Post on 21-Apr-2015
Introduction
Tata Motors is the largest multi-holding automobile company in India and it is the fourth
largest truck producer in the world. In addition, Tata Motors is also the second largest bus
producer in the world, with the revenues of US$ 8.8 billion in the financial year 2008.
Since its establishment in 1945, Tata Motors has grown significantly in the past 60years
with the strategies of joint venture, acquisition and launched new products in different
market segments (i.e. passenger cars, commercial vehicles and utility vehicles). A
significant breakthrough for Tata was the development and commercialization of the
truly Indian cars and they are Tata Indica (1998) and Tata Indigo (2002). Tata Motors has
experienced many joint ventures with Daimler Benz, Cummis Engine Co. Inc., and Fiat
and successfully acquired Daewoo Commercial Vehicle Co. Ltd. In the year 2008, there
were two most significant events which have had a momentous impact on the scale of the
Company’s operations and its global image. The launching of Tata Nano, the world
cheapest car and the acquisition of Jaguar and Land Rover, the two iconic British brand
have made Tata Motors well known to the people in the world.
Tata Motors has proven excellence over the years through continuous strong financial
results, market expansion, acquisition, joint ventures and improvement and introduction
of new products, it seems to have a promising future. But it failed the expectation as the
company was in trouble right after the acquisition of Jaguar and Land Rover (JLR) in
June 2008 due to the arrival of global financial crisis. The bridge loan of US$ 3 billion
which used to fund the acquisition of JLR was due on June 2009 and yet at the end of the
year 2008, Tata was only able to repay the US$ 1billion. The declining revenues and a
tight credit conditions was hurting the company’s cash flow.
The questions arise is that whether Tata Motors able to repay the bridge loan? Will it be
able to build up investors’ confidence and increase sales in the future? Could Tata Motors
survive or going under bankruptcy? And we would analyze and discuss these further in
the report.
Before we look into the reasons behind Tata Motors acquired JLR, let us take a look on
what makes Ford Motors to make the decision to sell JLR to Tata Motors.
Reasons behind Ford Motor’s decision to sell JLR
In 2006, reports said that losses at Jaguar stood at USD 715 million. Jaguar was not
performing well as it was unable to provide any profit for Ford due to high manufacturing
costs in United Kingdom. The wellbeing of Land Rover's profit, on the other hand, was
boost up by the record sale of 226,000 vehicles, an 18% year over year growth in 2007.
"Bringing down production costs and turning around the company successfully will be
the challenge,” analysts said. It was a test that Ford failed. Ford is combining both the
brands since the products and manufacturing of vehicles for Land Rover and Jaguar is so
intertwined.
The table below shows the number of sales of JLR after acquired by Ford:
Numbers 2005 2006 2007
Jaguar 86,651 72,680 57,578
Western Europe 46,789 41,367 33,024 57%
America 32,131 22,136 16,836 29%
Rest of Word 7,731 9,177 7,718 13%
Land Rover 170,156 174,940 202,609
Western Europe 97,303 95,399 109,785 54%
America 51,634 53,638 57,092 28%
Rest of world 21,219 25,903 35,732 18%
Total 256,807 247,620 260,187
Western Europe 144,092 136,766 142,809 55%
America 83,765 75,774 73,928 28%
Rest of word 28,950 35,080 43,450 17%
From the table, we may see that the sales of Jaguar are decreasing dramatically from 2005 until 2007. After intertwined Jaguar and Land Rover, sales from year to year fluctuated without certainty of growth. This is one of the reasons that lead Ford’s decision to sell JLR to Tata Motor.
The table below shows the cost of production for JLR:
From the table, we may observe that Ford failed to reduce production costs as major proportion of cost is material cost and they unable to bought cheaper materials from suppliers. This however is very different if Tata Motor takes the ownership because they are utilizing country’s vast natural resources.
The rationale to acquire JLR
After the acquisition of the British Jaguar Land Rover (JLR) business, which also
includes the Daimler, Lanchester and Rover brands, Tata Motors had obtained numerous
benefits and advantages. Below are the reasons behind Tata Motors’s decision to acquire
JLR:
1. Long term strategic commitment to automotive sector which Tata Motors want to
become a major player in the international automobile market.
2. Opportunity to participate in two fast growing auto segments to fulfill part of
Tata Group’s ongoing strategy of internationalization.
3. Increased business diversity across markets and products.
4. Land rover provides a natural fit for Tata Motors’s Sport Utility Vehicle (SUV)
segment which attracted Tata Motor.
5. Jaguar offers a range of “performance/luxury” vehicles to broaden the brand
portfolio internationally.
6. Benefits from component sourcing, design services and low cost engineering by
obtaining intellectual property rights related to the technologies.
7. Improved corporation’s image and increased its public reputation.
Subsequent to the acquisition of JLR, Tata Motors benefited:
100% stake in Jaguar &
land Rover Business
Tata Motors has acquired the business & initially they will be
operated independently of the partner.
Three plants in UK Tata Motors will directly own these two well invested plants by
Ford.
Two advanced design &
engineering center
4000-5000 engineers engaged in testing, prototype design & power
train engineering, development & integration.
Twenty six National
sales company
Both existing national sales companies of JLR and also those that are
carved out of current Ford operation would be owned by Tata
Motors.
Intellectual property
rights
These covers all key technologies to be transferred to JLR &
perpetual royalty free license on technologies shared with Ford.
Capital Allowance Capital allowance with a minimum guaranteed amount of US $1.1
billion to be carried forward for future tax savings.
Support from Ford Motor
Credit
Ford Motor Credit will continue to support the sales of JLR for the
next 12 months
Pension Contributed by
Ford
Ford will contribute US$ 600 million of the Pension Fund to the
workers in United Kingdom
After analyzed the case study, we believe that the main reason influence Tata Motor’s
decision to acquire JLR is to go global by acquiring famous international brand to
increase its global image. By acquiring JLR, Tata Motors able to obtain intellectual
property rights related to the technologies from JLR at the meantime improve
corporation’s image and increase its public reputation. It is not wrong to possess such
ambitious corporate mission and vision with aggressive strategies and strong support
from the high working capital. However, there are always some questions being asked
which form a doubt feeling among public. The questions are sound like -- Have Tata
Motors make enough pre-acquisition jobs such as risk measurement and macroeconomic
study before acquisition of the British Jaguar Land Rover (JLR) business on a cash free
and debt free basis? Are there any problems company could face in financing acquisition?
