June 2005 | Shifra Menezes

Foreign factor

Resting on the laurels of being India's top automotive manufacturer is not an option for Tata Motors, which is looking to increase its footprint in international markets

Recent years have seen a number of foreign automobile enterprises coming to India, attracted by a growing economy and an expanding market. The reverse — Indian auto companies seeking new frontiers abroad — is a trickle, but Tata Motors is working hard to change the equation.

Tata Motors has come a long way since the 1950s and 1960s, when it needed technical assistance from Daimler Benz and had just commercial vehicles to power sales. Today, the company is the country's largest automobile manufacturer and has a passenger vehicle business that has broken new ground in exemplary fashion. But domestic patronage, hefty as it may be, is ultimately limiting, particularly with increasing competition. Which is why the exploration of foreign markets is an imperative for ambitious automobile companies such as Tata Motors.

Besides competition, the automotive business, particularly the commercial vehicle market, is characterised by its considerably strong link to national economies. Companies looking to do more than just stay afloat cannot afford to keep their business connected solely to the fortunes of one country.

Another reason that Tata Motors is looking outwards is cost advantage. Until now Indian companies, manufacturers in particular, have been protected by high duty structures and a generally depreciating rupee. But sometime in the near future, if import restrictions are relaxed or the rupee begins to gain ground, India may not continue to have the low-cost manufacturing advantage it has enjoyed thus far. In that scenario, a presence in countries that offer greater cost advantages for manufacturing will pay off.

A third argument for overseas expansion is the fact that the automotive business relies so much on economies of scale, which translate into price benefits. Tagging along is the competitiveness factor, where quality and efficiency are directly improved (or should be) as a result of the high level of competition in foreign markets.

Discussing the company's plans, Praveen Kadle, Tata Motors' executive director of finance and corporate affairs, is quick to make the difference between international businesses and export activity. "A large number of Indian companies began their international operations with exports, but exports constitute only a segment of international business, and using the terms interchangeably means taking a very narrow view of things," he says.

Tata Motors is looking to widen its foreign campaign to more than just exports. In 2002, recognising the need to integrate its international strategy with its domestic one, the company split its previously independent international business arm into commercial and passenger segments and, as part of its overall business strategy, merged them with its commercial and passenger vehicle business units.

As part of its plans, the company has plotted four routes to international expansion. The first is the traditional method of export, at which the company has been quite successful, notching up export revenue of Rs969 crore in the first nine months of FY 2004-05, recording a growth of 41 per cent from sales in Europe, Africa, the Middle East and Asia.

The second is setting up assembly operations abroad. This does not necessarily involve establishing a full-scale manufacturing unit, but an operation where kits are sent in semi knocked down or completely knocked down assemblies, or as a fully assembled vehicles and sold in that market. Tata Motors worked this into its strategy when it set up its first assembly operation in Malaysia in 1974. Since then the company has similarly expanded into Malaysia, Bangladesh, Senegal, South Africa and Ukraine. All these assembly operations are set up by the distributors of Tata Motors for these countries.

Ratan Tata (centre) at the launch of the Novus

The third scenario would be actual acquisition, the route Tata Motors took with Daewoo South Korea. Here, Tata Motors bought the full-fledged heavy vehicle-manufacturing unit and, in the process, gained not just a manufacturing asset base, but access to the market through an already strong brand identity. The company was also presented a wide choice in terms of the markets in which it could use the Daewoo brand and, more importantly, access to R&D capability in the area of commercial vehicles.

In the short period of six years since the launch of passenger cars, Tata Motors has already achieved the No.2 position in the domestic car market in India. The company has successfully launched Indica in South Africa and Turkey and is marketing it under its own brand name.

An independent international effort will call for the company to dig deep into its pockets. "The automobile business is a resource-intensive one," explains Mr Kadle. "There needs to be consistent profitability and a proven track record. Businesses have to contribute, on an ongoing basis, a significant amount of cash for their survival and future growth. You need this winning combination: a track record of profitability, cost competitiveness, global sourcing for components/aggregates, effective capital-base management, and the ability to raise resources from international capital markets at the right time."

Expanding on the company's globalisation plans, Mr Kadle explains, "Tata Motors does not plan to be all over the world. Supply will follow demand and the company will need to address the markets for different vehicles as stand-alone projects. For example, the compact-sized Indica will be marketed in countries where the company perceives a substantial market for it, like it did in Europe. The same goes for our commercial vehicles business."

He adds that China is a distinct possibility for expansion, an opinion that is justified by just a glance at the dragon's consumption patterns. Right from commodities to automobiles, annual demands are phenomenal. "China is a big market and, I think, if you want to be a successful auto company then you may have to have some presence there. But, at the same time, one must keep in mind that no major auto company, except maybe Volkswagen, has made serious money in China. One has to be very careful in one's approach to the Chinese market."

Tata Motors' immediate goal is to achieve a 20 per cent contribution to its overall revenue from its international businesses by 2006. This seems to be realistic enough following the Daewoo acquisition, and its own products getting into more than 70 countries. Looking at successful global auto majors, for whom anywhere from 30 to 50 per cent of their business accrues from overseas sales, Tata Motors is still a long way off, but Mr Kadle believes that with its aggressive growth strategy a contribution of around 35 per cent may be achievable in five-six years. The trickle factor will by then begin to gather force.