Business cycles can be capricious, as officials for Tata Motors are discovering. During India's economic boom, the country's largest automobile manufacturer burst onto the international stage by acquiring fabled British luxury marques Jaguar and Land Rover for $2.3 billion. The company grabbed more attention last year when it unveiled the Nano, a potentially revolutionary sedan designed for emerging markets with a pricetag less than some laptop computers. Tata Motors, it seemed, was a carmaker in high gear.
But the global financial crisis has changed everything for one of the flagships of India Inc. Within the space of a year, Tata Motors has gone from being a developing-world success story to a cautionary tale of bad timing and overly ambitious expansion plans. Revenues are plummeting: Tata's commercial vehicles sales in India fell by 40% and exports by 45% in the quarter ending on December 31, 2008, while passenger car sales in India slid 14.4%. With losses mounting, it recently reported a quarterly loss of $58.5 million its first in seven years. To complicate matters, Tata Motors faces a June deadline when it must repay a $3-billion bridge loan taken on to buy Jaguar Land Rover (JLR). (See the 50 worst cars of all time.)
Unlike U.S. automakers GM and Chrysler, Tata Motors doesn't appear to be on the brink of bankruptcy. According to industry analysts, the company has strong management and the backing of the Tata Group, a venerable Indian conglomerate with $63 billion in annual revenues. "For Tata Motors to be in dire straits, things will have to worsen much more," says a Mumbai-based analyst with Credit Suisse who asked not to be named.
But the collapse in global auto sales is forcing the company to drastically scale back. Tata laid off some 850 employees at JLR in November, and reportedly is considering issuing another 1,500 pink slips. Indeed, the storied Jaguar and Land Rover brands that once were a source of Tata Motors pride are increasingly looking like boat anchors. Since the acquisition, Moody's, the investment ratings agency, has twice downgraded Tata Motors' debt rating, which now stands at non-investment grade.
Over the last few weeks, Tata Motors has hit the front pages of India's financial newspapers with more gloomy news: inventories are piling up and factories are being temporarily idled to slash production. Earlier this month, press reports surfaced that the company had missed payments to suppliers. Declining revenues and a tight credit market is hurting the company's cash flow, and officials were forced to issue a statement acknowledging financial problems. "There could be a delay in payments[ to suppliers]," Tata Motors Managing Director Ravi Kant told reporters at a briefing on Feb. 5. "It is a difficult situation." Tata Motors officials declined to comment for this story.
The setbacks are humbling to a company that not long ago was setting a fast pace. Tata Motors' trucks have been ubiquitous on Indian roads for decades. In recent years, it had captured a larger share of the domestic car market with the Tata Sumo and the Indica, India's first domestically developed car. Tata's cars, buses and trucks are sold in Europe, Africa, the Middle East, Australia and parts of Asia. The company bought South Korea's second largest truckmaker, Daewoo Commercial Vehicles, in 2004; a year later is acquired a 21% stake in Hispano Carrocera, a Spanish bus manufacturer.
Tata Motor's strategy was to push further into international markets by attacking the potentially vast, low-budget car market in the developing world. That effort was to be led with innovative models like the Nano. Through numerous innovative manufacturing strategies and cheap Indian labor the Nano was supposed to debut last year with a sticker price of about $2,500. Meanwhile, the company was dipping its toes into the luxury segment through the acquisition of struggling JLR.
Some analysts say Tata's strategy was right, but the tide has been running against it. The Nano project was delayed by legal wrangling surrounding the company's acquisition of land in the state of West Bengal for a manufacturing plant. A two-year dispute over the fate of some 13,000 families that were to be displaced by the factory was resolved when Tata decided to build the plant in the state of Gujurat instead. But the launch of the Nano, originally set for October 2008, had to be pushed back. The company now says the car will debut in the first quarter of this year.
But a bigger challenge financially is the JLR acquisition. Analysts say Tata Motors overpaid when it bought the loss-making British brands from Ford Motor in June, 2008. Just before the deal was announced, JLR reported an annual profit for the first time since it was acquired by Ford (the U.S. carmaker bought Jaguar in 1989 and Land Rover in 2000). But in the months leading up to the completion of the deal, sales of luxury cars and SUVs tanked as the global credit crisis worsened. JLR slipped back into the red, losing $383 million in the first half of 2008.
Saddled with debt from the acquisition, Tata Motors could get some relief from the public sector. Last month, the British government pledged to guarantee a total of up to $3.3 billion in loans to help U.K. car companies cope with the recession, which could make it easier for the company to get fresh financing and pay off the $3-billion bridge loan coming due in June. In addition, with interest rates declining, vehicle demand appears to be firming up in India, especially for passenger cars. Tata Motors January car sales were the highest since May 2008 good news since 80% of its revenues come from India. Economic stimulus measures being taken by the Indian government could also give some breathing room. Two weeks ago, Delhi announced that it was placing a $200-million order for 1,625 buses with Tata Motors, a deal that includes a 12-year maintenance contract worth $280 million.
Tata Motors wasn't the only Indian company that got burned by trying to expand internationally as the business cycle was turning against them. United Spirits, India's largest liquor maker, recently announced plans to reduce its debt by selling up to 49% of Whyte & Mackay, the British distiller it bought for $883 million two years ago. Setco Automotive, a leading Indian clutch manufacturer, has put all further foreign acquisition plans on hold after buying manufacturing facilities in the U.S. and the U.K.
Some even say the setbacks may provide a valuable learning experience. During the boom years, Indian companies sought legitimacy through the acquisition of overseas trophies, without paying enough attention to the long-term viability of the companies being acquired, according to a senior analyst with Crisil, an Indian debt-rating agency. Differences in culture, managerial norms and regulatory environments were improperly understood. "The past few months reflect that [India] became overconfident," the analyst says. "The Indian story became the gospel truth and vulnerabilities were not recognized." Those vulnerabilities are readily apparent now.