Would Tata Motors face problems after the acquisition of JLR? We would discuss these
in the further sections.
Problems a company could face in financing acquisitions
Complexity in raising fund
Normally, before the financing acquisition take place, company would have problem in
raising fund. The most common finance method is directly applying loan from the
commercial banks or investment banks. However, banks would have to go through some
of the details and documentations of the company before the loan is approved. Basically,
banks would have to analyze company’s performance, equity, current ratio, liquidity ratio
in order to determine the ability of the company to pay back the loan. Company which is
not doing well or having higher liquidity ratio probably may face more challenges if
raising fund from applying loan from banks. Therefore, company may need to have an
extremely well strategic plan in order to convince the bankers to approve the loan for
them. On the other hand, company itself has to go through some process too before the
finance acquisition actually take place. In most of the case, company may have to analyze
the fees and costs of the finance, make comparison between different finance methods, in
order to find out which finance method is the best for the finance acquisition activities.
These activities are complex and time consuming since it has to go through a lot of
process and do a lot of analysis. Indeed, company will face a great challenge if they wish
to do the finance acquisition.
Incur higher cost
Furthermore, bidder should understand and realize that the interest rate will be penalized
toward the maturity of the debt taken. The compounding of interest rate could increase
the financing acquisition’s expenses incurred by the acquirer relatively. Fundamentally,
the longer the maturity of the debt, the higher the interest expenses will be incurred and
vice versa. Therefore, the interest rate on debt in financing the acquisition became a
burden for the bidder indirectly and that is not a simple decision to be made on whether
financing the acquisition is the right method to achieve.
Uncertainty
In the whole process of M&A, it involves many uncertain factors which should be
concerned by the bidders. Normally, it comes from macro environments and also micro
environments. Marco environments include the changes of national economy policy,
periodic fluctuation in economy, fluctuation of interest rate and inflation rate as well as
the exchange rate. Meanwhile, the micro environments involve the changes of
management condition, fund raising and condition, price of purchasing, technology,
management in culture and harmonization after acquisition.
All these changes could differentiate company’s value before the acquisition and after the
acquisition toward the goal planned. Uncertain factors are objectively created and rise up
the cost of the company in order to implement the changes. Therefore, this high cost of
implementation could lead the possible loss affected by the volatility of the outside and
inside factors, which restrict the decision makers’ to make their judgments.
Fundamentally, bidders should consider and analyze what is the current change toward
the environment in current situation and the changes in future time as well before making
the decision to take control over another party. The basic changes that could distort the
decision making in financing acquisition are the interest rate. Therefore, bidders should
aware and make a precise judgment toward their decision in acquisition activities
Increase of default risk
Default risk means the possibility of a company unable to pay back its debt. Financing in
term of borrowing will definitely increase company’s liabilities, which in turn lead to
higher default risk. Let make an assumption that company able to get loan for the finance
acquisition. After that, the problem that may concern by the company is that the
possibility of unable to pay back the loan if the stock price didn’t increased and acquired
company does not provide return as expected. Normally, this is even worse if economic
crisis happen right after the acquisition. For instance, global financial crisis hit the world
right after Tata Motors acquired the Jaguar Land Rover, which lead to Tata Motors faced
its first losses in 8 years. Indeed, this would be a problem to the company which acquires
other company through financing. High default risk will decrease the credit rating of the
company by the bank and may force it toward bankruptcy subsequently.
Problems faced by Tata Motors and its probable solutions Problem 1: Lack of access to credit to repay the bridge loan of US$3 Billion
Tata Motors was facing problem in cash liquidity and have negative working capital after
the acquisition of JLR. Besides, the debt ratio had increased over the five years and they
have negative interest coverage which these shows that the company was having problem
in paying the bridge loan.
Subprime mortgage crisis has caused the demise of Lehman brothers which later lead to
the collapse of the global financial sector and further deepened the global financial crisis.
Consequently, the global line of credit is frozen which has cut the availability of financing
for companies throughout the global economic crisis.
Tata Motors was finding it difficult to access credit and raise fund from the stock market
due to the tight liquidity conditions, a gloomy and depressed stock market and lack of
investors’ confidence. Besides, lacking of working capital has caught them into trouble to
repay the bridge loan of US$ 3 billion which used to finance the acquisition of Jaguar and
Land Rover (JLR). The bridge loan was due on June 2009 and yet at the end of the year
2008, the company was able to repay only US $ 1 billion.
Solutions 1
i) Merge with Mahindra & Mahindra
The probable way to be cash-rich for Tata Motors might be merged with the other
company in the automobile industry. By merging with other cash-rich company, Tata
maybe can access to the working capital and get another piece of income from the
merged company to repay the bridge loan. To remain as the Indian owned multinational
company, we would suggest Tata Motors to merge with Mahindra & Mahindra (M&M)
as the company is one of the leading tractor brands in the world and it is also the largest
manufacturer of tractors in India (Wikipedia, 2010). During this global economic crisis,
the Asia countries were not hurt badly, so it is a possible move to merge with M&M, as
the merger requires no cash, and would have opportunity to gather fund through M&M.
