Industry Analysis: Tata Motors is currently situated in India with only 6% of the revenue coming from exports. India’s automobile market has grown steadily over the last seven to eight years, with the exception of the previous two years where the effects of the global downturn were felt, primarily in sales of passenger vehicles. Indian automobile market (passenger vehicle) share is currently little more than 4% of the total available market. In the year 2011-12, total 2.53 million passenger cars were sold in India.
Currently India has 31.4 million middle class households. In next 5 years, this number is expected to reach 53.3 million middle class households, thus providing a great market opportunity for car manufacturers. HHI for passenger car manufacturer market is 2139 (Exhibit 1) which is relatively low.
There are more than 20 car manufacturers currently present in Indian market. Prominent factors which govern the selection of a passenger car are Affordability, Fuel Economy and Luxury. In case of commercial vehicles, 0.89 million vehicles were sold in the year 2011-12. HHI for commercial vehicles is 4326 (Exhibit 2). Currently there are 4 major competitors in this segment. What business the company is in: Tata Motors is India’s largest automobile company. It is the leader by far in commercial vehicles in each segment, and has third highest market share in passenger vehicles segment. The company is the world’s fourth largest truck and bus manufacture.
Who will be its targeted customers: 85.1% of the total revenue (10.9 billion USD) of Tata motors comes from Domestic vehicle sales in India. Hence, India is the primary target market for Tata Motors. Being the low cost leader, target customers for Tata motors are middleclass households and youngsters which are the final consumers of passenger vehicles. For recently acquired luxury brand Jaguar Land Rover, target customers are affluent class of the society.
Target market for this brand is US and Europe. In commercial vehicle segment, main customers are transport companies for heavy or medium duty trucks and government transport authority for buses. What products or services it will offer: Tata motors’ core products or services are Domestic Vehicle Sales (85.1% of total revenue), Exports of Vehicles and spare parts (6%), Domestic Spare Part Sales (4.4%), and Vehicle Financing (0.1%). Vehicle portfolio of Tata motors consists of passenger car vehicles, medium and heavy commercial vehicles and military vehicles.
After acquiring Land Rover and Jaguar, Tata has a portfolio of passenger cars from micro cars to super luxury cars. In case of commercial vehicles, Tata offers vehicles ranging from small pickup trucks to extra heavy commercial trucks. Currently Tata motors are third in terms of market share (13%) in passenger vehicles market in India and first in commercial vehicles segment with a market share of 60%. 63% of the total revenue (vehicle sale) is from the sale of commercial vehicles while 37% is from the sale of passenger vehicles. Other sources of revenue are sale of spare parts, servicing of sold vehicles, financing to customers and retailers. Military vehicle sale plays a very small part in revenue generation due to government restrictions. How it will go about achieving all this:
Tata entered into Indian passenger car industry with the launch of Indica in the year 1998. From then till now, Tata Motors’ strategy has been to be the low cost leader in the market of passenger vehicles. With one of the best manpower in the country and acquiring well known Automobile design firms (eg. Trilix), Tata Motors has managed to maintain its low cost leadership in almost all passenger car segments in which they are competing under Tata brand. With one of the best distribution and service network in India, Tata has managed to have a competitive edge in pricing. Currently Tata Nano is the lowest price car in the world in micro car segment. For other brands of Tata Motors such as Jaguar Land Rover, strategy is to achieve uniqueness by providing superior quality and luxury.
For commercial vehicles sector, Tata does not have a significant price advantage over its competitor. But it has maintained its differentiation by establishing distribution and service network all over India. There are 597 authorized service stations of Tata Motors available across India as compared to 300 of Ashok Leyland which has next biggest market share in commercial vehicles segment. Porter’s Five Forces Analysis for Tata Motors: 1. The Threat of New Entrants: In any country, capital is required to set up a car manufacturing facility is substantial. Expenditure required for various activities such as marketing, distribution, after sales service and necessary infrastructure is also high. Manufacturing and marketing expenditure of Tata motors in the year 2011-12
was 5266.6 million USD (Passenger cars and Commercial vehicles) whereas that of market leader (in passenger cars) Maruti Suzuki was 540.3 million USD. These figures can prove to be a big barrier for new entrants. Presence of giant companies and their existing market penetration can also prove to be a barrier for new entrants. However, growth rate of Indian market which is expected to be more than 6.5% for next five years can prove to be a deciding factor. Entry of international brands like Mercedes-Benz, Volvo and Navistar in the year 2012 will challenge dominance of Tata in commercial vehicle segment. In a nut shell, I expect the threat of new entrants to be high. 2. The Customer / Buyer Power:
There are more than 20 manufacturers selling their cars in India. For every segment in passenger vehicles (from low cost micro cars to sedans to station wagons) there are enough options available for customers to choose from. Also, switching cost for customers is not very high considering the huge market available for resale cars. Launch of new electric vehicle ‘Reva’ by Mahindra will prove to be a direct competition for Tata Nano which is currently a low cost leader in the market.
