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Paper submission for the conference

The Greening of the Global Auto Industry in a Period of Crisis —

9th - 10th - 11th of JUNE 2010 — 18th International Gerpisa Colloquium

WZB - Berlin / AutoUni - Wolfsburg

Title

Tata Motors and the Financial Crisis – with particular emphasis on the

Passenger Car division

Authors

Gert Bruche

Faculty of Business and Economics

Berlin School of Economics and Law (HWR Berlin)

Badensche Str. 50-51,

D-10825 Berlin

Germany

Email: gert.bruche@hwr-berlin.de

Florian Becker-Ritterspach

University of Groningen

Faculty of Economics & Business

Department of International Business & Management

PO Box 800, 9700 AV Groningen

The Netherlands

Email: florian.br@gmx.de

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Tata Motors and the Financial Crisis – with particular emphasis on the

passenger car division

0. Introduction

As the global financial crises wreaked havoc on major Western automobile companies, particularly in the

United States, Tata Motors, the biggest Indian automobile manufacturer seems to have weathered the

storm albeit with some dents so far. In this paper we explore how the global financial crisis has affected

Tata Motors and how the company responded to the crisis strategically. While we focus on the

passenger car division, we will also discuss to some degree the commercial vehicle side, because the

effect of the financial crisis on Tata Motors (TM) cannot be fully understood without it.

Based on Boyer and Freyssenet’s (2003) definition of productive models the focus will be on changes in

the productive model (constituted by the interplay of profit strategy, product policy, production

organization and employee relations) in relation to key contextual changes in the company’s external

environment (liberalization, market conditions, financial crisis) before and after the global financial crisis.

A major conclusion of our analysis is that given Tata motors embeddedness in the Tata conglomerate

given the remaining importance of the Indian market, the company was buffered to some degree from

the effects of the financial crisis. Nevertheless, the financial crisis did leave its trace on the company as

the shortfalls in demand of commercial vehicles, passenger cars and SUVs were exacerbated by two

major strategic initiatives, the Jaguar Land Rover (JLR) acquisition and the Nano project, which had

developed their own problems and challenges as the following quotes from sources in the investor

community indicate:

“The rapid reversals at Tata Motors, which is probably the most internationally visible of Indian

automakers, mirror the suddenness with which many Indian companies have seen their fortunes

change as global lines of credit have frozen and the local economy has slowed down” (Srivastava,

January 2009).

“They are now fighting on three fronts: Their core business is collapsing, the small car project will

have to prove itself, and the global credit availability is a problem” (Nair, January 2009).

The paper will be structured as follows: We first briefly explain the early history of Tata’s entry into

automobiles (part 1). We discuss the development of TM’s regulatory and market environment (part 2)

and try to relate this to the evolution of the company’s productive model in the decade between its

entry into the passenger car market and the crisis of 2008/09 (part 3). In a final part we will draw

conclusions as to general as well as unique drivers and facilitating conditions of this case (part 4).

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1. The origin of TATA Motors, passenger car division

The predecessor of Tata Motors, Tata Engineering and Locomotive Co. (TELCO) was established by the

Tata Group in 1945; the company changed its name to Tata Motors (TM) in 2003. In 1954 TELCO entered

into a 15-year-contract with Daimler Benz under which the company started to assemble medium-duty

Mercedes-Benz trucks under license for the local market. After the accord ended in 1969, Tata continued

to manufacture and sell the vehicles under its own brand. In 1983 TELCO started to manufacture heavy

commercial vehicles followed in 1985, 1986 and 1989 by ‘indigenously designed’ light commercial

vehicles. A major move to strengthen its position in commercial vehicles was the acquisition in 2004 of

Daewoo Commercial Vehicle Co. of Korea which strengthened Tata’s position in the home market in a

number of other developing country markets, and enabled TM to gradually move up from being a

dominant player in the price-sensitive low end segment to the more performance oriented segments of

the market (Kumar 2009). Around the year 2000 the company started also to expand its engagement in

bus segment through a combination of licensing, own development, alliances and acquisitions. As a

result, the company is today the dominant player in commercial vehicle segment in India (60-70% market

share) the world’s fourth largest truck maker and the world’s second largest bus manufacturer (both in

volume terms).

