40 YEARS AGO... AND NOW

KRISHNA KANT

At the annual shareholders’ meeting of Tata Motors(then Tata Engineering and Locomotive Company,or Telco) in August 2001, Ratan Tata o�ered toresign from the company’s chairmanship if share-holders so wished. Though Tata’s o�er remainedjust that – merely an o�er – quite a few sharehold-ers and analysts criticised the management strat-egy of transforming Telco into a full-�edged pas-senger car maker.

The trigger for the collective angst was the com-pany’s results for 1999-2000, which wereannounced just three months prior to the share-holders’ meeting. Telco had reported its biggestyearly loss of ~500 crore, partly due to the fact thatit had invested nearly ~1,700 crore, which was aquarter of its revenue in the mid-1990s, to developan indigenous passenger car from scratch. But theIndica, which was commercially launched in 1998,proved to be a cash guzzler. It was only after thelaunch of the V2 that the Indica tasted success andbecame India’s second largest selling hatchbackby the middle of 2004. But the success proved to beshort-lived as sales took a hard knock after compe-tition closed in. Volumes began to lag from 2005-06.

The story is almost the same for other Tatamodels. Before the Indica, Telco had launched theTata Sierra in 1991. The model was a cross betweena utility vehicle and a passenger car, but could notretain its appeal for long. Since then, the Tatashave launched over a dozen di�erentmodels of cars and utility vehicles, butsuccess has been elusive despite the initialexcitement.

When the Sumo hit the road in 1994,customers who were used to the vagariesof soft-top utility vehicles, saw it as arefreshing change and lapped it up.Within two years, Telco came close tobecoming the top utility maker, till itsthunder was stolen by Toyota’s Qualis andMahindra’s Bolero. Telco didn't upgrade the Sumoin time, allowing the competition to catch up.

Tata Safari, India’s �rst indigenous sports utility

vehicle, met a similar fate. When �rst launched in1998, it was ahead of its time, but the product was notupgraded for over a decade, turning it into — as ananalyst describes it — an old daddy in its segment.

The biggest setback for Tata Motors was, ofcourse, failure of the Nano. Touted as athe world’s cheapest car and the centrepiece of Tata’s strategy to tap the oppor-tunity at the ‘bottom of the pyramid’,the car failed to excite buyers after theinitial hype. Its positioning and brandnarrative became too downmarket forIndia’s middle class, for whom buying acar is a statement of �nancial and pro-fessional success.

The net result of all this is evident.During the year ended March 2014, Tata Motorssold as many passenger cars in India as it did in2003-04. Many say Tata Motors has perhaps paid

the price for being too ambitious. Just think of it —its portfolio includes the country’s cheapest car(Nano) as well as the expensive sports utility vehi-cle (Aria). Even Maruti Suzuki, which sells nearly10 times more cars than Tata Motors, doesn’t strad-dle so many segments. The story might have beendi�erent if Tata Motors had tried to win one seg-ment at a time just like it built its commercial vehi-cle business.

Financial ups and downsTata Motors is no stranger to �nancial volatility.The company was set up at the dawn of India’sindependence to manufacture locomotives (fortrains) and construction equipment. Within afew years, it diversi�ed into commercial vehiclesand became the market leader by the early 1970swith two out of every three trucks on Indian roadscarrying a Tata badge. While the success made

Telco an automotive behemoth and the secondmost important company in Bombay House afterTata Steel (then Tisco), it was faced with a pecu-liar problem.

Commercial vehicles are a painfully cyclicalbusiness, and every boom is followed by a deep andpainful downturn that could set the company andits shareholders back by years. Being the marketleader with a large installed capacity, a downturnwas more painful to Telco’s shareholders. This isclear from a cursory look at the company’s �nan-cial ratios over the years.

The company o�ered stable and predictablereturns on equity (RoE) to shareholders till themid-1970s.

There was a spike in pro�tability in the next fewyears, but the good run was ruptured by the eco-nomic slowdown in the late 1980s. In the yearending March 1987, Telco’s RoE declined to 1.4 per

cent, a ratio previously seen in the early 1950swhen the company was still in its infancy. (see chart) .

The cyclicality worsened as the Indian econo-my was progressively opened up to competition,including foreign capital, from the early 1980s.The die was cast when Ratan Tata took over aschairman in 1988: If Telco wanted to retain its�nancial heft and its numero uno position in theautomotive sector, it had to de-risk itself from thecommercial vehicle cycle and diversify into themore predictable and fast growing passenger carbusiness.

“Since we already had 60 per cent share of thecommercial vehicle business, how much farthercan we go in that segment? We needed to haveanother segment. Having been in the televisionbusiness (Nelco) and seeing that grow, I was quiteconvinced that the car business was going to be abig business, provided we were at the lower end,”said Tata in a media interview about his strategy topush the company towards passenger cars.

In the interview, Tata also revealed that SumantMoolgaonkar, the legendary former chairman o fTelco, and J R D Tata, in fact, wanted to get intopassenger cars much earlier.

It had signed up with Honda in 1986 to manu-facture the Accord in India, but the governmentrefused permission, forcing it to invest in productdevelopment in-house.

Thus began Telco’s struggle to �nd a place in thedomestic passenger car market without losingfocus on its bread-and-butter commercial vehiclebusiness.

The journey has been rough indeed. But for the2007 acquisition and turnaround of Jaguar LandRover, Tata Motors would have been in deep trou-ble now. JLR, which has emerged as the fastestgrowing and one of the most pro�table luxury carmakers in the world, now accounts for nearly 90per cent of Tata Motors’ consolidated revenuesand all of its pro�ts.

Meanwhile, the struggle in the domestic marketcontinues. Will Zest, the latest Tata Motors show-piece, reverse the trend? One has to wait and see.

Tata Motors: The car dream that turned sourA JOURNEY ON FOUR WHEELS

| 1988: Launched Tata Mobile, India’s�rst pick-up truck

| 1991: Introduced Tata Sierra, a crossbetween an SUV and pick-up

| 1992: Introduced Tata Estate | 1994: Tata Sumo hit showrooms,

company’s �rst utility vehicle builtfrom scratch and powered by enginefrom its LCV range

| 1998: Indigenously developedpassenger car Tata Indica showcasedat Auto Expo

| 1998: Tata Safari, India’s �rst sportsutility vehicle hits showrooms

| 2001: Launched second-generationIndica: Indica V2

| 2002: Launched its �rst sedan TataIndigo built on Indica platform

| 2005: Tata Safari upgraded with new common rail engine

| 2007: Tata Motors and FIAT establisha joint venture in India

| 2008: Unveiled Tata Nano at Auto Expo

| 2008: Acquired Jagaur land Roverfrom Ford Motor Co

| 2008: Launched new generationTata Indica Vista

| 2009: Launchednew generation ofTata Indigo Manza

| 2010: Launched of Tata Aria, India’s�rst crossover

| 2012: Launched next generationTata Safari Storme

| 2014: Unveiled Tata Zest and Bolt atAuto Expo

01-10-2014, PAGE 2.

SOURCE: http://www.business-standard.com/article/companies/40-years-ago-and-now-tata-motors-the-car-dream-that-turned-sour-114100100027_1.html