However, we would disagree that this is the best solution as merger will make Tata hard
to make decisions for the future planning due to the conflict of objectives between the
two companies and finally caused the disruption in running the business.
ii) Divestment
To raise capital to repay the bridge loan, there is another possible move which is
divestment and this could mean that the company could sell part of its subsidiary or
assets. Many would think that forgo a profitability subsidiary or assets will cause the
company lose the future benefits from that subsidiary. Hence, this should be done with
proper investment analysis to identify which one to let go. If possible, sell the subsidiary
to the Tata group as an intra-group transaction, so it would benefit only the group
member and this move will give chance to Tata Motors to buy it back in the future when
there is a right timing.
ii) Combination of raising funds from public and refinance
Raising funds from public could be a good idea as the debt market is frozen and Tata
Motors actually had taken this step to raise fund and repay the bridge loan. Tata Motors
offered the 11 percent annual interest on three-year bond to raise money from the public
whereas government bond with same maturity offers a 6.97 percent yield. (Anand, 2008)
Besides, Tata Motors could think of refinancing to cover the bridge loan which is comes
to the due date maybe by using the long term loan to cover the short term loan. Under the
tight credit conditions, Tata Motors may accept the loan with a slightly higher interest
rate in order to get the money from the banks. Offer a higher interest means it will
increase company debts, but we believe that Tata Motors is able to survive under the
worldwide recession as they have good strategic planning and strong financial results
over the years since their establishment. The rationale behind these is to extend the debt
repayment period by settling the short term debt first and during the extension period, the
company is able to earn money from the launched of Tata Nano, the cheapest car in the
world to fight with the global economy crisis. As the time gone, the crisis will then ended
and the demand for the cars will increase and here comes the cash to settle the long term
debt.
Problem 2: Global financial crisis has severely impacted the global automobile
industry especially the luxury cars segment
The automobile sector in India was severely impacted by the global financial crisis in the
Indian and global business environment. GDP growth slowed down substantially from
9 % in year 2008 to 6.7% in year 2009. Followed by high inflation and high material cost
which lead to higher vehicle prices and fuel prices, unavailability of finance or higher
cost of finance as well as gloomy economic conditions had slumped the demand badly.
(Annual Report 2009) These factors have tremendously pressured both Tata Motors’
commercial and passenger vehicle industry which lead to sales declined. Jaguar and Land
Rover faced severe demand contraction due to the negative wealth effect. As the fuel
price and interest rate increase plus the continuing credit squeeze, consumers would buy
low cost and low fuel consumption car rather than luxury and high fuel consumption car
like JLR. So, the problem occurs as the JLR could not generate working capital to Tata
Motors and the recessionary trends deepened the domestic vehicle sales. The industry
performance in the domestic market during FY08-09 and the Company’s share is given
below:
Source: Society of Indian Automobile Manufacturers report and Company Analysis * including Magic and Winger sales # including Fiat branded cars
The Company’s exports also declined by 38.6% during the year 2009, due to the
meltdown in major international markets and the consequent swings in foreign exchange
rates.
The graph below shows the dropped of sales which affected the net profit margin:
Solutions 2
In order to survive in this sluggish economy condition, Tata Motors only has few options
which are laid off workers, cut productions, cut cost and boost sales with cheaper cars.
i) Lay off workers and cut productions
In fact, Tata Motors laid off 850 employees at JLR and stop production for few days to
stop pilling up the inventories in order to cut cost as JLR was hardly to generate revenue
at this point of time. Here the debatable ethical issues raised as the workers were jobless
because of the company’s action to survive.
ii) Launch low budget cars in the developing countries
There is a need for Tata to launch the low budget cars in developing countries to boost up
sales and generate working capital. The Asia countries have less impacted by the
recession, so it could be the opportunity for Tata to boost sales. This effort should be led
with innovative models like Nano (the world cheapest car).
iii) Focus on new product development and continue to introduce new products
in the marketplace
While the financial stimulus announced by the Government, particularly for
commercial vehicles, has had a positive impact. Hence, Tata should focus on new
product development in the commercial vehicles in order to grab the first bite of
revenue when the demand for commercial vehicles starting to increase. Besides,
introducing new products into the market would grab the attention of consumers and
they would buy the cars if they are affordable.
Problem 3: Increasing materials and fuel prices have slow the demand of vehicles
Due to the impact of tighter money supply with higher interest rate, there will be
meteoric rise in fuel and materials (e.g.: steel, tyres) price. High fuel price has caused
Tata Motors to feel the heat of slowing demand. Decrease in sales volume and
increase in cost as well as bearing the increment of short term debt would easily kill
Tata Motors. Therefore, a probable solutions would keep them survive and grow.
Both graphs above show the steel and fuel price pattern from the years 2007 and 2000
until 2010.
Solution 3:
i) Hedging or Joint Venture with the materials suppliers
It would be good if Tata Motors could have a forward contract with the suppliers to
hedge their exposure to the price of steel and tyres. This would definitely help Tata to
save a large amount of money if compare to the competitors. By using forward
contract to avoid the price fluctuation, Tata is able to reduce the cost and offer a car
which is more competitive in price. Joint venture with steel companies would also
help Tata Motors to get a slightly cheaper steel price than other competitors and this
would then to introduce low budget car which might help in boosting sales.
ii) Launch new products with fuel economy
In the consumer point of view, they will postpone purchase when the fuel price is
high if the cars in the market are not fuel economy. Hence, it would be a probable
solution to deal with the high fuel price if Tata Motors could launch new product with
fuel economy.
iii) Continuous research and development in developing vehicles that running on
alternative fuels
If Tata is able to be the first who developed the cars that running on alternative fuels
like CNG, LPG, and bio-diesel, ethanol blending or developed vehicles fuelled by
hydrogen. Tata would soon be the leader in the global automobile industry as the
sales of vehicles will increase tremendously.
Problem 4: Share price dropped drastically and affect its global image
As the debt market was frozen, Tata Motors turn to the equity market to raise fund.
After the issuance of ordinary shares with right basis where existing shareholders
could get one ordinary shares for every six shares held, the earning per shares of the
company dropped. This is due to the company earnings dropped (effects of the global
economic crisis) and the number of shares outstanding increase. The dropped of
shares price and EPS caused the investors and public losing confidence on Tata and
later it had affected its global image. Now, everybody is in doubt whether Tata
Motors able to survive and increase the EPS in the future and would think twice
before investing in Tata Motors.
The share price of Tata Motors dropped drastically after the issues of ordinary shares on
the right basis.