In 1966 TELCO established an Engineering Research Centre in Pune which was to “provide impetus to

automobile research and development” (TM Website 2010). As a kind of ‘prelude’ to the entry into the

mass market of passenger cars TELCO developed and launched of a portfolio of vehicles in the niche of

SUVs, Vans, and Pick-ups between 1991 and 1998. Another precursor to an entry into the mass car

market was based on a JV contract with Daimler Benz. In 1995 TELCO started to assemble the Mercedes

Benz E220 (CKD). As this project did not meet with much success and also involved disagreement with

the German JV partner, TELCO exited from the JV already in 2001. Mercedes Benz which had owned a

stake of around 10% in TELCO and the later TM finally sold its shares in March 2010 acknowledging the

fact that it had become competitors to Tata Motors in the commercial as well as – through the

acquisition of Jaguar - in the luxury segments of the vehicle market. As India’s passenger car market is

dominantly a small car market (Becker-Ritterspach/Becker-Ritterspach 2009) the definitive entry of Tata

into the Indian passenger car market can be dated at around 1998 when the company launched its first

compact car ‘Indica’, proudly presented as ‘India’s first fully indigenous passenger car (TM Website

2010).

One reason for the related diversification of TELCO into passenger cars - after more than 40 years of

operations as a commercial vehicle manufacturer - was reportedly to make the company less susceptible

to the typically strong cyclical swings of commercial vehicle markets through building a presence in the

less volatile passenger car market (Meredith 2007).

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Figure 1: Development of sales in the passenger car and commercial vehicle segment 2003-04 to 2009-10

Source: Siam website (2010)

Around 1993 the company started to work on the development of its own passenger car after Ratan

Tata’s original idea to build an Asian car as a collaborative effort by the Indian automobile industry had

received a less-than-positive response (see for this and the following Sagar/Chandra 2004, 44-46). The

car was designed in-house with some support by an Italian design consultancy and by a French firm for

the development of the gasoline engine; the diesel engine of the Indica relied on a modified engine from

its pick-up vehicle. For setting up the manufacturing TELCO bought an unused Australian plant from

Nissan. The whole project which lasted three years involved 700 engineers and cost around 400 million

US$ - a similar project of development, tooling and setting up of production facilities would cost well

over $ 2 billion in an industrialised country (ibid). The Indica met with instant success in the Indian

automobile market and became the most successful car launch in Indian history.

As a complementary strategy to the entry into the passenger car segment the Tata Group established in

1995 Tata AutoComp Systems (TACO) with the aim to facilitate and enhance the manufacture of auto

components. TACO is a holding company for a number of subsidiaries and JVs which established the Tata

group as an automotive supplier in several segments and partners with leading OEMs.

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2. The development of Tata business environment until the financial crises

TM’s market performance and the evolution of its strategy and productive model including its foray into

the passenger car segment in the ten years leading up to the financial crisis in fall 2008 can be

characterized as the outcome of the interplay between the transformation India’s economic regime and

policy environment and a strong ‘strategic intent’ of the top management (Ratan Tata, the Chairman of

the Tata Group and of Tata Motors, took a strong personal interest in Tata’s automotive engagement). It

was the fundamental change of this economic environment that changed demand and supply conditions

in the Indian automotive market for both commercial vehicles and passenger cars.

Transformation of the Indian economy

In the context of the New Economic Policy of 1991 the Indian automotive industry was one of the areas

in which the Indian Government took a keen interest. Internally, the policy changes focused on shifting

the economy from a state-led coordination and state-led investment growth regime to a more market-

led coordination and market-led investment growth regime. Externally, the reforms aim at liberalizing

the trade and foreign direct investment regime (Krueger and Chinoy 2002). In combination, these

reforms implied a massive de-regulation of private sector controls and a step-wise privatization of public

sector enterprises and additionally the entry of foreign companies. As a result India’s FDI-regime as well

as other active policy measures of the Government had a major impact the local and international

players entering the Indian automobile industry (see table 1).

Table 1: Major Policy Initiatives for the Automotive Industry after 1991

Year Policy / Initiative Major influence & relevance for TM

1991-

1993

De-licensing of automotive industry TM can freely expand its production

capacities and can move into new

segments

1991 Automatic approval of FDI up to 51% foreign ownership Increased competition

1995 India’s Accession to WTO; full application of the TRIPS system

(patenting, IP) in 2005

2002 New ‘Auto Policy’: make India a global hub for auto components &

regional hub for small cars, encourage R&D and vehicle designing

Incentives for small car strategy

Automatic approval of FDI w. 100% foreign ownership Increased competition

2003 Core Group on Automotive Research (CAR) set up involving

Government, industry and academia

2004 150% deduction of R&D expenses from taxable income Incentives for indigenous R&D

