IIPM makes business education truly global: Tata Nano: The turnaround vehicle?

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Lakhs of lower-middle income households in the country will now be able to fulfill one of their long-standing wishes, that of owning a car

Tata Motors earned international acclaim in 2003 with the announcement that it will introduce a ‘People’s Car’ to be priced at about Rs.1 lakh ($2,000). Though this idea was scoffed at initially stating the impracticability of the same, after years of efforts and dedication by the company, Nano was successfully unveiled in January 2008, silencing the critics. The company then went on to create more headlines in mid-2008 when it acquired the premium auto brand, Jaguar-Land Rover (JLR).

However, since then, fortunes have taken a virtual U-turn for Tata Motors as the global sub-prime crisis multiplied manifold, leading to the crumbling of global financial systems, sending global economies into a downward tailspin and pushing them into recession. This put considerable strain on the company’s financials, which now faced a double whammy owing to the near collapse of the global demand for JLR products and the considerable evaporation of domestic automobile demand owing to the economic slowdown.

Now lots of hope is being pinned on Nano and its role in resurrecting the dwindled fortunes of one of the largest domestic automobile players in India. So, can the small car achieve the big feat of reviving Tata Motors’ growth?

Probably, this possibility is being raised considering the history that Tata Indica had an important role to play in contributing to the fortunes of Tata Motors. However, it seems highly improbable that the Nano will be able to achieve this feat. Consider the following:

• JLR is expected to contribute over 50% of Tata Motor’s net revenues over the next couple of years, with the balance coming from domestic commercial vehicle and passenger vehicle sales.
• The expected sales volume of the Nano and its price tag suggests that at best, it would contribute 2-2.5% to the consolidated topline of Tata Motors by financial year 2012.
• The contribution in terms of net profit from Nano is expected to be negligible considering the expected ex-factory cost of the car and the margins earned on it.
• The problems Tata Motors is currently facing largely pertain to the debt on its books and the slackened demand for JLR products globally.

Thus, we believe that for the fortunes of the company to turnaround partially, the US and the European economies have to gain strength as the fate of JLR hinges on the consumer spending in these economies. Secondly, the domestic demand for CVs must also revive to support Tata Motors’ growth. Debt servicing and debt repayment over the next 2-3 years will also have an important role to play in improving the fundamentals of the company.

To conclude, while the Nano has managed to garner headlines for Tata Motors, we do not believe it will be able to repeat history any time soon for financial reasons. However, the company deserves huge credit for ensuring that the dream, and undeniably the most ambitious project of Mr. Ratan Tata, comes true. Also, with this achievement, Tata Motors has ensured that lakhs of lower-middle income households in the country will now be able to fulfill one of their long-standing wishes, that of owning a car.

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Source : IIPM Editorial, 2009

An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).

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