Sirivechapun Jitphum

Tata motors case analysis

Introduction:
The Tata group is one of the largest automobile companies in India and ranks
sixth in the commercial vehicle manufacturing in the world. It is a leader in the
commercial as well as the passenger vehicle segment. The top three passenger
vehicles are sports utility vehicle, mid-size car and mini-truck. In May 2008, the Tata
group acquired Ford Motor’s British based automotive icons Jaguar and Land Rover.
Lack of safer, comfortable and spacious means of transportation and poor quality of
mass transport is a common concern in India.

Decision Problem:
The Tata group come up with a unique concept “Tata Nano: the People’s car” to
be built within USD2500 (Rs1 lakh), an affordable, safer, comfortable and spacious
alternative to the middle class families and students. The chances of Tata Motors
squeezing a drop of profit out of a $2,500 Nano is highly unlikely with the Nano's
long promised price staying the same and rising cost for raw materials. 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. Tata has faced controversies 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.
Protests over the land acquisition 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.

Decisions Alternatives:
Innovative Marketing:
Tata will sell its ultra cheap new car through its own retail outlets as well as auto
dealerships. The Nano's overall marketing strategy will use conventional media in
an unconventional manner.
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
composite materials for structures. It brings to market a totally different value
proposition than the one available and can change the paradigm of a product.
Cost Reduction:
Use of alternate materials and reduced consumption of material being used were
primary considerations to minimize the cost of production. Alternate Suppliers to
get same material at fewer prices as well as establishment of suppliers near the
manufacturing facility were key strategies adopted by Tata Group. This helped in
reducing the delays in the supply chain and setting up dedicated vendors to supply
the raw materials to the Nano plant.

Industry Analysis:
India is well-known for its massive transportation system. As India's transport
network is developing at a fast pace, Indian Automobile Industry is growing too and
therefore, providing employment to a large section of the population. Thus the role
of Automobile Industry is very essential in Indian economy. Various types of
vehicles are manufactured by the Automobile Industry. Indian Automobile Industry
includes the manufacturing of trucks, buses, passenger cars, defense vehicles, two
wheelers, etc. The industry can be broadly segmented into the car manufacturing,
two wheeler manufacturing and heavy vehicle manufacturing units. The major Car
manufacturer are Hindustan Motors, Maruti Udyog, Fiat India Private Ltd., Ford
India Ltd., General Motors India Pvt. Ltd., Honda Siel Cars India Ltd. Hyundai Motors
India Ltd., Skoda India Private Ltd., Toyota Kirloskar Motor Ltd. The two-wheeler
manufacturing is dominated by companies like TVS, Honda Motorcycle & Scooter
India (Pvt.) Ltd., Hero Honda, Yamaha, Bajaj, etc. The heavy motors like buses,
trucks, defense vehicles, auto rickshaws and other multi-utility vehicles are
manufactured by Tata-Telco, Ashok Leyland, Eicher Motors, Bajaj, Mahindra and
Mahindra, etc. India`s giant automotive manufacturer company TATA MOTORS has
largest share in commercial vehicle in India. It has also positioned itself in the
international market after acquiring Jaguar and Land rover and exporting their key
products in the international market. The future of Indian Automobile market is
bright as it looks forward to manufacturing and implementing new innovations.

Political factors: The liberalization of the automobile industry in 1990s encouraged

foreign investors and Indian companies to enter into joint ventures. India became
the largest and fastest growing car markets in the world in 2005-06 and it was
reported that the passenger car market grew by 25% per year and the passenger
vehicle exports grew by 12.7% annually. India has a well established regulatory
framework under the Ministry of Shipping, Road Transport and Highways in which
SIAM (Society of Indian Automobile Manufacturers) plays a very important role. All
the stake holders are part of the regulation formulation setup. The Indian Auto
Industry is implementing both Safety & Emission regulations in compliance with
International Standards for sustained growth of the auto industry for combating the
environment concerns and become a global export hub.

Economical factors: There is a massive transportation system in India for the public
which helps the economy to the large scale. The new development of road system is
contributing a lot towards the transportation system of the country. Better and
wider roads built with the long lasting material are helping the economy of the
country as less expense will occur. With the better transportation system the
material is moved to different places with a greater ease and in short time, in turn,
helps in increasing the GDP as more products can be made in same time. The per
capita income of India is increasing due to which the buying power of the consumers
has also increased making people buy cars and bikes. The banking system in India
provides people with easier and cheaper finance schemes which help the consumers
to buy vehicles easily.