2005 National Automotive Testing and R&D infrastructure project

(NATRIP) setup: mission to upgrade infrastructure and establish

centres of excellence for automotive R&D

Investment of 380 m $ over 6 years

2006 India becomes contracting party to Global Technical Regulations

Agreement; Six Indian working groups for different auto

component

NATRIP signs MOU w. Vehicle Certification Authority of U.K. for

issue of certificates in India after testing in NATRIP centers

2007 Automotive Mission Plan (AMP) 2006-2016 foresees setting up of

Automotive Training Institute, Auto Design Centre, special Auto

Parks and auto component virtual SEZs , Technology

Modernization fund with special emphasis on SMEs

Source: Adapted from Pradhan/Singh 2008, 12-13 and various sources

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For Indian companies, the liberalizations implied the emergence of international competition in what

used to be an entirely protected market. Hence, while the new policy regime enhanced and improved

the infrastructural conditions for Tata’s push into ‘indigenous’ innovation, it also lowered the entry

barriers for foreign car producers. This facilitated a surge in FDI by all major foreign car manufacturers,

be it in the form of increase or take over of the Indian equity in JVs (like in the case of Maruti) or through

a host of greenfield investments (e.g. VW recent investment in Pune). The rapid ‘internationalisation’ of

the domestic car market increased the competitive pressure on Tata and the ‘urge’ to upgrade

technologies and capabilities. It also increased the need to internationalize operations to gain and reap

economies of scale and integrate into the web of alliances among global car manufacturers.

Table 2: Production of Vehicles in India (1989-90 until 2007/08)

Source: Ranawat/Tiwari 2009, 54

Changing demand conditions

Regarding to the demand-side of the automobile industry, economic growth and fiscal and monetary

reforms had a positive effect on investments and consumption. On the one hand, the reforms of the

1990s contributed to recovery and growth of the Indian economy. On the other hand, the fiscal and

monetary reforms also included a reduction of the excise duty on automobiles. Between 1991 and 2008

successive Indian Union Budgets reduced the excise duty for (small) cars (e.g. from 66% in 1991 to 8% in

2008) and commercial vehicles. What is more, as the financial crisis started to hit the Indian automobile

industry, the Indian government launched in early 2009 a stimulus package with a strong focus on

supporting the suffering commercial vehicle sector by providing credit lines and slashing taxes on

CVs(TM 20-F report 2009).

After some fluctuation in the late 1990s and early 2000s, the Indian economy saw a steady and strong

growth at around 8 per cent from 2003 onward. This economic growth contributed to investments in

capital goods and growing disposable incomes, to a further growth of the Indian middle class and

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thereby to an expansion of consumer demand (D’Costa, 2005). The Indian Government in turn played its

part in directly stimulating consumer demand. Between 2001 and 2006 the Indian Government further

reduced the income tax as well as customs and excise duty across a range of products. Catering to price

sensitive customer segments, Tata very much benefited from excise duty cuts in successive union

budgets (ACMA, 2006; Nair, 2006). In addition, low interest rates and easier financing arrangement

equally supported consumer demand and growth of the Indian automobile industry up to the financial

crises. At the same time, despite efforts to improve the countries fiscal performance, the economic

growth allowed increased public spending in crucial infrastructural areas, most important of which

transportation (e.g. the ‘golden quadrilateral’, connecting New Delhi, Mumbai, Chennai, and Kolkata)

benefitting Tata commercial vehicle business.

For the Indian automobile industry, the high growth rates and growing disposable incomes since

2002/2003 translated into a substantial sales growth. In 2004/2005 the sales of passenger cars and

multi-utility vehicles cross for the first time the 1 million mark (see figure 1). In the years before the

launch of the Indica (1990/91 to 1997-98) the demand for passenger cars had been rising modestly. After

a short period of stagnation demand picked up again in 2002 and doubled in the following years,

providing TM with substantial growth opportunities. Much more dramatic was the rate of expansion of

supply and demand in the 2-wheeler market. Here sales grew from 1,635,473 in 1991 to 5,367,950 in

2003 (the time at which the Tata Nano decision was taken), and further to 8,359,065 in 2008 (Siam 2008-

09). The major decisions of almost all foreign OEMs and auto parts makers to enter for the first time or

substantially increase their existing FDI were taken around 2003-05 and led to significant leap in FDI

inflows from 2006-07 onwards (2005/06 ~140 m USD, 2006-07 ~ 280 m, 2007-08: ~680 mn).

While Tata expanded and benefited from the effects of the economic reforms, the company also

experienced increasingly the cyclicality of its commercial vehicle business in the period of economic

downturn at the end of the 1990s and the bite of foreign competition entering the market, equally

resulting form the reforms. Hence, Tata’s strategic move into the passenger car business and its

emphasis on cost reduction and quality initiatives, its recovery as well as strong position in the Indian

market in the 2000s, have to be placed into a the wider context of a new economic growth regime.

Taken together it can be said that TM’s strategy in the first decade after entry into the passenger car

market evolved in a situation of accelerating demand for cars in the compact segment, an accelerating

demand for two-wheelers, a supportive auto policy by the Indian Government and a decisive lowering of

the entry barriers for foreign car producers. As more recent developments the demand for cars in the

premium and luxury segments started to grow rapidly from a small base and the demand from compact

to the mid-size segment started also to grow. In the following paragraph we will outline how the

development of Tata’s business context up until the global financial crises is reflected in the evolution of

the company’s productive model.