Solutions 4
i) Boost sales and increase company’s earnings
In order to boost sales, launch new products with fuel economy and low budget cars as
mentioned above will help to achieve the target of sales increase. When the sales increase,
the earnings will increase and hence the EPS will increase. Besides, when there is a sign
of revenue growth, the public will have their confidence on the company increase and
finally they will build up again its global image.
ii) Expose the future strategic strategies through media release
Smart investors will do a company analysis before they invest in that company and
normally they will get information from the annual reports, newspaper, and electronic
devices. Hence, it is a probable way to build up investors’ confidence through media
release to announce the company future profitable plans. Tata Motors always have good
plans to provide the best value of money to its shareholders and customers where it can
be proven from its past sales history. They always make the good decision in acquisition
the right firms and joint venture with the high technology-based auto-maker firms. Hence,
investors would be convinced to pump in fund to the company and it would also help in
gaining trust from the financial institutions to lend Tata a huge loan for refinancing.
Problem 5: Relocation of Nano’s factory from West Bengal to Gujerat
The factory of producing Tata Nano was set up at West Bengal in order to launch the
product on October 2008 but due to the violent political agitation in West Bengal over the
land issue, Tata Motors was forced to relocate their prestigious Nano project to Gujerat.
This has eventually delayed the launching of Tata Nano in October and increase the cost
of setting up factory and facilities to produce Nano.
Solutions 5
Due to the political issues problem, Tata Motors has no power to control this external
factor environment. Therefore, Tata Motors can only change its internal variable and
reallocate its resources in order to continue its operation for Tata Nano project. Therefore,
the factory which uses to produce Tata Nano had shifted to Gujerat at the end.
Reasons of global financial crisis and its impact on the economies of
developed and developing countries
Bursting of housing bubble, drastically drop of stock price, large financial institution
collapsed, government intervention to bail out the financial system, slowdown of Gross
Domestic Product (GDP) and so on are the serious issues that indicate the economic
recession which cause by the global financial crisis 2007-2010. Although it started at
United State American, the negative effect of financial crisis sweep away around
different regional’s economy no matter developing or developed countries due to
dependence of those economy system on the USA’s financial condition.
Between year 1997 to 2006, the price of typical American house increased by around
124%. This housing bubble and low trammel of borrowing requirement, incite those
home investors refinancing their home loan with lower interest rate (some even lower
than market interest rate) by taking out second mortgages secured by price appreciation.
However, when interest rate start raise and housing price began drop moderately in year
2006-2007 sweep around U.S., housing bubble busted and refinancing become more
difficult. Such condition resulted in homes worth less than the mortgage loan and lead to
foreclosure epidemic which happen in late 2006 continuously drain wealth from
consumers and erodes the financial strength of financial institution. Moreover, defaults
and losses on other loan type had significantly expanded the crisis from housing industry
to other part of the economy especially the banking industry which incurs huge number
of subprime mortgage loan. The financial crisis 2007-2010 culminated on September
2008 with Lehman Brother filing for bankruptcy. In the beginning state, global financial
crisis was resulted by the insufficient of regulation and monitoring implement by the
government and financial institution in the housing industry and banking industry.
After the bursting of housing bubble and bankruptcy of Lehman Brother, the U.S. was in
bear market. The U.S. stock market drop drastically. U.S. Nasdaq index and S&P 500
index were drop around 25% from year 2007 to 2008 and it went worse in year 2009
(decrease around 11% again). Besides that, the import and export of U.S. also decrease
seriously. All this bear market effect will influence the GDP of U.S. and continuously
influence other economic system and countries.
Since U.S. is the largest economic system and operate huge international trade with other
countries (U.S. ranked as the biggest international trader by WTO). The table shows
information about the top partner of U.S. for international trading. Any bad performance
of U.S. economy includes the decrease of GDP and stock price will pressure the
economic performance of those countries no matter developed or developing countries.
The global financial crisis started at U.S. will reduce the purchasing power of U.S.
international traders and also investors who loss confident with the economy. This will
resulted in declining of U.S. foreign direct investment in other countries and also the drop
of import and export of U.S. Reducing of that capital or income will affected the income
of those countries which directly depreciate the value of GDP and companies’ stock price.
As the result of it, the global financial crisis had created the recession for the world’s
economy. This also the reason for how financial crisis in U.S. globally affected other
economic systems.
The global financial crisis go worse when the import and export of other countries
declining and pull down the stock value of the countries. This will further reduce the
purchasing power of consumer and investment quantity of investors. And these reduce or
slowdown the GDP growth of those countries. For the first quarter of 2009, the
annualized rate of decline in GDP was 14.4% in Germany, 15.2% in Japan, 7.4% in the
UK, 18% in Latvia, 9.8% in the Euro area and 21.5% for Mexico. This is the reason of
how the world suffering recession cause by the U.S. financial crisis. The following graph
shows the some decreasing of GDP growth of Asia and Pacific.
The following graph shows the GDP performance of Latin America countries as a total.
According to the Overseas Development Institute, the global financial crisis affects the
developing countries in two possible ways. First there could be financial spillover and
contagion for stock markets in emerging market. For example, India stock market
declined by 8% in one day as the Brazil and U.S. plunged; the Russian stock markets had
stop trading twice. Those examples clearly show that, no matter developing or developed
countries, the stock market across the world had dropped substantially since May of 2008.
Second impact is due to the worse condition in developed countries which influence the
developing countries. It could be in severe ways:
1) Trade and trade price
Recession will cause inflation and reduce the real value of currency. This will
cause the commodities price increase especially those items like oil, copper, and
so which highly demanded by China and India. The graph shows the increasing of
price of commodity and petroleum during year 2007 to 2008.
2) Remittances
Since condition in developed countries is in recession, fewer migrant will move to
developed countries. For instance, less job available in England during the
recession cause a lesser amount of people from Turkey and East Europe seeking
work in England. This kind of situation will reduce the remittance to developing
countries (which reached a record $251 billion in 2007, but have fallen in many
countries since).
3) Equity investment and foreign direct investment (FDI)
Effects of recession incite the drop in confident level of investors with investment.