Social factors: The Automotive Research Association of India has been playing a
crucial role in assuring safe, less polluting and more efficient vehicles. New
measures are being taken to make the automobiles less polluting. Reducing
pollution helps creating a better and healthy environment for the society.

Technical factors: The Indian auto Industry is working with the authorities to
facilitate for introduction of the alternative fuels. The latest technology is being
adopted by the companies and is being launched in India as well. A lot of new safety
measures are now taken into consideration before the car or any other motor
vehicle is launched to ensure its safety and reliability.
The impact of the severe downturn in the automobile industry during the year
2009 was observed in the fall of major players like GM, Chrysler and Ford. On other
the side, 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 is
expected to be from emerging economies such as India, China and Eastern Europe.
Significant growth of auto market in these countries will be attributed to the fast
growing small car segment. The small-car revolution is taking place within the
context of the very different needs and desires of the new consumer in emerging
markets. The low-cost cars are typically their first choice to be driven around the
town, but not for long distance trips.

Company Analysis:

Strengths
Brand name TATA: Tata Motors is the only company in India with a broad based
presence across the industry, in all segments of the commercial vehicles market –
heavy and medium commercial vehicles, light commercial vehicles, pick-ups, mini-
trucks - and key segments - compact, midsize car and utility vehicle segments - of
the passenger vehicles market.
Unique Understanding of customer needs: Going forward, Tata Motors had
anticipated that non-car owning families, at the bottom of the pyramid, will look for
an extremely affordable vehicle. Nano is an excellent option to meet the needs of
low-income group.
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 the 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 fuel efficient smaller cars - not just in the developing world, but everywhere.
Access to distribution channels: When a new product is ready to be launched, a well
developed distribution is must for its success. The TATA motors had an advantage of
well established distribution channel across the world

Weakness
Low power: The low-cost cars are typically their first choice to be driven around the
town, but not for long distance trips.
Not a status symbol: Small cars are still seen as an entry level option as it offers
limited features. The small car segment doesn’t find many takers in the developed
world where people still prefer luxury and safety over anything else.
Delay in manufacturing: Due to political issues, the manufacturing plant was shifted
to Gujarat. The political conflict and opposition from local community caused a
major delay in the establishment of the production facility for the Tata Nano.

Opportunities
Large market for selling: It will be commercialized all over India. It is mostly
targeted to the middle class and lower middle class people.
First car in low range: NANO enjoys the monopoly are there are no competitors in
this segment.
Potential in global market: The success of Nano would lead to decreased demand of
products from developed countries as there is a greater emphasis on fuel efficient
vehicles and traffic congestion globally. Once the companies from developed
countries experience restricted growth in developing countries, the demand for oil-
guzzling cars from developed countries is sure to decline. Nano is expected to cut
sales of bigger car companies in India and other developing markets. Nano possess a
great potential to become the master of roads in the developing countries.

Threats
Company rival: 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.
Concerns over traffic congestion: A larger number of cars will adversely impact the
environment due to emissions.