3. The evolution of Tata’s productive model and the financial crisis

Tata’s profit line and the global financial crisis

Following India’s New Economic Policy and market liberalization in the early 1990s Tata Motors

witnessed an impressive profit growth peeking in 1996/97 which was followed by a steep fall and loss

making between 1997/1998 and 2000/2001 in the wake of the Asian financial crises and increasing

domestic competition. Between 2001/2002 the company saw again a sharp rise in profits which

stagnated in 2006/2007. Showing the effect of the global financial crises, TMs profits fell again sharply in

2007/2008. Despite the sharp fall in profits, however, TM did not report any losses in the midst of the

global financial crises in 2008/2009 (figure 2). Figures for the financial year 2009/2010 indicate that the

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fall in profit has halted and that TM was able to increase its net revenue compared to the year

2008/2009.

Figure 2: TM’s performance between 1990-01 and 2008-09

-100000

-50000

0

50000

100000

150000

200000

250000

300000

1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

Depreciation

Profit/loss Before Taxes

Taxes

Profit/loss after Taxes

Source: Compiled from Tata annual reports 1990-01 to 2008-09

Overall, the financial crisis had a stronger negative effect on TM’s net profits compared to Maruti

Suzuki’s and Hyundai Motors, TMs major rivals in the Indian market. This was mainly due to TM’s

comparatively stronger involvement in the commercial vehicle production which was hit harder by the

crisis as compared to the passenger car segment.

In the commercial vehicles market TM was hit hardest by the large volume drop in this very cyclical

industry. TM had to face a reduction of 15.2 % in unit sales of commercial vehicles in FY 2009 (ended 31

March, 2009) doing still better than the overall contraction of the Indian commercial vehicle market of

17.3% in the same period (see figure 3). As commercial vehicles represented some two thirds of TM’s

revenues before the JLR acquisition the shortfall in this division had a significant affect on the company’s

revenues and profits. In 2009-10, however, the commercial vehicles industry recovered with domestic

sales volume growing at 40.2% for Tata (TATA Motors FY10 Review). Tata comments on the

improvement as follows:

“After a sharp decline in sales volume in 2008-09, the commercial Vehicle industry recovered with

a strong sales growth in 2009-10. Recovery in CV industry was mainly on account of improving

economic activity as reflected by improvement in industry production, favourable impact of

Government supported stimulus package and overall improvement in the financing

environment.” (TATA Motors FY10 Review).

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Figure 3: Tata’s domestic sales and exports in major vehicle segments between 2003-04 and 2008-09

Source: Compiled from Siam Statistical Profile 2008-09

Staring in 1998, with introduction of the TATA Indica, the company’s market share in the passenger car

segment rose within a few years from virtually 0 to 17.11 % in 2005/2006. Peeking in 2005/2006, the

company’s markets share shrunk, however, to currently 13.16% in the passenger car segment. Since

2006/2007 TM saw a fall in sales in the domestic market (- 6.68% in 2007-08 and -3.96% 2008-09). In the

passenger car segments the overall reduction in TM’s unit sales in the Indian market was – 4,8 % in the

period FY 2008/9, composed of a reduction of 17,1% resp. 17,6% % in the small car and SUV segments

and a growth of 68,8% in the midsize car segment. As the Indian passenger car market increased slightly

(+0,9%) during the period TM’s overall market share in the market of 1,5 million units slipped from 14,2

to 13,6% (TM Annual Report 2009). While exports in the passenger segment remained low they too

where down from 12210 units in FY 2008 to 6295 in FY 2009 (SIAM 2010) which is a 48.45% drop (see

also figure 3). Overall, TM was performing weaker than its main rivals Maruti Suzuki and Hyundai Motors

who were still able to realize sales growth in the Indian market despite the global financial crisis (see

figure 4 and 5). Like in the commercial vehicle sector, however, Tata Motors could realize a substantial

growth in domestic sales volume in 2009-10 (TATA Motors FY10 Review).

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Figure 4: Passenger cars domestic sales TM, Maruti Suzuki and Hyundai compared, 2001-02 to 2008-09

Source: Compiled from Siam Statistical Profile 2008-09

Figure 5: Passenger cars market share TM, Maruti Suzuki and Hyundai compared, 2001-02 to 2008-09

Source: Compiled from Siam Statistical Profile 2008-09

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In addition to the shortfalls of unit sales in the original TM operation JLR unit sales were down 32%

during the period June 2008- to March 31, 2009 (the post acquisition period during which JLR was

consolidated for the first time with TM’s accounts). Jaguar sales were only marginally down by 3.2% -

mainly as a result of the success of the newly launched Jaguar XF – while Land Rover sales fell 39.9%

(Tata Motors 2009). For the financial year April 2008 to March 2009 TM recorded a loss of 60.8 billion

INR (1,2 billion US$) on revenues of 722,8 billion INR (14,3 billion US$), the first loss since 2001-02 (Tata

Motors 2009). This includes losses of 306 m BP (~ 210 m US$) from the JLR acquisition. Unlike TM’s

domestic sales, the recovery of JLR sales has been slower. Tata commented the slow recovery as follows.

