASSETSTotal Non-current assets 21,378 22,666Total Current assets 36,593 39,637TOTAL ASSETS 58,303 62,454- Total assets adjusted for asset-backed financing transactions 49,959 51,725

LIABILITIESStockholders' equity 10,036 9,413Provisions: 8,611 8,698Debt: 20,188 25,761Other financial liabilities 105 189Trade payables 12,603 11,777Other payables: 5,019 4,821Deferred tax liabilities 263 405Accrued expenses and deferred income 1,169 1,280Liabilities held for sale 309 110TOTAL STOCKHOLDERS' EQUITY AND LIABILITIES 58,303 62,454- Total stockholders' equity and liabilities adjusted for asset-back financing transactions 49,959 51,725


ASSETSTotal Non-current assets 21,378 22,666Total Current assets 36,593 39,637TOTAL ASSETS 58,303 62,454- Total assets adjusted for asset-backed financing transactions 49,959 51,725

LIABILITIESStockholders' equity 10,036 9,413Provisions: 8,611 8,698Debt: 20,188 25,761Other financial liabilities 105 189Trade payables 12,603 11,777Other payables: 5,019 4,821Deferred tax liabilities 263 405Accrued expenses and deferred income 1,169 1,280Liabilities held for sale 309 110TOTAL STOCKHOLDERS' EQUITY AND LIABILITIES 58,303 62,454- Total stockholders' equity and liabilities adjusted for asset-back financing transactions 49,959 51,725

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Exhibit 6 (continued) Results by Division, Business Area and Geography

Source: Fiat Annual Report, December 31, 2006, p. 13, p. 26.

Source: Fiat Annual Report 2006, p. 11.

Results by DivisionNet Revenues Trading profit

2006 2005 2006 2005 2006 2005

Fiat Auto 23,702 19,533 291 -281 727 -818Maserati 519 533 -33 -85 -33 -85Ferrari 1,447 1,289 183 157 183 157Agricultural and Construction Equipment (CNH) 10,527 10,212 737 698 592 611Trucks and Commercial Vehicles (Iveco) 9,136 8,483 546 332 565 212Fiat Powertrain Technologies 6,145 4,520 168 109 102 81Components (Magneti Marelli) 4,455 4,033 190 162 175 127Metallurgical Products (Teksid) 979 1,036 56 45 26 27Production Systems (Comau) 1,280 1,573 -66 42 -272 -8Services (Business Solutions) 668 752 37 35 28 7Publishing and Communications (Itedi) 401 397 11 16 12 13Holding companies, Other Companies and Elminations -7,427 -5,817 -169 -230 -44 1,891Total 51,832 46,544 1,951 1,000 2,061 2,215

Revenues by Business Area2006 2005 % to Total

2006% to Total

2005Automobiles 25,577 21275 49.3% 45.7%Agricultural and Construction Equipment 10,527 10212 20.3% 21.9%Trucks and Commercial Vehicles 9,136 8483 17.6% 18.2%Components and Production Systems 12,366 10727 23.9% 23.0%Other Businesses 1,581 1618 3.1% 3.5%Eliminations -7,355 -5771 -14.2% -12.4%Total 51,832 46544 100.0% 100.0%

Operating resultResults by Division

Net Revenues Trading profit2006 2005 2006 2005 2006 2005

Fiat Auto 23,702 19,533 291 -281 727 -818Maserati 519 533 -33 -85 -33 -85Ferrari 1,447 1,289 183 157 183 157Agricultural and Construction Equipment (CNH) 10,527 10,212 737 698 592 611Trucks and Commercial Vehicles (Iveco) 9,136 8,483 546 332 565 212Fiat Powertrain Technologies 6,145 4,520 168 109 102 81Components (Magneti Marelli) 4,455 4,033 190 162 175 127Metallurgical Products (Teksid) 979 1,036 56 45 26 27Production Systems (Comau) 1,280 1,573 -66 42 -272 -8Services (Business Solutions) 668 752 37 35 28 7Publishing and Communications (Itedi) 401 397 11 16 12 13Holding companies, Other Companies and Elminations -7,427 -5,817 -169 -230 -44 1,891Total 51,832 46,544 1,951 1,000 2,061 2,215