Unstable economic environment had refrained investors putting in their money in
stock market or any fund investment due to high risk in real value of currency.
Investors would tend to invest in assets such as gold and other. This resulted in
less working capital and credit availability in the market. Developing countries
will face credit crunch. The following graph shows the decline of investment in
India during the global financial crisis.
4) Commercial lending
Since bankruptcy of Lehman Brother and the financial collapse of Iceland due to
high debts, banking industry of developed countries was under pressure in not be
able to lend as much as they done in past. U.S. banks losses were forecast to hit
$1 trillion and Europe banks is around $1.6 billion. Under such condition, low
credit availability will force companies in both developed and developing
countries into trouble of insolvency and further slowdown or postpone the
projects or investments.
5) Unemployment
High commodities price and low investment rate as well as low credit availability
had reduce the income and profit of many companies and force them to reduce the
working capital by layoff the employees. This type of strategic will increase the
unemployment rate of the countries and further deteriorate the economic
circumstance. It will also incite more crime, weaker health systems and higher
poverty which will construct an unstable social condition bring negative impact
on economic recovery.
The impact of global financial crisis on the developing and developed countries will vary.
It is depend on the respond of those countries’ government in deal with the crisis. The
government has to modify the policies and regulation as well as changing the fiscal
policy and monetary policy to reduce the effect of financial instability and recover the
economic condition.
Impact of global financial crisis on the automobile industry
Worldwide slumping in Automobile’s sales and production
The global financial downturn was primarily affected the American automobile
manufacturing industry followed by the European and Asian automobile markets in
October when the sales of the automobile industry slummed in year 2008. However, in
2007, the signs of the economic crisis started to reveal. All was begun by the sales
dropped incurred in Japanese and US motor vehicle from 2006 until 2007.
The pressure of the global financial crisis totally distracts the automobile markets finally
when this industry faced negative growth rates in sales and production for 2009. The
economic downturn boiled over in 2008 from the North countries of the world and
continues spread to the South countries in 2009. Furthermore, global production and sales
in the automotive industry is expected to fall in 2009 (table: -21.5% and -16.4%
respectively).
The sales of the South America were most affected by the crisis which is dropped from
3.2% to -29.6%. While, Japan were more severely affected in productions downturn
incurred a slumping percentage from -0.3% to -32.5% in 2009 and this relates to the
export surplus that has been involving for the NAFTA area. Western Europe, Africa
(Middle East) and Asia-Pacific (excluding Japan) is assumed to have least affected areas
in terms of the car sales and incurred a minor decrease in vehicle production
Japan
In December 2008, Japan’s fourth biggest car manufacturer-Suzuki Motor Corporation,
announced that it will cut their production in Japan in about 30,000 units due to failing in
demand. Nissan, another leading Japanese car manufacturer, declared to slashing
production of its output by 80,000 vehicles in the first quarter of 2009. Beside,
Bloomberg reported that Mitsubishi Motors move to reduce planned output by 110,000
vehicles in the year ending of March 2009 because of tumbling sales in Japan, the US and
Europe
With a weak US economy and high gas prices in the summer of 2008, Toyota reported a
decline in sales for the month of June, as well as same figures reported by the Detroit Big
Three. Toyota claimed that, these were attributed mainly to slow sales of its Tundra
pickup, as well as the shortages of its fuel efficient vehicles such as Prius, Corolla and
Table World car sales and production by sub-regions 2007-2009
( change in %, year on year basis)
Source: Automotive World Automotive Passenger Car OEM Quarterly Data Book, Q2, 2009. Reclassified data calculated from rounded off data Note: #) NAFTA and South America figures (include light trucks)
Yaris. On December 22, 2008, Toyota slashed profit forecasts in sales and their sales in
the United State were down 34% and were drop 34% in Europe as well for the year
ending in March 2009.
France
The French automobile manufacturer, PSA Peugeot Citroen, foresee the falling of sales
volumes by at least 10% in 2009, following a 17% drop in the last quarter on 2008. The
European domestic sales fell 4% and the world wide sales drop by 7%, which is forcing
Renault to abandon their 2009 growth targets.
South Korean
Despite a global economic slowdown, Hyundai-Kia, the South Korean automakers, have
been successfully managed its rapid growth in 2009. It is unusual for Hyundai-Kia’s
continued success when most automakers facing in sales falling. Hyundai-Kia took
significant advantage of the crisis by creating affordable and high quality with well
designed vehicles while indirectly attracts the customer confidence to invest in their
markets. Nonetheless, South Korean automakers were not completely immune to the
crisis and Hyundai Motor Company had begun reducing production in US, China,
Slovakia, Turkey and India since the demand of motor vehicles was badly affected by the
financial crisis.
India
The pressure of global downturn affects the State Bank of India to reduce the interest
rates on automotive loan in February 2009 citing falling production quantities. Tata
motors conducted a widespread marketing campaign toward the Tata Nano, which is
classified as “the people car”, while the manufacturer hopes this low cost product will
encourage customers to purchase the vehicle in the credit crisis period.
2008 and 2009 - The bad period for automobile manufacturer
General Motor (GM) and Chrysler faced the reducing cash flow and falling in
profitability during the automotive industry crisis in the late of 2008 due to the global
financial downturn. Consequently, the huge negative impact faced by both giant
automotive manufacturers (GM and Chrysler) in USA was bringing about bankruptcies
and bankruptcy protection claims under the US Chapter 11 clause. While, another well
known automotive manufacturer-Ford, managed to stay in an independent condition due
to the previous debt restructuring process.
Capital restructuring with a condition of high possibility for being unable to pay debt, the
external government intervention, supplier defaults and falling in customer confidence
extremely affect the automotive industry in the midterm and long term period.
Subsequently, through reduced in R&D investment, slumped the capacity and capability
of the organization will lead to falling in competitiveness and further decline in the
automobile markets performance.
Automotive firms’ actions
The economic crisis generally affected the automakers and auto-parts suppliers within the
entire global countries to implement the standard crisis management. Obviously,
interrelated between the automobile manufacturers around the world is widely conducted.
