TATA NANO

4/2/2010

1. For the global small car industry, analyse opportunities, threats, key dominant features and industry driving force worldwide. Outline “Tata Motors” strategies to leverage/deal with these to build its competitive advantage.

The impact of the severe downturn in the automobile industry during the year 2009 was seen in the fall of major players like GM, Chrysler and Ford. During these turbulent times the small car segment has seen substantial growth and a rise in demand. The majority of growth in the global automobile industry in the coming decade will come from emerging economies such as India, China and Eastern Europe. And the largest contribution to growth of auto market in these countries will be the fast-growing small car segment. In India for example the small car segment accounts for close to 70-80% of the total demand. In a recent research published by CARE small car sales are foreseen to grow at a faster CAGR of 15.8 per cent from 0.9 million units in FY 2008-09 to 2 million units in FY2013-14. Even in countries like US, small cars are fast gaining acceptance. Currently small cars account for just 2-3% of the markets in these countries but this is set change in the coming years.

The small-car revolution is taking place within the context of the very different needs and desires of the new consumer in emerging markets. Consumers buying cars that cost $8,000 differ greatly from those buying $15,000 cars. Those low-cost cars are typically their first, and they will be used as family cars, but not for long-distance trips—instead, they will be predominantly driven around town.

Opportunities:

1. Economic growth of the developing countries such as India, China, Brazil, etc which has resulted in an increase in the demand for automobiles

2. Low cost manufacturing in labour intensive countries that helps in reducing costs and developing small cars

3. Rising fuel prices and depleting resources which is causing people to move from gas guzzling automobiles to smaller and lighter fuel efficient cars

4. Government incentive in countries like India to develop the small car market5. Rapid innovation in designing and manufacturing techniques that helps in developing lighter

vehicle models at lower costs

Threats:

Western manufacturers have long had the luxury of highly developed value chains, from product development to purchasing to manufacturing to marketing, but that is by no means the case in emerging markets. In these markets, the sophisticated infrastructure available to Western manufacturers to back up the design and building of cars—for instance, the large supplier base equipped with the latest technology to do much of the component design—simply doesn’t exist.

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Environmental considerations like the CO2 legislation that is puts the responsibility of emissions on the car manufactures will reduce the profitability of small car (volume) producers

Changing consumer preference in favour of bigger cars as small cars are still seen as an entry level option

Growing concern of the impact that a large number of small cars will have on the infrastructure and environment

Safety issues with respect to the crash tests that small cars can survive The small car segment doesn’t find much takers in the developed world where people still

prefer luxury and safety over anything else.

Key determinant features:

The buyers in this segment are generally first time buyers and their main considerations are low cost and fuel efficiency

The manufacturing of these cars generally happens in labour intensive countries as this helps the manufacturers in reducing the costs and passing the benefits to the customers. Countries like India, China and Korea are thus the hubs of small car manufacturing.

There is a lot innovation in that is required in the design and manufacturing process which will help in reducing the costs

There is stiff opposition from various quarters such as the environmental groups. This is because of the fear that a larger number of cars will adversely impact the environment due to emissions

Driving Forces worldwide

While the developed countries saw GDP growth of just 2.2 percent in 2007, the so-called BRIC countries—Brazil, Russia, India, and China—achieved an impressive 9.4 percent. Such rates of growth are bringing rapid increases in prosperity throughout the developing world. With that rise in prosperity, consumption patterns are changing dramatically. Large swathes of the world are emerging from poverty and entering the middle class, and the increases in income that are driving that change mean these newly well-off people no longer must spend the vast majority of their income on the bare necessities—food, clothing, and shelter. Instead, they find themselves able to afford such comparative luxuries as better healthcare, communications, and transportation—including scooters, bikes, and, more and more frequently, cars. Another thing which is noteworthy is the low labour cost in emerging economies which is attracting hordes of manufacturers to their soil.

Rising income levels of middle class in the developing world and reduction in the ownership cost with less expensive cars such as the Tata Nano increase the demand in the small car segment and open up new markets for car manufacturers

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The need for a second car by families apart from the big sedans that can be used by households for their day to day activities within short distances

As oil prices rise and concerns about the environment grow, the small car is becoming the king of the road. Nowhere is this more evident than in the developing world, where increasing prosperity is bringing millions of first-time buyers into the market for new cars. This presents a tremendous opportunity for India, which is growing quickly, building a vast middle class, and gaining experience in building and selling cars. India can take advantage of its experience in this market to become the world leader in the fast-growing small-car segment.

