Tata Motors’ tie-up with Rover of the UK marks a notable turn not only for the Tata company but also for Indian manufacturing’s global aspirations in general. The joint venture’s success is critical. For one, it would determine whether the company is capable of emerging as a competitive global player. No less important, the road traveled by Tata Motors (TM) could become a strategic benchmark for other Indian manufacturing companies to follow. 

The global opportunity that beckons TM is worth its foray. World trade in passenger cars, multi-utility vehicles and commercial vehicles is close to $400 billion today. True, cars and vehicles manufactured in India are already being exported, but mostly by MNCs who have set up manufacturing bases in India. In contrast, this is the first major export advance by an Indian manufacturer. Since the company has the capability to enter all three market segments, even one per cent market share would deliver revenues of $4 billion — nearly twice its present turnover. 

Success stories of auto companies becoming global players are largely confined to those which have grown in developed markets like the US, the EU or Japan. Perhaps, Hyundai is the only company from an emerging market in that league. Others like Daewoo have fallen by the wayside, and should it succeed, Tata Motors would force its way into an exclusive club of a handful of companies. But what are the chances of success? 

When compared with the experience of manufacturing companies, particularly from emerging markets, TM’s strategy has a reasonably good chance of delivering. First, like other global leaders, it has established itself as a successful and leading player in the domestic market. Second, by turning itself around after suffering a whopping loss of over Rs500 crore, it has demonstrated the ability to weather a shock. With its bottom line now looking increasingly good, it would be in a position to bear yet another shock, should market conditions turn adverse. The ability to suffer reverses is an important attribute of companies that nurture global aspirations. 

What’s more, the Indica that Rover would sell under its own brand would bring benefits that far outweigh the losses that may accrue in case of failure. The 20,000 cars that Rover has promised to sell per annum in the UK and in Europe would deliver huge operating leverage to TM by ensuring better capacity utilisation, and add substantially to the company’s margins; some say margins could go up by two per cent per annum. This is an impressive number considering that the world auto industry survives on an average margin of three per cent. 

Some may argue that by surrendering its brand name to Rover, TM is behaving more like an OEM supplier and sub-contractor. This is true, but there are sound reasons why at its present stage of growth and capability, the company must do this. Indeed, its management needs to be lauded for its sagacity of sticking to an unavoidable learning curve rather than take an ambitious leap into nowhere. 

Doubtless, TM has demonstrated its capability to compete against global players in the domestic market. But this does not mean that Indica, as sold in India, is a world-class product. Indica has succeeded more because of the price advantage it offers, rather than its quality in relative terms. The defect rate on Indicas is much higher than what’s acceptable in advanced markets, where consumers are less price sensitive, and demand superior quality standards. In addition, TM’s customer service standards remain behind those practised by global majors. This comes from first-hand experience. I own a Honda City and an Indica and the gap between the service offered by their respective dealers is not only wide, but appalling at times. 

The tie-up with Rover would provide TM the technology for making improvements in production technologies and processes needed for quality control and tight monitoring of defects per vehicle, better safety standards, etc. In sum, the tie-up would enable the company to develop a world-class car that can then be launched under the Tata Motors brand in demanding markets like the US. It would also expose the company to customer service standards needed for advanced markets. Should the company successfully move up the learning curve, and also sustain its unique selling proposition as a low-cost producer, it could emerge as a leader in the global auto market over the next decade.