The year 2008 was considered a milestone in Tata Motors history. In early 2008, the company had unveiled a plan that was supposed to further the company’s fortunes; little did they know that the plan was the beginning of their most significant financial problems. The company had unveiled the cheapest car in the world that was going at a price of 100, 000 rupees. Tata Motors followed this with the acquisition of two other brands, the Jaguar and Land rover brands. As already mentioned, this strategy did not transform the Tata Company, as it was initially thought. This paper, hence, is an analysis of the rapid reversals of the Tata Motors’ fortunes that took place in between early 2008 and March 2009. The paper will show how the company’s fortune was affected the frozen global credit lines that affected India’s economy and that of the Indian automakers largely.
Tata Motors was started in the year 1945 under the name TELCO, Tata Engineering and Locomotive Company Limited. The company’s main aim was to manufacture products in engineering, as well as, locomotives. The company made its first commercial vehicles in 1954 when it entered into a contract with Daimler Benz AG to manufacture commercial vehicles for the company. By 1961, the company had begun manufacturing its own commercial vehicles, which were first sold to Sri Lanka.The Company set up a research center in Pune in 1977. It was in 1983 when the company manufactured its first heavy commercial vehicle. In 1985, the company collaborated with Hitachi to manufacture the first hydraulic excavator; the manufacture of the first indigenously produced automobile, the Tata 407, commenced in 1986. In the following years, the company introduced its indigenously manufactured passenger cars.In 2002, the Tata Indigo and Indica were unveiled.
The company also started selling the MG Rover; a UK brand for the manufacturing company in the UK.In 2003, the company unveiled a new name Tata Motors. In 2004, the company bought Daewoo Commercial Vehicles Company. The company continued to sign other deals with other companies like Fiat India automobiles, Fiat Group 8, and Fiat Auto. The company marketed its products in numerous countries like Kenya, Malaysia, Ukraine, Senegal, and Russia. The company attained an excellent reputation, as it began to work with prestige car manufacturers like Porsche, Chrysler and Volkswagen. The Tata team was also highly skilled and talented. The company’s goal was to establish itself as a major automobile manufacturer in India and in the international market through acquisitions and mergers. It was in this light that the company acquired the JLR from Ford.
The company’s rationale for acquiring these new brands was;
- To enable the company to penetrate the luxury car and premium all terrain market,
- To improve the company’s strength in the global market,
- To strengthen the company’s product and technological development and innovation abilities to address issues brought about by changing trends in the market,
- To share the best quality assurance and manufacturing processes and systems, to enhance the company’s managerial and human capital talent,
- And to increase the company’s operational synergies
The acquisition of the British brands from the Ford Company by the Tata Motors did not transform the profits of the company as the chairman had expected. It was thought that this overturn of events was triggered by the global financial crisis that caused the demand of automobiles to decrease. The decreased demand impacted Tata Motors, business wise, and especially when it came to the success of the newly acquired brands. The picture that the financial position of the company presented at the end of the financial year also gave little hope. It was during this financial year that the company had reported its first loss in more than 8 years. As compared to the last year’s profit of about Rs. 741. 51 billion, the company’s loss in 2008 f 25. 05 billion rupees was tremendous.
The situation continued into the next financial year’s first quarter. In June 2009, the company reported that had acquired a net loss of 3. 29 billion rupees on the 169. 54 billion rupees of revenue it had acquired in the first quarter of the 2009 financial year. The company thought that this loss had been attributed by the fallen sales of the newly acquired brands, whose volume in sales had decreased by 52 percent when compared to those acquired in the previous year. The loss that the JLR brands registered alone was put at 8.73 billion rupees, with the main markets for the brands decreasing significantly.
While the company suffered from these unexpected losses, it also reeled under the huge burden of the large debt it had acquired during the acquisition of the JLR. The total loan was about 3 billion US dollars, and the company had only managed to pay 2 thirds of the loan. The plans of the company to secure funds to refinance this loan had been ruined by the financial crisis. This was because the company’s share price had significantly dropped causing the failure of the rights issues that was supposed to secure enough funds for refinancing the loans. Eventually, the promoters had to subscribe since other shareholders shied away from the rights issues. Later, the company had to raise the required finances through schemes on fixed deposit that were issued to the public and offered to the private placement of NCDs, non- convertible debentures, at an interest rate that was high.
The company also faced serious setbacks with the Nano. The company experienced challenges in launching the new car when the farmers around the manufacturing plant of the Nano brought forth complications which made the company move its plant to another area. The agitation was supported by some political forces, and it was difficult to ignore the agitation. The company, thus, experienced delays in the launch of the new car, as it would take some longer time, about a year, to launch the car from the new location. Further some industry experts expressed doubts on the success and profitability of the launch. They were concerned that the company, with the current issues in finance, was not in a position to manufacture and sell such large volumes.
As it was, the company’s chairman had a tough task of making Tata Motors profitable once more. The company had three main challenges to address; they had to turn the performance of the new brands around, the company also had to refinance the remaining loan, and it had to make the Nano project successful and profitable.
What did the problems the company was facing mean? It was thought that the company had made a bad move in acquiring two new brands at a time when the financial crisis had affected much of the spending capabilities of customers all over the world. Credit availability was, therefore, significantly affected,and the price of credit also increased. As a result, the demand for automobiles was affected, and it plummeted considerably across the world. This, in turn, largely affected the finances and operations of the company, and specifically the performances of the newly acquired brands.
The decreased sale volumes of the JLR also caused the company considerable amount of problems. By September of 2008, the total sales of the new brands dropped by about 11.4 percent as compared to the sales volumes of the previous year. The land rover was shown to have fallen sales of not less than 19.1 percent. The sales volume of Jaguar, however, increased by 17.5 percent. The company’s anticipation that the new brands would generate enough capital for the company to finance internal working capital was not realized. The company had to acquire funds from external sources in forms of loans. The company also had to cut workers. Others were given compulsory leave with a percentage of their salaries. The company’s troubles with finance did not make the matters any easier. The company had raised a total of 3 billion dollars in loan during the acquisition of the JLR. The company was struggling to make payments of the loan as it had launcheda rights issue that failed to pick. In the end, the promoters of the issues had to bid on it as the shareholders did not respondwell to the offer.
By mid 2009, the financial position of the company had deteriorated so much that the company had cut and dropped numerous workers to make ends meet. All in all, the chairman expressed great optimismthat the company would recover in time.
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