“For the early part of the financial year many of the markets in which Jaguar Land Rover operates

experienced negative GDP growth. All major markets returned to positive GDP growth in Q3 and

Q4 2009/10. Strong growth continues in many emerging markets especially China, India and

South America. During 2009/10 the automotive sector in the UK, Europe and the USA, benefited

from a variety of vehicle scrappage schemes. Many of these schemes have now ceased. The

scrappage schemes resulted in some Jaguar Land Rover sales however the impact on the

premium car and 4x4/ SUV segments has been minimal and Jaguar Land Rover didn't benefit

significantly from the presence of these schemes. Confidence within financial markets has been

adversely affected by concerns over public sector debt, recently heightened by events such as the

downgrading of Greek and Mexican sovereign debt ratings. However despite these concerns

Jaguar Land Rover has successfully obtained financing to meets its requirements from a variety of

commercial sources.” (TATA Motors FY10 Review).

However, even for JLR sales volume saw a recovery at the beginning of the financial year 2010-11.

The burden of two strategic initiatives

While the financial crises did have some adverse effect on Tata’s profit line in its domestic operations, it

was the acquisition of JLR and the Nano project that coincided with the global financial crises and

brought the company close to bankruptcy.

The acquisition of JLR was formally concluded on June 2, 2008. Apart from the JLR losses which derived

from demand shortfalls for JLR cars, the acquisition created serious financial problems which started

with the downgrading of TM’s already non-investment grade rating ‘BB+’ to ‘BB’ even before the deal in

April 2008 (Leahy 2008). The deal was funded through a bridge loan of US$ 3 billion through a syndicate

of banks; in addition US$ 0.7 were raised to fund engine and component supplies and working capital.

The original plan to refinance the expensive bridge loan through rights issues fell prey to the financial

crisis and was exacerbated by the generally sceptical view of capital markets towards the JLR acquisition.

In the aftermath of the initial refinancing failure TM went through a lengthy and difficult period of

various partial attempts to raise the needed loans during which the company was close to bankruptcy

and might have even become insolvent if it had not been part of the Tata group. Eventually, the

company had to accept expensive refinancing operations, and left TM vulnerable due to a high debt-

equity ratio (see for this Indu/Gupta 2009a, 2010).

The other problem which coincided with the crisis was the delayed launch of the Tata Nano. The project

had cost Tata an estimated 400-600 m US$ in R&D investments. Originally the Nano was planned for

launch in [early 2008] and was to be produced in a newly built factory in Singur, West Bengal with a

capacity of 300,000 units and ample space for an additional vendor park which would host important

component suppliers (see for this an the following Alfaro et al. 2009). TM had rented the land with an

attractive 90 year lease with the active support of the communist state government which had started to

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actively invite private investment to the state. Soon after the closing of the deal protests by farmers

started, the political opposition got invoved, court cases started; eventually the situation got so difficult

that TM officially announced in October 2008 their decision to close all operations in Singhur and

relocate the factory to Sanand in Gujarat (were again farmers filed a court case in December 2008

claiming the forcible acquisition of their land without adequate compensation). Due to these delays the

first Nanos could only go on sale in 2009 by using another production site with capacity limits of

[50,000]. The full capacity of some 300,000 units in Sanand will only be available in 2011/2012. TM

incurred significant additional expenses, looses almost all of its lead time vis-à-vis competitors like

Bajaj/Renault and shifted the potential break-even point (said to be in the order of 350,000 units p.a.) for

this high risk project very much into the future.

As can be seen from the preceding analysis TM was in a serious crisis around the end of 2008 and the

beginning of 2009.

The evolution of Tata’s profit strategy TM’s profit strategy in the passenger car segment after 1998 can be characterized by two partially

interrelated vectors: 1.) the expansion of the product and geographic scope of TMs passenger car

business and 2.) the creation and upgrading of TM’s knowledge, technology and competence base in the

passenger car domain (resource building strategy). In the following discussion we will mainly focus on

the first aspect.

Tata’s initial profit strategy in the passenger segment at the end of the 1990s was a volume expansion

strategy combined with an emphasis on cost control (see Boyer 2000). Specifically, the company’s profit

strategy built on leveraging scale economies while taking advantage of volume growth in price sensitive

segments. To cater to the cost control aspect of its strategy Tata strongly emphasized indigenous R&D

production capability. In fact Tata is the Indian automobile company with the highest level of local

content and R&D capability.