Revenues by Business Area2006 2005 % to Total

2006% to Total

2005Automobiles 25,577 21275 49.3% 45.7%Agricultural and Construction Equipment 10,527 10212 20.3% 21.9%Trucks and Commercial Vehicles 9,136 8483 17.6% 18.2%Components and Production Systems 12,366 10727 23.9% 23.0%Other Businesses 1,581 1618 3.1% 3.5%Eliminations -7,355 -5771 -14.2% -12.4%Total 51,832 46544 100.0% 100.0%

Operating result

Number of Companies Number of Employees Number of Facilities Number of R&D Centres Revs (millions EUR)2006 2005 2006 2005 2006 2005 2006 2005 2006 2005

Italy 146 155 75,751 77,070 52 56 50 52 14,851 13,078Europe excluding Italy 285 280 42,904 43,376 56 58 32 32 20,298 18,518North America 76 80 11,714 12,575 25 28 15 17 6,315 6,048Mercosur 31 40 30,877 29,132 20 20 10 10 5,416 4,364Other regions 99 99 10,766 11,545 27 27 9 9 4,952 4,536Total 637 654 172,012 173,698 180 189 116 120 51,832 46,544

Number of Companies Number of Employees Number of Facilities Number of R&D Centres Revs (millions EUR)2006 2005 2006 2005 2006 2005 2006 2005 2006 2005

Italy 146 155 75,751 77,070 52 56 50 52 14,851 13,078Europe excluding Italy 285 280 42,904 43,376 56 58 32 32 20,298 18,518North America 76 80 11,714 12,575 25 28 15 17 6,315 6,048Mercosur 31 40 30,877 29,132 20 20 10 10 5,416 4,364Other regions 99 99 10,766 11,545 27 27 9 9 4,952 4,536Total 637 654 172,012 173,698 180 189 116 120 51,832 46,544

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Exhibit 7 Fiat’s Joint Ventures

Source: Fiat Annual Report 2006, December 31, 2006, p. 134.

At Dec 31, 2006Name Country Fiat % of

InterestAmount

(EUR millions)

Fiat Auto Financial Services S.p.A. (ex Fidis Retail Italia S.p.A.) Italy 50.0% 528Tofas-Turk Otomobil Fabrikasi Tofas A.S. Turkey 37.9% 206Naveco Ltd. China 50.0% 117Società Europea Veicoli Leggeri-Sevel S.p.A. Italy 50.0% 93Société Européenne de Véhicules Légers du Nord-Sevelnord Société Anonyme France 50.0% 61Consolidated Diesel Company USA 50.0% 47LBX Company LLC USA 50.0% 27New Holland HFT Japan Inc. Japan 50.0% 27Turk Traktor Ve Ziraat Makineleri A.S. Turkey 37.5% 23Nan Jing Fiat Auto Co. Ltd. China 50.0% 22Transolver Finance Establecimiento Financiero de Credito S.A. Spain 50.0% 17New Holland Trakmak Traktor A.S. Turkey 37.5% 14CNH de Mexico SA de CV Mexico 50.0% 13Other minor 18Total investments in jointly controlled entities 1,213

At Dec 31, 2006Name Country Fiat % of

InterestAmount

(EUR millions)

Fiat Auto Financial Services S.p.A. (ex Fidis Retail Italia S.p.A.) Italy 50.0% 528Tofas-Turk Otomobil Fabrikasi Tofas A.S. Turkey 37.9% 206Naveco Ltd. China 50.0% 117Società Europea Veicoli Leggeri-Sevel S.p.A. Italy 50.0% 93Société Européenne de Véhicules Légers du Nord-Sevelnord Société Anonyme France 50.0% 61Consolidated Diesel Company USA 50.0% 47LBX Company LLC USA 50.0% 27New Holland HFT Japan Inc. Japan 50.0% 27Turk Traktor Ve Ziraat Makineleri A.S. Turkey 37.5% 23Nan Jing Fiat Auto Co. Ltd. China 50.0% 22Transolver Finance Establecimiento Financiero de Credito S.A. Spain 50.0% 17New Holland Trakmak Traktor A.S. Turkey 37.5% 14CNH de Mexico SA de CV Mexico 50.0% 13Other minor 18Total investments in jointly controlled entities 1,213