While the reputation and performance in the automotive markets should be well manage
in order to maintain the standard and quality of the organization.
However, the insufficiency of working capital to face the global financial crisis lead to
planning in reduction of output(parts, vehicle) management by most automakers in order
to survive from lack of ability to funding the business activities. Decreasing in production
lead the management of the company turn to reorganize the human resource management
involving internally eliminating shifts of working hours, reducing overtime, performance
based bonuses, temporary worker layoffs and contract employees.
Furthermore, the automakers also manage the external’s relationship by way of
managing the upstream value chain (business services, suppliers) and downstream value
chain (dealers, transport, after sales services, logistics vehicle financing and insurance as
well as recycling).
Finding Alliances and other alternatives
Some of the automotive manufacturers attempt to consolidations, mergers and
acquisitions within the same industry’s parties while finding alliances to back up the
automotive industry. The global financial crisis lead the automobile manufacturers to
renegotiation of existing contracts, loans and credit lines as well as the company
restructuring system. These could slightly assist the company to stabilizing and balance
up the ability to continue the business activities.
The negative impacts and massive distraction caused by the global economic crisis
critically repositioned the automakers’ capability to growth in the global markets. If we
realize that, DaimlerChrysler disbanded, Suzuki and Fiat (potential acquisitions) was
abandoned by General Motor (GM), and Ford has been reduced its engagement in Mazda.
Subsequently, these changes exposed for new formations including the alliance taken by
Chrysler with Fiat, Suzuki and Volkswagen (VW) are becoming allies acquiring equity
from each other, and Mitsubishi Motor Corporation is linking up with PSA in the year of
2000 due to the global financial crisis effects.
Development of new trend has been introduced where, automakers from the South
countries seeking foreign direct investment of automobile capital in the North countries
to undertake their asset. For instance, South Korean (Ssangyong) has been acquired by
Chinese (SAIC) in 2004. In 2008, Indian Tata Motors also acquires Jaguar Land Rover
from Ford. Meanwhile, General Motor (GM) has sold the Hummer to Chinese Sichuan
Tengzhong Heavy Industrial Machinery Company in 2009. Furthermore, Ford also trying
to selling its subsidiary, Volvo, by negotiating with Chinese Geely.
Get support from government
Consequently, the impacts of the economic crisis blow up the car manufacturers’
intention to have the reinforcement from the government in order to stable the
momentum in consumer demand of motor vehicles. The President of the automobile
industry’s trade association, ACEA, and the CEO of PSA Peugeot Citroen, Christian
Streiff has claimed his statement in a press release subsequent to an ACEA board meeting
in Paris at the motor show. He mentioned that the governments should respond and
stimulate the economy while, remove the credit crunch in order to restore the consumer
confidence. This can be the method to let the consumers have the confidence to buy and
invest indirectly in new vehicles produced. Meanwhile, the secretary general of the
automobile industry’s trade association, ACEA, Ivan Hodac, added, due to the regulatory
requirements strengthening actions, the global downturn adds to an extensive pressure on
car production in Europe.
The influence of macroeconomics environment on business
Macroeconomics is one of the general fields in economic which deal with the structure,
performance and behavior of the whole economy of a country even the regional and the
whole world. Understanding the macroeconomics environment is necessary for a
business to be success in what they are doing because macroeconomic factors can be
obstacles for business but sometime it can also be the opportunity for business to success.
Gross domestic product (GDP), unemployment rate, and prices indices are some of the
important aggregated indicator in macroeconomics’ study. It build up models to explain
the relationship between factors such as consumption, unemployment, inflation,
investment, saving, national income, national policies and international trade. Those
factors will significantly influence the successfulness of a business no matter locally or
go international.
First, we will focus on how inflation rate influence the business. Inflation is an increase
in the universal level of prices of goods and services in an economy over a period of time.
This means that, inflation will erosion in the purchasing power of money, each unit of
currency can buys fewer goods or services. So, the weakness of purchasing power will
increase the cost of production (the cost of materials, transportation cost and so on) cause
the price of goods and services become higher. Moreover, sales of goods and services
will also decline due to the high selling price and low purchasing power of consumer.
With the same income level, consumers have to become more careful in purchasing and
avoiding any luxury goods and services. This effect of inflation will lead to drop in both
revenue and profit of business. In such condition, company has to be cautious with the
economic changes.
The following graphs show the decline of industrial production, retail sales and also
world trade in between year 2008 and year 2009. It also includes the consumers’
confident level about the market.
Besides decreasing of real value of currency and other monetary items, inflation also
discourage the investment and saving due to uncertainty of future real value of monetary
items. This negative effect will possibly lead to decline in investment of productive
capital and saving in non-producing assets. For instance buy gold and sell stock. Low
investment and saving rate also influence the loan or debt availability in the market.
Consequently, company will become harder to gather the working capital from neither
borrow from financial institution nor raise fund from public and at the same time, their
value of companies fall due to high underselling transaction of stock. Without the
necessary working capital, company cannot operate well and miss those opportunity of
good investment. This will deteriorate the profit and earnings per share (EPS) of business
which had been reduce in fall of sale and high production cost. This condition will
become worse when investors lost confidence with the market and business. Companies
will go bankrupt if they don’t handle it well.
Basically, in order to avoid going bankrupt, companies normally will try to reduce their
working capital. The most common way is to layoff their employees ethically or
unethically which will raise the unemployment rate all around the economy (The
following graph reflects the negative employment rate during year 2008 to year 2009).
Unemployed individual are unable to earn money to meet financial obligation. Increasing
of unemployment rate mean that people become poorer in purchasing power which mean
less goods or services they will consume. It cause consumption fall and deteriorate
companies’ sales. Besides that, some social issues may occur due to high unemployment
rate such as illegal immigration, crimes, and so on. This will create an unstable business
environment which restrains the foreign direct investment and stock prices. It goes worse
when the social problem boost become political issue include president resign and lost
power of current government. This unstable political condition will destroy the whole
economy of the country and influence the growth of business. So, companies have to pay
attention on the unemployment rate in a country before they step in the market.