Accordingly the company targeted in its product policy the main growth segments in India which are

essentially the price sensitive compact and mid-size segments (Becker-Ritterspach/Becker-Ritterspach

2009). This also involved offering a rather limited product variety throughout much of the 1990s.

However, beginning in the 2000s, the company sought to diversify its product portfolio by 1.) base model

diversification, 2.) by venturing into an entirely new segment at the A0 level with the Nano and 3.) by

moving into premium segments through international acquisitions. We shall look at these issues in more

detail.

In the first years after the Indica launch Telco focused on establishing a strong No 3 market position in

the compact car segment after Maruti-Suzuki and Hyundai. Based on the Indica platform a longer sedan

version (Indigo) was introduced in 2002 (see table), and upgraded as well as extended versions were

introduced in subsequent years up to 2008.

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Table 3: TM’s main model introduction in the passenger car, MUV, SUV and Mini Van segments

Introduction Model Segment

1991 TATA Sierra MUV

1992 TATA Estate MUV

1994 TATA Sumo MUV /SUV

1998 TATA Indica Compact B

1998 TATA Safari SUV

2002 TATA Indigo Mid-size C

2007 TATA Winger Min Van

2007 TATA Magic Micro Van

2008 TATA Nano Mini – A 0

2010 TATA Aria SUV

Source: Compiled from TM website 2010

The idea to build an extremely low cost car which could be an entry model for the huge number of

motorcycle, scooter and three-weeler drivers willing to upgrade to a ‘real car’ was mentioned the first

time by Ratan Tata as the 1 lakh car (100000 INR, appr. 2500 US$) at the Geneva auto exhibition in 2003

(Meredith 2007). It took the development team five years until the first Tata Nano could be shown at the

Delhi auto expo in January 2008; introduction of the first Nano had to be postponed to summer 2009

because of the unplanned shift of the primary manufacturing site from Singhur in West Bengal to Sanand

in Gujarat. After starting the booking process in March 2009, TM had booked orders for 203,000 Nanos

by May representing a sales value of 5-600 million US$; due to the limited capacity of only 50,000 units

in its interim production plant in Uttarakhand the delivery of these cars will take at least until the end of

2010.

While this vertical downward move – from compact cars to a new low price entry segment – was very

much focused on a perceived market potential primarily in India and perhaps other developing countries

TM moved in the same year the company’s product scope in the opposite direction. By acquiring JLR in

June 2008 TM entered the premium and luxury segment (and the premium all-terrain vehicle segment)

which can be considered a surprising move by a company which was at that time essentially a low cost

manufacturer of compact cars. At the time, of the closing of the deal, well before the financial crisis hit

the automobile market, many analysts were skeptical of the rationale for TM’s move and doubtful about

the proposed synergies TM wanted to realize with their low cost operation in India (see Tata’s Letter of

Offer and various quotes of analysts in Indu/Gupta 2009a, p.4 and Indu/Vivek 2009b, p.3). In only five

years, between 2003 and 2008, TM had expanded the vertical market scope of its passenger car business

in both directions: into the ‘lowest end’ of the market and into the upper premium/luxury end of the

market.

Serious attempts to internationalize TM’s passenger car business started with the signing of an export

agreement with the MG Rover Group in 2002 which foresaw the marketing of the CityRover, a modified

Indica model, through Rover’s dealer network in the UK and Europe. However, the first batches of the

car which was offered in the UK and Spain did not sell well and the deal finally collapsed in 2005 when

MG Rover became insolvent and the physical assets of the collapsed firm were sold to the Chinese

Nanjing Automobile Group (Adams 2008 and Punithavathi/Syed 2009, p.2). Although TM managed to

increase its export share to around [20%] of consolidated revenues in the first half of 2008 (before the

JLR acquisition), these were almost only commercial vehicles while TM had not managed to export any

significant volumes of its passenger cars by that time. In the passenger car market, TM was therefore in

mid 2008, at the time of the JLR acquisition, a purely Indian player, a fact which is sometimes confused

as in Tata’s official statements ‘exports’ and internationalization of the passenger car segment are not

separated from the more successful internationalisation drive of the commercial vehicles division (see

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figure 3). The Strategic Alliance with Fiat concluded in 2006 includes apart from a distribution agreement

for Fiat cars in India and a number of co-operations in the commercial vehicles fields a joint venture

agreement for the manufacture of the Fiat Palio “for the Indian and overseas market” (TM Annual Report

2008); the plant was finally established in April 2008.