Space constraints in most of the major cities in the world make it difficult for owners to manage with a large car. They would rather prefer an easily manoeuvrable small car

The emergence of low cost manufacturing and design hubs helps the company in reducing the costs and in developing smaller cars to cater to the need of the domestic market

Auto makers are looking to develop innovative financing and ownership models in keeping with the needs of the emerging-market consumer. Companies are putting together financing structures that allow extended families to finance a car together. Alternatively, some combination of bank financing and microfinancing could be used to build up local markets.

Tata Motor’s strategy to leverage with these and build a Competitive advantage

The chairman of Tata motors, Mr. Ratan Tata, recognized the fact that there was an inherent need in the consumer’s mind for a car that was affordable and functional. He thus built upon this idea and developed a strategy that would help Tata motors create a blue ocean in the low cost car segment. Some salient features of the strategy were

The Indian passenger vehicle market is greatly tilted toward two-wheeled motorcycles and scooters, which made up 78 percent of vehicles sold there in 2007. That’s because India remains a poor country, with projected median household income of just over $3,000 in 2008. Until the advent of the Tata Nano, the cheapest car sold in India cost about $5,000, unaffordable for the average Indian family. Nano’s price of $2,500, however, puts it well within the realm of possibility for a much larger, and fast-growing, number of households.

Tata Nano targeted young families-couples with 2 children, who could not afford a car. They also targeted parents of college going students as well retired people in order to leverage maximum popularity among these segments which till now were untouched segments as far as cars were concerned.

The company followed a lean design strategy that helped minimise weight in turn maximising performance per unit of energy consumed and delivering high fuel efficiency

The company tied up with the suppliers and ensured that they would set up their manufacturing facilities in close proximity to the Nano assembly plant. This helped in reducing the delays in the supply chain and the vendors were entirely dedicated to supplying to the Nano plant.

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The design of Nano was such that all extra accessories were removed. Features such as one windshield wiper, smaller tyres and frugal interiors helped reduce the overall cost of the car. Most of it came in the form of institutional innovation which was encouraged at Tata motors

The modular design of the car helped in penetrating deeper into the rural markets as this provided an opportunity for franchisees to be set up who could assemble Nano and sell it

One of the biggest strategic decisions was to price the basic model of the car at a price point of Rs 1 lakh. Tata motors was thus able to provide both differentiation and a low price without compromising on either

The low cost strategy also acted as a promotional strategy as the launch of Nano was all that was needed to grab the consumer’s attention.

2. What are the critical success factors for small car industry? Analyse ‘Tata Motors Limited’ strengths and weaknesses relative to its global competitors?

The critical success factors for a small car industry are varied: Affordability & Credit: In Indian terms even small cars are costly – the average small car costs

around 12 times average annual disposable income. Affordability will restrict sales growth of larger cars in the foreseeable future .Small, fuel efficient cars will remain the main market. It is not only a matter of the cost of the vehicle in the showroom, it is also the total cost of ownership. But what is changing is that vehicle demand used to be driven by government, by institutions and private companies – now it is being driven by private, middle-class consumer demand. And for this set of consumers, affordability is the key issue.”

Attitudes: Indians are savers, they are frugal, they are cost conscious, and they are very driven by value-for-money, Most companies believe that this means that medium sized cars will remain hard to sell in volume – but that despite the conservatism of consumers, attitude changes will drive small car sales.

Growing working population-While the developed countries saw GDP growth of just 2.2 percent in 2007, the so-called BRIC countries—Brazil, Russia, India, and China—achieved an impressive 9.4 percent. Such rates of growth are bringing rapid increases in prosperity throughout the developing world. Consider India: At the turn of the millennium, fewer than 500,000 Indian households earned more than $15,000 per year; that number has since exploded tenfold, to 5.5 million households. Upward migration of household income levels, fast paced urbanization (to rise from 28% to 40% by 2020) and middle class expanding by 30 - 40 million every year are the major factors which make India the global small car hub.