Overall, I believe Customer / Buyer power is substantially high in Indian Automobile market. 3. The threat of substitute products: India is famous for its two-wheelers (bikes and mopeds) and three-wheelers. These are very real and obvious threats to auto manufacturers. For medium and heavy commercial vehicles, railways and ever expanding shipping market can act as substitutes. Considering overall market of Tata motors, the threat of substitute is medium. 4. Bargaining power of suppliers There are more than 20 car manufacturers in India.
Though there are number of suppliers for parts which do not demand high technology, suppliers of critical components such as steering wheel assembly, gear box etc. have considerable bargaining power. These key manufacturers can’t be held ransom by one car manufacturer as they can market their product to any other car manufacturer in India. Overall, bargaining power of suppliers is medium. 5. Rivalry among competitors The industry for Passenger vehicles in India is not yet in matured phase and is still struggling to find the upcoming stars and possibly topple the leaders.
Even though Tata is a clear market leader in medium and heavy commercial vehicles, entry of Navistar, Volvo and Mercedes in the same category will challenge their dominance. In my view, Rivalry among competitors is Very High. Competitor Analysis: Maruti Suzuki is the only car maker having higher number of service stations (2947) than Tata in India. Its current market share in Indian automobile market is 40%. Maruti Suzuki has higher number of cars in its portfolio.
Most of the revenue of the company comes from sale of cars in the compact and mid size segment. Even though Maruti does not have a price advantage over Tata, they are offering more number of options to customers. Maruti does not compete in Executive and Luxury cars segment unlike Tata (Jaguar). Maruti has managed to increase its market share consistently for last two years whereas Tata’s market share has reduced in the same period even with the successful launch of Tata Nano. Future Prospects:
For last few years Tata motors has followed a strategy of being a low cost leader. Tata’s market share and also the sale has gone down in last two years in Executive and Luxury car segment where price is not the deciding factor for customers (Exhibit 4).
Looking at the expected growth of Indian economy, primary target market of Tata motors which is middleclass household is expected to grow. But at the same time, from Porter’s five forces analysis it can be said that improving profit margins would be a difficult task for Tata Motors. In my view, Tata Motors should put emphasis on increasing their exports which currently counts for only 6% of the total revenue. Developing countries especially in south East Asia can be an ideal market for Tata Motors.
Exhibit 1: HHI for Passenger Car Segment in Indian Market
Manufacturer Maruti Suzuki Hyundai Motors Tata Motors Mahindra Toyota Honda Ford VolksWagon Nissan Skoda Others
Market Share 40% 14% 13% 8% 6% 4% 4% 3% 2% 2% 5%
Contribution to HHI 1600 196 169 64 36 16 16 9 4 4 25
Cumulative HHI 1600 1796 1965 2029 2065 2081 2097 2106 2110 2114 2139
Exhibit 2: HHI for Commercial Vehicle Segment in Indian Market
Manufacturer Tata Ashok Leyland Eicher Motors Swaraj Mazda Others
Market Share 60% 25% 9% 2% 4%
Contribution to HHI 3600 625 81 4 16
Cumulative HHI 3600 4225 4306 4310 4326
Exhibit 3: Value Chain for Tata Motors Firm Infrastructure: Intensive R&D Huge Dealer Network Low Cost Diverse product Range Human Resource Management: Unionized Workforce Outsourcing of less important components Technology Management: In house design Efficient process planning Indigenous Technology Procurement: Established Suppliers In-house manufacturing of important components Inbound Logistics Operations Outbound Logistics Marketing and Service - Low Cost - Strong Mfg Setup - Finance for - One of the best service Sales - Strong Distribution - Strong Process customers and - High marketing network in India - Strong Service Planning retailers cost - Wide dealer network - Target Customers: - High investment in - Special discounts - Alliance with Fiat - Service available in 40 Middleclass Households, R&D to reduce cost for employees for better portfolio countries Youngsters
Exhibit 4: FY 2011 - 12 74,521 856,072 204,729 41,557 12,027 368,272 152,019
Micro Compact Mid-Size Executive Premium and Luxury Utility Vehicle Vans
Industry Sales FY 2010 - 11 70,431 834,271 174,074 49,269 12,097 315,417 161,939
5.80% 2.60% 17.60% -15.70% -0.60% 16.80% -6.10%
Company Sales FY FY Growth 2011 - 12 2010 - 11 74,521 70,431 5.80% 176,104 159,412 10.50% 19,645 28,167 -48.50% 4,796 8,536 -43.80% 985 425 131.80% 49,035 41,968 16.80% 7,958 1,313 506.10%
Market Share FY FY 2011 - 12 2010 - 11 100% 100% 20.60% 19.10% 9.60% 21.90% 11.50% 17.30% 8.20% 3.50% 13.30% 13.30% 5.20% 0.80%