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Exhibit 8 Photo History of Fiat Cars in India

Fiat 1100 (1937-1969) Premier Padmini (1968-2000)

Fiat Uno (1983-present)

Fiat Palio (1996-present)

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Exhibit 9 Information on Tata Group

Established in the 1870s by Jamsetji Tata as a textile manufacturer and trader, the group moved into a number of business areas throughout the 20th century: hotels (1902), iron and steel (1907), electricity (1910), education (1911), consumer goods (1917), aviation (1932), chemicals (1939), automobiles (1945), tea (1962), consulting (1968), publishing (1970) amongst several other businesses.

As of 2007, Tata Group was India’s largest industrial conglomerate running over 90 companies. Major acquisitions included the Tetley tea brand in 2000 (the first acquisition of an international brand by an Indian group) and the $12.2 billion (€9.2bn) buyout of steel manufacturer Corus Group, creating the sixth-largest steel company in the world.

Note: Tata Motors was included under the engineering division. Tata Motors had revenues of approximately €4.5 million in 2005-06.

Source: www.tata.com

Tata Group FiguresEUR million

Total turnover

Value ofAssets

Exports Profits

2005-06 18,000 14,844 4,400 1,7612004-05 14,185 12,073 3,654 1,4102003-04 12,162 10,236 2,628 1,0342002-03 11,328 10,639 2,732 8132001-02 11,756 11,686 2,989 8152000-01 9,984 10,817 1,575 2661999-00 8,640 9,341 1,123 445

Tata Group FiguresEUR million

Total turnover

Value ofAssets

Exports Profits

2005-06 18,000 14,844 4,400 1,7612004-05 14,185 12,073 3,654 1,4102003-04 12,162 10,236 2,628 1,0342002-03 11,328 10,639 2,732 8132001-02 11,756 11,686 2,989 8152000-01 9,984 10,817 1,575 2661999-00 8,640 9,341 1,123 445

Tata Group Revenues by Business Area

Services9%

Materials23%

Engineering (incl. Tata Motors)

32%

Energy7%

Consumer products5%

Chemicals4%

Communications & Information Systems

20%

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Exhibit 10 Tata Motors Information

Tata Motors was India’s largest automotive maker. Over four million Tata vehicles were in use in India. The company’s vision was: “to be best in the manner in which we operate, best in the products we deliver, and best in our value system and ethics.”

Tata Motors had 32,000 employees spread over four main production facilities: Jamshedpur (Jharkhand) in the east, Pune (Maharashtra) in the west, and Lucknow (Uttar Pradesh) and Pantnagar (Uttarakhand), both in the north. The company was setting up a new plant in Singur (close to Kolkata in West Bengal) for the manufacture of the 1-lakh automobile.

The company had over 2,000 dealerships, services and spare points locations throughout India. It offered customer financing through TML Financial Services Limited.65

Tata Motors had been traded on the New York Stock Exchange since September 2004. As of late 2007, the company’s market capitalization was $7bn (€4.8bn).

Source: Tata Motors Annual Report, March 31, 2007, p. 3. Exchange rates applied by case writer (taken from www.oanda.com)

65 Tata Motors Website, http://tatamotors.com/our_world/profile.php, Accessed Nov., 30, 2007.

EUR millionsYear Ending March 31 2006/07 2005/06

Summarized Balance SheetWhat the Company Owned

Net Fixed Assets 1,104.3 841.9Investments 427.8 375.2Net Current Assets 480.8 474.1Miscellaneous Expenditure 1.7 2.6Total Assets (Net) 2,014.7 1,693.8

0.0 0.0What the Company Owed 0.0 0.0Loans 692.4 546.8Net Worth 1,186.4 1,031.0Deferred Tax Liability 135.9 115.9Total Funds Employed 2,014.7 1,693.8

Summarized Profit and Loss AccountIncomeSale of Products and Other Income 5,512.9 4,466.7Total Expenditure 4,358.1 3,517.1