Increased access to credit and lower interest loans- Increased consumer embrace of financial products and easy availability of car loans is another factor which has played a big role in success of small car industry. Auto makers are looking to develop innovative financing and ownership models in keeping with the needs of the emerging-market consumer. Companies are putting together financing structures that allow extended families to finance

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a car together. Alternatively, some combination of bank financing and micro financing could be used to build up local markets.

Government support-The governments of emerging economies like India are helping local suppliers increase both their capabilities and their capacity by encouraging exports, providing capital to build globally efficient scale, and offering incentives to invest in new technologies. Finally, it is further developing the local supplier base by encouraging foreign companies looking to do business in India to enter into joint ventures and partnerships with local companies.

Environmental concerns -High oil prices and concern for environment are critical factors in success of small car industry. High fuel and commodities prices are expected to be around for the foreseeable future, and those prices will only make cars more expensive to build and to run, thus reinforcing the desire to keep cars small. Concerns about the environment and global warming are also promoting the trend toward smaller cars—not just in the developing world, but everywhere.

Innovative technology -With the shift to smaller cars for emerging markets, carmakers must develop new technologies and new business models to meet the demands of these markets. Small cars must be lighter and more fuel-efficient, so manufacturers are turning to such technologies as alternate power trains, fuels, propulsion systems, and braking systems, as well as materials not typically used in cars, including plastics for exterior body components such as doors, and strong, lightweight alloys and composites for structures.

Set up in 1945,Tata Motors is India's largest automobile company.With close to 4 million Tata vehicles plying in India, since the first roll out in 1954, it is the leader in commercial vehicles and the second largest in passenger vehicles. It is also the world's fifth largest medium and heavy truck manufacturer and the second largest heavy bus manufacturer. In India, the company has manufacturing facilities in Pune (Maharashtra –western India), Jamshedpur (Jharkhand – eastern India) and Lucknow (Uttar Pradesh – northern India), and a nation-wide dealership, sales, services and spare parts network comprising over 2,000 touchpoints.The company employs over 22,000 people.Tata cars, buses and trucks are being marketed in several countries in Europe, Africa, the Middle East, South Asia, and South East Asia and in Australia.Tata Motors has research centres in India, the UK, and in its subsidiary and associate companies in South Korea and Spain.

Strengths of Tata motors:

Strong Presence in the Marketplace-Tata Motors is the only company in India with a broadbased presence across the industry, in all segments of the commercial vehicles market – heavy and medium commercial vehicles, light commercial vehicles, pick-ups, sub one-tonne mini-trucks - and key segments - compact, midsize car and utility vehicle segments - of the passenger vehicles market.

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Unique Understanding of Customer Need-With 50 years’ presence in the automotive business,Tata Motors understands customer needs and develops products that meet their needs.To consider a few examples, as early as 1980s, the company launched Light Commercial Vehicles, amidst Japanese competition, in which it today strongly leads. In the 1990s, anticipating the need for an affordable family car, it launched the now famous Tata Indica, which occupies a leading position among compact cars.This keen sense of the customer pulse led the company to launch in 2005, the Tata Ace, India’s first sub one tonne mini-truck, as a last-mile distribution vehicle once again creating a new market. Going forward,Tata Motors had anticipated that non-car owning families, at the bottom of the pyramid, will look for an extremely affordable vehicle, providing exceptional value and this small car was Nano.

Skill Base Developed Over the Last 40 Years-Tata Motors is also very well-placed on technology capability.The company had set up its Engineering Research Centre as early as 1966.With 1400 scientists and engineers and state-of-the-art development, testing and validation facilities, it is this technology capability which has, allowed Tata Motors, over the decades, to offer indigenouslydeveloped products.This strength has been accentuated, with the inclusion of TMETC,TDCV and Hispano Carrocera in the R&D network, besides several other specialist external agencies. The company no longer needs to develop every necessity itself.Today it just has to manage the process of product creation, drawing upon already available R&D and skills from different sources.

People Strength-The company’s key strength is its people.The over 22,000 employees comprise a very broad talent base, with the required skills in every aspect of the industry. With increasing international initiatives by the company, this talent base is now getting enriched with the necessary competencies to respond to meet world-class standards of quality and cost.