Before the financial crisis TM’s product-market scope in passenger cars was confined to its position in

the Indian compact car segment (~ 14%, No 2-3) with some extensions into the mid-size segment, and

coverage of the SUV niche. TM’s pioneering move with an ultra low cost car ‘down the income pyramid’

had been delayed and sales would only start in early to mid 2009. The geographic scope of TMs sales of

passenger cars was largely restricted to India only with some marginal exports of Indicas and MUVs/SUVs

to a few developing countries. The game-changing entry into the markets for luxury cars and all-terrain

vehicles through the acquisition of JLR – which also meant an immediate internationalization of TM

passenger car business - was completed only few months before the global crisis which hit JLR as hard as

all the other car manufacturers.

New investments, reorganization, cost erosion and quality enhancement

In 2010 TM operated five plants. The company established its first commercial vehicle plant in 1945 in

Jamshedpur (Jharkhand). In 1966 the company opened up a second commercial vehicle plant in Pune

(Maharashtra). Pune was also selected as the production location for its utility vehicles and (Estate and

Sierra) and passenger cars (Indica and Indigo) that were introduced in the 1990s. In 1992 TM established

a 3rd commercial vehicle and SUV plant in Lucknow (Uttar Pradesh). In 2007 the company set up its

fourth plant for commercial vehicles in Pantnagar (Uttarakhand), which was followed by a fifth for the

Nano in Sanand (Gujarat). In the first years after liberalization Tata saw a strong growth in market

demand. The company responded to this demand by setting up new plants and expanding or setting up

new plants at its existing locations. Next to building up new production capacity, the company also

underwent substantial reorganizations as it shifted from a functional organization to a business unit

structure in 1994. This reorganization involved a division of what was then still TATA Engineering into an

Automobiles and Construction Equipment Business Unit (TM Annual Report 1995). As the company’s

foray into the passenger car segment increased and the share of the passenger vehicle business

increased TM responded again and divided its business division Automobiles into the Passenger Car

Business Unit and Commercial Vehicle Business Unit (TM Annual Report 2000). However, while the

company soon realized after market liberalization that it had to cope with a changed market

environment and the shift from a supply driven to a demand driven, hence customer driven market

environment, it was not until the advent of the company’s crisis in 1997-98 that serious turnaround

initiatives were taken to improve quality and control cost. To improve quality levels and to control cost,

first measures where taken in 1997-98 by introducing lean manufacturing and by implementing business

process engineering with the help of international consultants (TM Annual Report 1998). In the midst of

losses in 2000 the company adopted a three phase recovery plan. The company’s CEO Ravi Kant

described these phases as follows:

“Phase one was intended to stem the bleeding, since we just couldn’t ignore the fact that our

sales volumes were still falling with the shrinkage of the overall market. Costs had to be reduced

in a big way, and that was going to be a huge challenge for a company that was not only the

market leader but had been used to operating in a seller’s market and employing a cost-plus

approach to pricing. Phase two was to be about consolidating our position in India, and phase

three was to involve going outside India and expanding our operations internationally.”

(Kant 2006)

15

In the first phase, cost reduction moved to the center stage. In an effort to reduce costs (called cost

erosion strategy by Tata) the company targeted four areas including direct material cost, variable

conversion cost, fixed cost and financial restructuring. As part of its new cost reduction programme, the

company halved its supplier base to 600 and reduced its employee base by about 40% between 1999

and 2000 (Coondoo 2009). In the same year, TM started a comprehensive quality improvement

programme. TM introduced the Tata Business Excellence Model (TBEM) which included as an important

element the adoption of Six Sigma, Kaizen and ERP systems. While the recent crisis has also led to a new

round of cost cutting and quality enhancing measures, indications are that company’s crises in the late

1990s hit the company harder and led to more substantial strategic changes and turnaround measures.

Expansion, rightsizing and shifting employment relations

The first years after market liberalization marked an expansion in employment as production volumes

grew and new production sites where opened up. However, with the shift from a supply to a demand

driven market, mounting competition and loss making at the end of the 1990s, the company engaged in

what it called ‘’rightsizing’’. This heralded a shifting governance compromise. While the old comprise

before liberalization was marked by a steady and protected business environment that turned into a

growing demand scenario after the liberalization of the 1990s with personnel expansion, steady pay rises

and high employment protection, the new compromise following the company’s crises at the end of the

1990s involved a weakening of the position of labor, as the workforce was massively reduced and the

remaining workforce’s compensation became tightly coupled with market standards and importantly,

with company as well as individual performance. Specifically, between the 1999 and 2001 the company

reduced its workforce from around 33000 to 22000 through voluntary separation schemes and attrition.