0.0 0.0Profit/(Loss) before exceptional items and tax 445.1 380.3Profit before tax 444.9 382.1Profit after tax 330.8 284.5

Bal. Sheet (Year End) - Mar 31/07 - Indian Rupee to EUR 0.01727 0.01862P&L (365 day avg.) - Indian Rupee to EUR 0.01729 0.01861

EUR millionsYear Ending March 31 2006/07 2005/06

Summarized Balance SheetWhat the Company Owned

Net Fixed Assets 1,104.3 841.9Investments 427.8 375.2Net Current Assets 480.8 474.1Miscellaneous Expenditure 1.7 2.6Total Assets (Net) 2,014.7 1,693.8

0.0 0.0What the Company Owed 0.0 0.0Loans 692.4 546.8Net Worth 1,186.4 1,031.0Deferred Tax Liability 135.9 115.9Total Funds Employed 2,014.7 1,693.8

Summarized Profit and Loss AccountIncomeSale of Products and Other Income 5,512.9 4,466.7Total Expenditure 4,358.1 3,517.1

0.0 0.0Profit/(Loss) before exceptional items and tax 445.1 380.3Profit before tax 444.9 382.1Profit after tax 330.8 284.5

Bal. Sheet (Year End) - Mar 31/07 - Indian Rupee to EUR 0.01727 0.01862P&L (365 day avg.) - Indian Rupee to EUR 0.01729 0.01861

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Exhibit 11 Photos of Tata Cars

Tata Indica (1998-present)

Tata Safari (1998-present)

Tata City Bus Tata Pickup Truck

Tata Truck Tata Tipper

Source: www.tatamotors.com

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Exhibit 12 Other Agreements Between Fiat and Tata

Throughout the joint venture agreement (JVA) negotiations in 2006 and 2007, the two companies had several topics of discussion on the table including an investigation to co-produce in China, the possibility of joint production in Fiat’s South African plant (Tata Africa had acquired a plant in Rosslyn, South Africa from Nissan in 2006)66 and, the joint analysis of producing trucks at Fiat’s Argentinean plant. By February 2007, the companies announced that Fiat would be producing a Tata pick-up truck under license with the Fiat badge in Argentina. Annual production was estimated at 20,000 units with total planned investment to be $80m (€58m). The pick-up would provide Fiat with Tata’s know-how on pick-up trucks with the exception of the engine, which was designed by Fiat and produced at Fiat’s Brazilian facility in Sete Lagoas; Fiat planned on marketing and distributing the pick-ups with the Fiat badge throughout South America and in select European locations through Fiat’s dealer network. Upon the announcement, Marchionne stated: “This agreement is a further step in the building of a large, focalized partnership with Tata and will allow Fiat to enter a specific car segment with a very competitive product. We believe in a win-win know-how exchange with our Indian partner.”67

The teams also talked about the possibility of cooperating outside of passenger cars and powertrain technologies. Specifically, both groups felt that their commercial vehicles divisions should converse about possibilities of collaboration. Executives from Iveco, Fiat Group’s commercial division, met with Tata Motors Commercial Vehicles division in 2006. In November 2006, Fiat announced that Iveco would likely set up a joint venture with Tata to distribute Iveco-Tata commercial vehicles in Brazil through Iveco’s dealer network.68 In mid-February 2007, Iveco and Tata announced the signing of an MoU to analyze cooperation in various aspects of commercial vehicles such as engineering, manufacturing, sourcing and the distribution of products and components.69

66 Cokayne Roy, “Tata and Fiat Auto discuss making vehicles at local plant,” The Star, Oct., 31, 2006, p. E1.

67 “Fiat and Tata announce agreement for pick-up production in Argentina,” Fiat-Tata Press Release, Feb., 14, 2007.

68 Saitto Serena, “Fiat Exec Confirms JV With Tata In Argentina, Brazil,” Dow Jones Newswires, Nov., 9, 2006.

69 “Iveco and Tata Motors explore strategic alliance opportunities,” Fiat-Tata Press Release, Feb., 14, 2007.

Documents

Fiat's Strategic Alliance with Tata · Fiat's Strategic Alliance with Tata Observers lauded the tie-in stating that Fiat had the potential for more sales in the burgeoning Indian