Weaknesses of Tata motors can be underlined in few cases. The company's passenger car products are based upon 3rd and 4th generation platforms, which put Tata Motors Limited at a disadvantage with competing car manufacturers. Despite buying the Jaguar and Land Rover brands Tata has not got a foothold in the luxury car segment in its domestic, Indian market. The brand associated with commercial vehicles and low-cost passenger cars to the extent that it has isolated itself from lucrative segments in a more aspiring India. Other competing car manufacturers have been in the passenger car business for 40, 50 or more years. Therefore Tata Motors Limited has to catch up in terms of quality and lean production.

3. Analyse small car industry using porter’s five forces model and value net. How does ‘Tata Motor Limited’ minimise impact of five competitive forces?

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There is continuing interest in the study of the forces that impact on an organisation, particularly those that can be harnessed to provide competitive advantage. The ideas and models which emerged during the period from 1979 to the mid-1980s were based on the idea that competitive advantage came from the ability to earn a return on investment that was better than the average for the industry sector. As Porter's 5 Forces analysis deals with factors outside an industry that influence the nature of competition within it, the forces inside the industry (microenvironment) that influence the way in which firms compete, and so the industry's likely profitability is conducted in Porter’s Five Forces Model.

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BARRIERS TO ENTRY

• Time and cost of entry - Time is most essential thing while launching a product inany market. The launch of the NANO is quite viable as the demand of the small car is on the rise in the market. By the cost of the entry we mean the initial capital required to set up a new firm is very high, it makes the chances of the chances of new entrants are very less.

• Knowledge and Technology - Ideas and Knowledge that provides competitive advantage over others when patented, preventing others from using it and thus creates barrier to entry. The TATA motors have great knowledge/ experience in the automobile industry and has renowned technological advantage because of the recent acquisition and mergers.

• Product Differentiation and Cost Advantage - The new product has to be different and attractive to be accepted by the customers. Attractiveness can be measured in the terms of the features , price etc. At this level the price of the NANO car was one thing that is attracting customers. And above all this the image , trust the name TATA carries with it.

• Government Policy and Expected Retaliation - Although government's job is to preserve free competitive market, it restricts competition through regulations and restrictions. The government tried to promote the TATA Motors to start a plant by providing land and tax rebates. But the unexpected retaliation by the local people surface in the setting up of the plant which costed the company a lot.

• Access to Distribution Channels - When a new product a launched a well developed distribution is must for its success. The TATA motors had a advantage of well established distribution channel across the world

BUYERS

Switching Costs - If switching to another product is simple and cheap the customers does not think much before doing it. In case of NANO car the switching cost from bike to car is too high. Thus increasing the demand of the car many fold.

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Number of customers/ Volume of sales - If there are few buyers then they are able to dictate the terms. They pull down the cost by Bargaining. The bargaining power of buyer is high as there are lot of choice available to the buyer and the service do not vary from one manufacturer to the other. They force the manufactures to improve the quality. All this can be clearly seen in the case of NANO car the price tag at which it has been offered or the quality of the NANO car no compromise has been done at any front.

Brand Image - The brand image of the TATA and the segment in which the NANO has been the most attractive thing in the entire package.

SUPPLIERS

• Number and Size of Suppliers - A company to manufacture its products requires raw material, labor etc. If there are few suppliers providing material essential to make a product then they can set the price high to capture more profit. Powerful suppliers can squeeze industry profitability to great extend. In case of NANO the supplier are limited and the size of the suppliers are parts of the NANO car are obtain from the supplier who them are big enough and limited substitutes are available against them. So the entire production line depends upon them only.

• Ability to substitute - Suppliers' products have high switching costs. In many case even when substitute are available its not that easy to opt for substitute as the next product in the assembly line depends upon it. If the change in the any part is brought about the long list of depended parts also have to be changed , which in most cases is not feasible to do.

SUBSTITUTES

Price band - The threat that consumer will switch to a substitute product if there has been an increase in price of the product or there has been a decrease in price of the substitute product. If the price of the NANO car will increase the main expected customers ie the one switching from bike to car will not move to car and will remain in the bike only. Thus the price is kept checked in this manner.

Substitutes performance - The performance of the substitute sector will also play a important role in the success of the NANO car. If the price of the Bike segment increases or the price band of the small segment fall, it will have effect on the

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quantity required in the market. Its just on the price but also the features and the other services associated or it may be the status symbol story. The success of the electric car segment with player like REVA can also effect the demand of the NANO.