In response to the crises, the company also renegotiated wage agreements with its unions. Although the

company had a record of cordial and constructive labor relations, the new wage settlements gave rise

labor unrest, followed by a lock out and the formation of a new union at its Lucknow plant in 2000. At

the same time, the company professionalized its HRM function and integrated its HRM systems as part of

a TATA group initiative which included, on the one hand, the introduction of new training methods and

more comprehensive training programmes and, on the other hand, the increasing adoption of potential

assessment, performance measurement, career development and performance based remunerations

systems across different employee categories, including the worker level (John and Vasudha 2009). For

example, in 2003 the Company signed new 3-year wage agreement with its Unions in Lucknow and Pune

which included performance payment linked to quality (TM Annual Report 2003).

As the global financial crises mounted in 2008/2009, TM reacted to the downturn by a range of cost

cutting measures. These also included an overall reduction in wage cost and a hiring, bloc closures,

reduction of temporary employees and voluntary retirement. Also, to scale down production the

company reverted to temporary shutdowns at various plants and working day reductions by posting a

‘no work notice’ for non-permanent workers at its Jamshedpur plant (Mande 2010, TM 20F Report

2009). However, it is still an open question if the global financial crises led to yet another shift in the

company’s governance compromise. On the one hand, the company has not been hit as hard as other

automobile companies abroad as India’s business environment remained rather stable and saw a fast

recovery in the aftermath of the global financial crisis. On the other hand, the company’s

internationalization, particularly the JLR exposed the company more to the global and stronger effects of

the financial crisis abroad. Additionally, the internationalization has gone along with the introduction of

foreign top management as the recent appointment of Carl-Peter Forster as Managing Director of Tata

Motors indicates. While the JLR did see some layoffs as a result of the global economic downturn (Singh

2009), indications are that TM’s labor relations, employment conditions and governance compromise at

home did not see a major change as a result of the global financial crises.

16

4. Conclusion

As we have shown the effect of the financial crisis on Tata Motors’ passenger car business must be

understood in the context of several concomitant processes and interfering conditions. TM’s original

core business in the passenger car division (small cars in India) was mildly influenced by the crisis as TM’s

passenger car sales decreased by only 5%. The company was much more negatively affected by the

decline in sales of its commercial vehicle division which represented – not yet taking into account the JLR

acquisition – some 2/3 of its turnover. However, the financial crisis had a much more serious impact [in

the last quarter of 2008 and the first quarters of 2009] because of the ‘burden’ of two major strategic

initiatives. The shift of the production site and postponement of the full Nano launch which was

originally scheduled for launch in March 2008 by two years led to unexpected resource needs (new

manufacturing site) and a shortfall of otherwise expected 2008-09 revenues. While this burden was not

caused or much exacerbated by the crisis in the global car industry, the acquisition of JLR only few

months before the onset of the crisis actually affected TM much more: the dramatic decrease in JLR’s

sales (JLR being fully exposed to European and US markets) significantly increased the heavy losses of the

new combined company in FY 2008/09; even more importantly, the refinancing of the short term

bridging loan of $ 3 billion for the acquisition became much more complicated and costly in a situation of

dried up capital markets. The refinancing difficulties and increasing financing cost contributed to a

serious debt overload of TM which might have led to bankruptcy (and a take-over) if the TM would have

been a stand-alone company and would not have been protected and supported by its affiliation to the

Tata group and its well connected chairman.

While it is no surprise that the crisis caused (temporary) problems and challenges for TM’s business it

seems much more remarkable how little effect it had on the company’s strategy. TM steered through

the crisis without much change in its path-changing (Nano) as well as its path-breaking (JLR) strategy

initiatives. The constancy of purpose as well as a continuous and consistent execution of strategic plans

was maintained despite highly skeptical capital market markets which had temporarily withdrawn

support from TM. The unwavering pursuit of a transformational strategy of TM in the face of the

financial crisis can be ultimately explained only by the affiliation of the company to a very strong and

supportive conglomerate with a particular mode of operation: TM is one of the few ‘strategic’

companies of the Tata group; it is guided personally by the Chairman of the Tata Group who has

committed the group to a course of globalization and innovation while relying on India’s comparative

location advantages; it allows the company to sustain long periods of low profitability and significant

investments in resource and capability accumulation; TM profits from the value and attraction of the

TATA brand in its dealings with suppliers, customers and the Government, as well as in attracting

talented staff; it also profits from various group support services like the groups excellence model, its

acquisition and finance expertise and its training efforts. This inherent ‘affiliation strength’ enabled TM

to even use the crisis as an ‘accelerator’ for the implementation of its strategies by legitimizing a more

swift course towards cost cutting in the JLR operations (announced closure of one plant and shift of

significant supply sources to India). It may also have facilitated the far-reaching changes in TM’s top

management as experienced top managers were available due to the crisis and a change of top

management seemed to be justified in view of TM’s difficulties and temporary low performance. It can

therefore be concluded that the financial crisis has not much affected TMs transformational change

[change in productive model?] or even reinforced and accelerated it.

17

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