When the high inflation rate and unemployment rate occur in an economy as mention
above, the economy will go down and economist named it as recession. During the
recession, GDP of the country will fall and affect it import and export of goods, the
currency exchange rate, and inflation of stock price and so on. This will influence other
countries or region like the economic crisis 2007-2010 at United State of American
which cause decline of USA’s GDP had badly effect the countries all around the world.
In order to recover the economy from recession, government will change their fiscal
policy and monetary policy. Fiscal policy is use of government expenditure and revenue
collection to influence the economy. Where monetary policy is the centre bank of the
country which is controls the supply of money, often targeting a rate of interest. The
graph below is showing the deficit in the fiscal balance for those developing and
developed countries and also the public debts. It clearly stated that government increases
their expenditure during the financial crisis period. Changes of both policies above will
influence the business. As business borrows money from financial institutions all the time,
increase in interest rate will influence the business. Higher interest rate means companies
have to incur higher costs to repay loan. Besides that, higher interest rate also reducing
the individual loan appetite and indirectly decreasing the demand of goods and services at
market. Furthermore, government also may increase the taxation rate for certain aspect to
increase government income. This will let government has more money to increase the
government expenditure which will raise the aggregate demand of the country and raise
up the GDP. So, companies will force to follow the tax rate incurred and force to follow
pattern of resource allocation which designed by government in budget. This all negative
effect of macroeconomics’ factors will require companies pay attention on it to survive
and success.
However, if a business can take advantage of the changes of macroeconomics’ factors,
they will be success even in the recession. For instance, while inflation rate increase, the
stock price of some companies will fall drastically. This is the golden opportunity for
those big and wealthy companies to acquire those companies with low cost through
acquisition or merge. This will benefit the companies in long-term. Moreover, when
government increases their expenditure through the budget, companies may have change
to raise their sale and profit if they get those chances.
So, in short, macroeconomic ‘environment will influence the business in both positive
and negative ways. There is necessary for businesses to understand what happen around
them, response to those macroeconomic factors, and grasp those opportunities and at the
same time avoid threads.
The importance of global business environment for the success of organization Nowadays, there are many multinational companies (MNC) which operate in different
regions and countries. In order to operate effectively and efficiently, these multinational
companies definitely could not be run away from understanding the global business
environment, especially on the environment of the countries which they are operating.
Understanding business environment is crucial as it will give a significant impact on the
success of an organization. Whatever it is, organization will not be able to control the
external factors which caused by business environment. The only things that organization
can do to ensure its success in business is that to adapt the external environment by
changing its internal variables, such as resources, policies and business strategies. Thus, it
is vital for an organization to analyze the business environment in their prospect countries
before they start their operations in that particular countries as different countries would
have different economic, currency, cultural, politic, law, regulations, and technological
environment. Organizations can only success if they have well planned strategies and
well allocate their limited resources to face the threat and grab the opportunities when it
comes.
Importance of global business environment for the success of organization would further
be discussed in more details as follow:-
Economic Development
Before an organization starts its operation in another country, it is vital to understand the
economic development of that particular country. The level of economic development
will indirectly tell the organization the affordability of consumers. From there, they can
estimate and expect how many units product can sell and what reasonable profit can be
made. Basically, level of economic development which reflected by standard of living
can be measured by evaluated Gross National Income (GNI) per capita. It will generally
show the citizen’s share of national income. Table 1.1 below shows the Gross National
Income per capita at purchasing power parity. From that information, organization can
roughly predict which country is suitable for them to sell their products by looking at the
purchasing power of the citizens. It is very clear that citizens in United States have the
highest purchasing power among the five countries. If Tata Motors want to sell their
Jaguar and Land Rover cars, probably they will tend to focus on United States instead of
China or India. On the other hand, if their product is economical car like Tata Nano,
probably, they will tend to focus on China and India as well.
List of countries by Gross National Income per capita at purchasing power parity in
2009:
Table 1.1
Country US$
United States 46,730
Japan 33,280
Malaysia 13,530
China 6,710
India 3,230
Source: Wikipedia
Currency Valuation and Exchange rates
Currency and exchange rates would have a great effect on the organization especially for
those who import vast raw materials or products from foreign countries. The cost of
products may vary due to the changes of currency value. For instance, Tata motors buy
engine from its subsidiary, Land Rover which based in UK. The exchange rate for 1 GBP
is 73.3696 INR. If Tata Motors buy engine from Land Rover which cost 10000 GBP,
therefore it has to pay Land Rover for INR 733,696. What if Tata Motors delay its
purchases for two weeks and the exchange rate at that time are 72.5980? Let’s just make
a simple calculation again. It will cost INR 725,980 for Tata Motors if delay for two
weeks of purchases. From a simple calculation above, it show that currency and exchange
rates would have effect on success of the organization through affect its product cost. In
reality, every company is trying to minimize their cost and maximize its profit. Indeed,
analyze the currency and exchange rates is important before expand its business to other
countries. Graph 1.2 below shows the exchange rates of Indian Rupees with US Dollar
from year 2008 until July of 2010. Exchange rates are fluctuated from time to time.
Apart from that, organization has to evaluate those factors that conducive to economic
growth. For instance, is that particular country has reliable banking system and a strong
stock market. Besides, does the government have policies that encourage investment and
does it has strong infrastructure such as telecommunication system, transportation, energy
and social facilities. These are those factors that contributed to economic growth through
attracting more investors. Indirectly, it will affect the success of an organization.
Cultural problem
Normally, when dealing in another country, the major problems that would be faced are
language, time and sociability and intercultural communication problem. These problems
are mainly due to the problem of different culture among the people who come from
different countries and have different background. It is important for an organization to
ensure their success in foreign countries if they could understand and adapt to the culture.