Analysis of Alternatives:
Branding identify the maker of a product and allows consumer to assign the
responsibility for its performance to a particular manufacturer. The new Tata Nano
focuses on not only one segment of Indian population which has an access to the
other automobiles, but also to a greater percentage of population who can
overstretch a bit from buying a new two-wheeler or a used small car to getting a
brand new vehicle in the form of the “People’s Car”. The branding strategy in Nano’s
case is corporate name combined with individual product name. Ever since it was
conceptualized, anyone and everyone in the automobile industry had commented
that the Tata dream of a People’s Car was just a figment of imagination and making a
car at this low a price without compromising on quality is not possible. This very
fact makes the Nano special. It is a brand that defines the dream, coupled with the
hard work, dedication and determination of a team who believed in and worked for
converting this vision into reality. The introduction of Tata Nano received media
attention due to its targeted price. Tata adapted a strong communication strategy to
get the word out to the public through media, trade shows, auto shows, internet
buzz and pre-launching of the Nano.
The demand of any product is mainly driven by two main factors: the price of the
product and income of the buyer.
Target Markets:
• Two-wheelers people: those people who are working professionals or college
students but cannot afford to buy a three lakh car.
• Second hand car user: those people who cannot afford to buy new car but would
be able to buy new car cheaper than used car.
• Auto rickshaw/Three-wheeler: Most of the auto rickshaw costs almost the same
price as Nano.
• Middle and lower income class: these are the people that are growing and are
also becoming a little richer which is making them afford a car. The buyers in this
segment are generally first time buyers and their main considerations are low cost
and fuel efficiency
The real price of the vehicle is the capital cost plus the running cost (fuel, insurance,
service and maintenance). Lower purchase price and running cost of Tata’s Nano
would appeal to mass markets. The introduction of Tata Nano would elevate the
number of households that could afford a car by 65%. Tata will be creating a whole
new segment and in turn, getting the first mover advantage. It is also assumed that
lesser the fuel consumed by the car, the more number of Nano will be purchased by
the people.
For most of the products, as the income goes up, the demand goes up. As the
income increases, the household moves the ladder up graduating from bicycle to
two or three-wheeler and two-wheelers to motorcars. In addition, if the price were
to decrease, the demands get a further fillip. It has been assumed that the low price
of Nano will galvanize the demand. The strength of income elasticity outweighs the
price elasticity for an expensive product. Vehicles also fall under this category. It is
the growing income that strongly impacts the demand than the lower price. India’s
two-wheeler market was listed second largest globally in 2007 and the demand is
expected to be 18 million units by 2011. Among the two-wheeler segment, the
motorcycles, scooters and mopeds have major share in the market. Three-wheelers
also dominate the market for carrying passenger and cargo loads. The majority of
the two-wheeler and three-wheeler owners does not own a car and belong to the
lower or middle income groups. With fast growing middle class, it has been
projected that there will be increase in demand for lowest end car. The Tata Nano
group is targeting the two-and three-wheeler middle-income groups, college
students and used car buyers.
In the absence of strong competition, Maruti Udyog ltd. has dominated the Indian
automobile market since 1980s. The competition in India’s automobile history had
been heating up in the recent years. As the automobile sector rapidly evolved
through deregulation and open markets, many foreign companies already set up
their presence in India through tie-ups with local manufacturers and some have
done entirely at their own. Since then, there has been an emergence of new
competition of higher value segments of passenger car market. For the four wheeler
segment, Maruti Udyog dominates the automobile industry holding 52.2% share of
the passenger car market, followed by Hyundai with 19.2% and Tata Motors with
16.6%.
For two wheeler segments, it remains quite a local dominant game but some
global players also have presence in the market. Major players in this segment
include Bajaj Auto, Hero Honda, TVS Motors, Yamaha and Kinetic. The two-wheeler
with its low price and lower running cost would continue to be an option for biker
and lower income segment. Nano would position itself as the cheapest car against its
major competitors, Maruti Udyog and Hyunda Motors India Ltd. without
compromising quality, safety and emission standards.
Since the car has to be built within a cost of USD2500 (Rs1 lakh), no conventional
design would work. 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 the environmental groups. This is because of the fear that a larger
number of cars will adversely impact the environment due to emissions. The
company designed the car from scratch to offer customers a low cost small car,
meeting regulatory requirements and achieve performance targets such as fuel
efficiency. Nano has been designed with a family in mind. It would serve as roomy
compartment for a family of four. Nano’s safety and emission standards exceed
current regulatory requirements.
Tata is taking advantage of its well established dealerships and changing the
manufacturing and distribution channels. A distributed manufacturing system
would refer to central control system. The entire manufacturing system would be
connected by networks for communication and monitoring. The manufacturing of
small cars generally happens in labour intensive countries as this helps the
manufacturers in reducing the costs and passing the benefits to the customers.
Developing countries like India and China are thus the hubs of small car
manufacturing. According to Ratan Tata (Chairman of the Tata Group), the car
components could be built at different locations and then shipped as “car kits” to
local manufacturers for assembly. The automaker would oversee the quality and
reliability of the assembly operations, taking full responsibility of product liability.
Using this strategy, Tata expects to meet the consumer demand as the market
grows. Tata is implementing a hub and spoke model for Nano’s distribution. The
unique distribution would increase dealership points as well as add sales and
customer touch points. In terms of manufacturing strategy, the possibility of Nano
final assembly being done at local dealers would be a breakthrough.
The cost structure is basically the cost required for the manufacturing of the
product includes the cost of raw materials and the inputs. Nano has the smallest
exterior footprint with a length of 3.1 meters and width of 1.5 meters but is 21%
more spacious than Maruti 800, the world’s smallest car. Nano offers incredibly
spacious passenger compartment which can comfortably seat four people. To
minimize the cost of production, the alternatives were explored such as reverse
auctions, minimizing the cost of luxuries by designing car components to serve
multiple functions and long term contracts with over 100 suppliers. Tata Nano was
launched aiming the low-income people of India. So, the price has been decided
according to the target groups only. The less number of accessories is another
reason for the price to be set low as compared to other passenger cars in the
market. Tata implemented market-penetration pricing, which is low to set a low
price for a new car in order to attract a large number buyers and a large market
share. This will be done by achieving the high sales volume, resulting in cost
reduction and allowing the company to cut its price even further. Tata is working on
the strategy of reducing costs and waste to improve profits by implementing a new
style of pricing than the traditional way of pricing of automobiles. More cost
reduction means more profit. This means Tata’s will continue to squeeze suppliers.
The low price of Nano will help to keep out competition and maintain its low-price
position.
The economies of scale are the cost advantages that a business obtains due to
expansion. There are factors that cause a producer’s average cost per unit to fall as
scale is increased. Economies of scale may be utilized by any size firm expanding its
scale of operation. The common ones are purchasing (bulk buying of materials
through long-term contracts), financial (obtaining lower-interest charges when
borrowing from banks and having access to a greater range of financial
instruments), and marketing (spreading the cost of advertising over a greater range
of output in media markets). Each of these factors reduces the long run average
costs of production. Tata is counting on the economies of scale along with careful
sourcing of materials to keep prices down.
Nano may impact the sales of the other small passenger cars to some extent.
As there is price difference between Nano and two wheelers, the two wheelers
would continue to be an entry level option. There is a wide scope for Tata Nano
because of the upward migration of the living standards and lower price as
compared to the other options available in the market. A large segment of the
population is emerging from poverty and entering the middle class. Consumption
patterns are changing dramatically. The increases in income mean these newly well-
off people find themselves able to afford economy cars. 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 will increase the demand of the small car and
open up new markets for car manufacturers. Low labour cost in emerging
economies is also attracting hordes of manufacturers to their soil. As oil prices rise
and concerns about the environment grow, the small car will become the king of the
road. This is more evident than in the developing world where increasing prosperity
is bringing millions of first-time buyers into the market for new cars. Tata Nano can
meet the needs for a second car by families apart from the big sedans for commuting
within short distances. 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 maneuverable small car. 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.
Recommendations:
• 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.
• 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.
• 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.
• New product launches on time, within budget, and focused 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.