Buyers willingness - Products with improving price/performance tradeoffs relative to present industry products. It will determine the willingness of the buyer to but the NANO car.The willingness of the customers to go forward try the new product in the market ie 'NANO'. They might be willing to go for the test products like Maruti 800 , Santro etc.

COMPETITIVE RIVALRY

1. Number and Diversity of Competitor - This describes the competition between the existing firms in an industry, the current scenario, the small car market in India is very competitive with players like Maruti Suzuki, Tata Motors, Hyundai etc. which was pretty much dominated by Maruti. But with launch of Nano the 1 lakh car the whole momentum of the market has shifted. Now to be competitive in market other companies have to either slash rates of their existing model or have to go back to the drawing board and build again.

2. Price Competition - Advertising battles may increase total industry demand, but may be costly to smaller competitors. Products with similar function limit the prices firms can charge. Price competition often leaves the entire industry worse off. NANO is the only player so it has the price freedom but as the Maruti and Honda are also planning to launch the car in the same segment the price competition will start

3. Exit Barriers - Even if the product fails in the market its not that easy for the company to exit the market just like that because of the heavy investment it has made in the initial stage. If the NANO fails or falls flat the TATA motors will not be in a state to slow done the product even when NANO production line can be used by the other products after few modification as for NANO only the new product line were setup and huge cost were incurred.

4. Product Quality - Increasing consumer warranties or service is very common these days. To maintain low cost, companies consistently has to make manufacturing improvements to keep the business competitive. This requires additional capital expenditure which tends to eat up company's earning. On the other hand if no one else can provide products/ services the way you do you have a monopoly. NANO enjoys the monopoly are there are no competitors in this segment.

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4. Draw ‘Tata Motors Limited’ value chain and outline how it helps build in competitive advantage?

Inbound Logistics

Long term contract with service provider's -transporters and agents. Personnel at regional offices for over seeing the smooth transit of goods. Transparency and monitoring through deployment of IT- all transactions through SAP. DTL supplies for critical high value items. Efficient storage facilities - easy storage and retrieval.

Operations Capital Equipment Manufacturing division - tooling development capabilities

of global standard. Apprentice Trainee Course - ensuring stable source of skilled manpower. Kaizen & TPM team - continuous drive to improve efficiencies. Automated manufacturing processes. Distributed manufacturing -Assembly units at South Africa, Thailand,

Bangladesh, Brazil etc.

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Maintenance-technical competence. Capacity Utilization

Outbound Logistics

Stockyards, all across the country. Long term contracts with transporter's - higher volume of business to transporters

ensures competitive price. Regional Sales Office and Vehicle Dispatch Section linked through SAP. Efficient security system for prevention of any kind of pilferage.

Marketing & Sales

Structured approach to understanding the requirements of individual customers - QFD's conducted at regular intervals.Clear identification of product requirements, leading to development of innovative products - Tata 207 Dl, Tata Ace

Pan India presence and global footprint. Independent teams for addressing the requirements of institutional customers -

Defense, State Transport Units Helping to augment the scarce resources - Fiat selling vehicles through Tata dealerships,

in return Tata has access to Fiat's technology and unutilized capacity.

Service

Easy availability of spare parts. Efficient collection of data from field and communication to the respective plants. Pan India presence, as well as global presence. Large network of workshops - Dealer workshops and TASS. Training facilities - for dealer end and TASS personnel.

Procurement

E procurement initiative. Global Sourcing Team - China , a key destination for sourcing essential items like tires,

power steering units etc., Steel procured from Belarus Long term relationships with a stable and loyal pool of suppliers. Technology driven procurement - SAP and VCM. Strategic subsidiaries & JV's - TACO group of companies , Tata Cummins Centralized Strategic Sourcing for key components -FIP's, Steel etc. Group resources -Tata Steel and Tata International

Technology Development

Approximately 2% of the annual profits of the company invested in research and development.

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Knowledge portal - helps employees keep abreast with the latest technologies. Extensive prototype building and testing facilities. Strategic partnerships - MDI (France), Fiat etc. Formal benchmarking process. "Technology Day" organized across all plant locations.