Language
As we know, the international language in business is English. However, some countries
like Japan and China take pride in their own languages and cultures. Only those who are
English educated would know how to speak in English. But in reality, we are commonly
dealing with those people who cannot speak English. Therefore, it has made the business
communicational process harder. Maybe they have to employ translator, which in turn
make the business not efficient since it is not direct effective communication which will
cause misunderstanding in certain meaning of word or lost of information when
translating the language. Sometimes, it will create misunderstanding due to the different
culture problem. For instance, a manager from US misinterpret message delivered by a
Japan manager due to language’s misinterpretation.
Time and sociability
Meeting that discuss business issues normally will start and end on time for the Europe
countries. Those people from these countries appreciate time very much and think that
“time is money”. However, some Middle East countries would have different culture in
term of time perspective. For instance, they tend to come late for the meeting.
Intercultural communication
Intercultural communication means the way of someone is talk, distance during
communication and how direct when someone is speaking or delivering their messages.
For some people especially Middle Easterners like to use body language, hand gestures
and even raise their voice while talking to somebody. This is different from Northern
Europeans who less raising their voice or have hand gestures while talking to somebody.
Besides, some people tend to talk in a foot distance. But, American would prefer to have
personal space while talking to others. In addition, the way of deliver message would be
different for those people who come from different countries. For instance, American and
Chinese tend to deliver their message in a more direct way compare to Japanese.
It is very important to understand others’ culture especially in the countries that
organizations are operating. Through understanding their culture, an organization can
adapt itself to the culture environment in order to get more business. At the end, it will
ensure the success of an organization.
Legal and Regulatory Environment
Different countries would have different sets of law and regulation. For those
multinational companies which operating in foreign, it has to understand and abide with
the foreign countries’ laws and regulations. It is vital to do so as it will give a significant
impact to the organization which violates the laws and regulations. Worst to worst, an
organization may shut down its operation or leave the country if they fail to comply with
the laws and regulations. In order to solve the legal and regulatory issues in foreign
countries, an organization may employ some lawyers in order to give proper advice. For
instance, Tata Motors which currently has its operation in UK, South Korea, Thailand
and Spain would have to abide those countries’ laws and regulations too in order to
survive and continuously grow in their operation.
Technological Environment
Technological environment refer to the materials and machine used in the production,
receptivity of an organization to the new technology and last but not least, the adoption of
technology by the consumers in a country. All of these factors would affect an
organization’s productivity and volume of selling of its product. For instance, Tata
Motors sell luxury cars like Jaguar and Land Rover which require high technology to
manufacture in India, probably it may not achieve the expected revenue as most of the
citizens in India are middle low income. They cannot afford to buy Jaguar or Land Rover
which cost US$ 67000. Moreover, the technologies in India still not so advance compare
to United Kingdom which can produce high end car like Jaguar and Land Rover. Indeed,
organization who wishes to expand abroad has to analyze the technological environment
also before they start its business over there. Definitely, it is one of the external
environment factors that will affect the success of an organization.
Is acquisition the right method to go global?
Right Method at the Right Timing
Referring to many acquisition cases and conceptual theory, we believe that acquisition is
a right method to go global if it is at a right timing. Acquisition to go global is a right
method if it would yield the benefits like increase the company’s global image, learn
from the acquired company in the form of highly invested research and development,
own the facilities and assets without set up cost, have the intellectual property rights, and
etc.
For instances, General Motor under the control of William C. Durant (1908) and Alfred P.
Sloan (1923) has over the years acquired numerous automobile companies worldwide
namely Oldsmobile, Cadillac, Elmore, Oakland in 1909. Also in 1909, GM acquired the
Reliance Motor Truck Company of Owosso, Michigan, and the Rapid Motor Vehicle
Company of Pontiac, Michigan, the predecessors of GMC Truck. GM operated 150
assembly plants by 1980s. GM had brought the record of led in global sales for 77
consecutive years (1931 to 2008) before the latest financial crisis, longer than any other
automaker.
Acquisition must be made at the right timing in order to get the benefits mentioned above.
We clarify that the right timing is the economy boom or when there is economy burst but
the company does not get hurt and able to finance the acquisition without calling for
default after the acquisition. If the acquisition happens in the right timing, it is truly a
right method to go global.
Acquisition to go global could be a wrong method
Acquisition to go global could be a wrong method if it does not create the above
mentioned benefits. For instances, a small company is about to acquire a big company
with huge financing and unable to pay the debt afterwards, poor risk management and no
detail analysis on the target company. Consequently, the company would overpay for the
acquisition and yet could not gain the desired benefits.
Is buying Jaguar and Land Rover to go global a good move?
In our opinion, we would say that it is a right method for Tata Motors to acquire JLR to
go global simply because Tata Motors has recognized that these two British iconic brands,
Jaguar and Land Rover, needed to retain their identity, design and technical independence
as also their image in the marketplace, while at the same time integrate with the
management of Tata Motors, and find synergies in the capabilities and facilities between
the two companies. Considerable progress has been made in identifying sources of
components from India, recognizing engineering and Computer Aided Design
capabilities within Tata Motors and marketing synergies in various geographies. Tata
Motors on the other hand has recognized the high level of technology and skills
embedded in JLR which could be of great value to both companies.
Conclusion
According to Tata Motors’ annual report for the year 2008- 2009, the year under review
would be viewed as in great despondency. The Company faces a major decline in
demand across its product range; it must bear the burden of the major acquisition of JLR,
and faced with a major collapse in vehicle demand in Western Europe and the U.S. But to
many in the Company this is yet another year of challenges with the excitement of
meeting such challenges head-on.
“The spirit, commitment and dedication of the whole Tata Motors team at all its locations
and across all levels are truly phenomenal and this continues to be the company's greatest
asset. I feel confident that if we can sustain our operations through this difficult period,
taking whatever steps we need to take to see the year through, we could overcome all the
obstacles in our path. I feel strongly that in later years we can look back on the JLR
acquisition and say to ourselves that this was a very worthwhile strategic acquisition and
one which has brought us considerable technology and global presence” Reported in
Chairman’s Statement by Mr. Ratan N Tata.
We believe that Tata Motors will surely rebound since it has the great leadership under
Ratan Tata who has successfully managed to sail through many adversities in the past and
bring Tata Motors to the global stage.
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