SWOT

Strengths
• Tata Motors is a market leader in automobile industry in India with a high
market share.
• Tata Motors has a good employee base which gives them high production
efficiency.
• Tata Motors are considered a reputable brand in India which gives them an
advantage over its competitors.
• Tata focuses not only the quality of its products but also on the quality of its
management. They have a program of intensive management development in place
in order to establish its leaders for tomorrow
• Tata Motors understands customer needs and develops products that meet
their needs.
• Tata Motors produce low price car with high fuel efficiency which gives them
a big customer base in the country. Example Tata Nano
• Tata Motors has been aggressively acquiring foreign brands to increase its
global presence.
Weaknesses
• Tata Motors is known for commercial vehicles and low priced cars. However,
it does not have a foothold in the luxury segment in the domestic market.
• Tata Motors shareholders are not getting much from their investments due
to low return on investments on shares.
• Tata Motors are not able to meet safety standards in their vehicles in
comparison to its competitors.
Opportunities
• Tata Motors can take advantage of their low cost vehicle by entering into
third world countries where people have low purchasing power which gives them a
big export opportunity.
• Jaguar and Land Rover provide Tata Motors with an opportunity to establish
itself in the luxury segment.
• Tata Motors can incorporate safety features in their vehicles to gain more
customer satisfaction.
• Joint ventures in other countries allow Tata Motors to easily enter into new
market internationally.

Threats
• There are lots of powerful competitors for the luxury market that are
beginning to enter the Indian market such as: Honda, Toyota, Ford and Mercedes-
Benz.
• Tata Motors currently have a cost advantage over its competitors; however, if
the competitors follow the same strategy, then it may reduce their sales.
• The prices of material such as steel, plastic, rubber is rising, which will cause
an increase in the total production cost of the vehicle.
• Improvement in technology by competitors.
• Tata Motors low safety standards can impact their sales.