Human Resource

Vast pool of technically competent engineers and managers. Focus on development of technical capabilities -Technical Training Center's,

Alliance with technical Institutes Focus on development of managerial capabilities -MTC's , TMTC, executive training

programs at premier business schools Career advancement schemes - ESS, FTSS

Firm Infrastructure

Multi - Location facilities Strong leadership - under the aegis of Tata Sons Best in class prototype building facilities Technology - SAP Large product portfolio

Key Strategies

International strategy based on the competitive advantage:

New product (eg. Tata Nano, the cheapest car in the World).

Acquisitions (eg. Land Rover and Jaguar brands from Ford Motors).

Partnership with established companies (eg. Alliance with Fiat since 2006) to enhance the product portfolio and knowledge exchange.

Facilities for learning from other companies.

Developing programmes for intensive management development.

5. What are the current and emerging challenges for Tata Nano and your recommendations?

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In January 2008, Tata Motors launched Tata Nano, the least expensive production car in the world at about Rs. 1,00,000 (US $2,500).The city car was unveiled during the Auto Expo 2008 exhibition in Pragati Maidan, New Delhi. Tata Nano Europa has been developed for sale in developed economies and is to hit markets in 2010 while the normal Nano should hit markets in South Africa, Kenya and countries in Asia and Africa by late 2009. A battery version is also planned.

A few challenges faced by Tata Nano are:

Tata has faced controversy over developing the Nano as some environmentalists are concerned that the launch of such a low-priced car could lead to mass motorization in India with adverse effects on pollution and global warming.

The Tata Nano uses plastics and adhesives rather than welding, to reduce cost. There is no radio, no passenger side mirror and only one windscreen wiper. If you want air conditioning, which you just might in India’s oppressive summers, you will need to get the deluxe model. And it is not going to be hitting the export market any time soon – the cost of meeting US safety requirements would double the cost of the car – but it is a pretty good replacement for those who currently precariously cram the family onto a motorbike, as many do.

One of the problems facing Tata Motors is that, while the Nano's long-promised price has stayed the same, costs for raw materials have gone through the roof. Even as oil retreats from a high of nearly $150 per barrel, the chances of Tata Motors squeezing a drop of profit out of a $2,500 Nano is highly unlikely. Choosing a single culprit for this is impossible, since escalating material costs have raised the price of everything from corn flakes to crude oil. Focusing only on the Nano's steel exterior, it's clear how difficult it will be for Tata to stick to that $2,500 price for long.

Protests over the land acquisition methods used by Tata Motors began on Aug. 24, led by Mamata Banerjee, chief of the Trinamool Congress political party.This led Tata Motors to shift its manufacturing plant to Gujarat. While currently the political tensions have subsided, there is no guarantee that in future land acquisition row would not lead to another full fledged political war.

While the company has long touted its lineup of cars as cheap, safe and fuel efficient, Tata has had challenges, including production delays, mechanical problems and questions about profit margins. Most recently, a Tata Nano burst into flames just as it was driven out of the showroom. Although the incident raised concerns about the safety of the Nano, the company

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said it believes it was a one-time event. A year ago, three customers also complained that their Nanos had started to smoke. (The smoke was reportedly caused by a short circuit that led to plastic parts smoking from the heat. Tata replaced the supplier of the faulty part.).

A few recommendations for Nano:

1. Increasing global presence – Nano must show more presence in the developed markets apart from the developing ones since people are becoming more sensitive towards Environmental issues and of course they want to spend less on fuel guzzling cars.

2. Full scrutiny of technical failures – The recent technical failures must not be taken lightly and cars must be called back to fix the problems before the issue blows into a full fledged controversy and mars the Nano brand.

3. Political issues and Land acquisition- More transparency should be there in land acquisitions for building plants. Local people must be taken into confidence before embarking on building plants in the area.

4. The brand needs more of advertising and promotion which it is currently lacking. The low cost must not compromise on quality. Easy loans must be made available to those who wish to own this car.

5. The automotive industry is a B2B (business-to-business), B2C (business-to-consumer) industry involving large investments and a long-term return on investment plans. New product launches on time, on Budget, and focussed on the target segment will be critical to the future success of OEMs and suppliers across all segments.

Volatile raw material and input costs, especially oil and steel, will continue to have a pervasive impact on the operating profitability of OEMs. Successfully managing supply chain complexity, implementing low-cost country sourcing strategies, and continuous technological innovation will be vital to achieving long-term cost mitigation goals.

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