Tata Daewoo Deal

(i) Examine the market implications of acquiring the Daewoo plant by Tata Motors

Tata Motors inked an investment agreement in February 2004 to acquire the South Korean truck-major Daewoo Commercial Vehicle for $102 million. The acquisition marks the beginning of Tata Motors global expansion trail and is expected to help the company make headway in a number of other markets.

Tata Motors is the largest company of the Tata Group of companies. Poised at a Global growth mission where it aspires that in long term basis major revenue of the organization will be achieved from overseas market. Tata Daewoo marks a significant milestone to achieve such ambitious mission.

The Global Tata Motors

The most important advantage is that Tata's top line and bottom line will go up. International business accounted for less than Rs 400 crore of Tata's turnovers in fiscal 2003. Meanwhile Daewoo itself recorded a turnover of Rs 1200 crore in the fiscal year 2003 and is a profit-making company. Daewoo's manufacturing plant was operating at only a quarter of its capacity, yet it commanded a 22 per cent market domestic share in the 8-tonne-plus segment. This will be further strengthen to 25% and increase it by another 5% to 7%.

Tata's have set a goal where overseas revenues will account for 25 per cent of turnover in three years. After identification of four key markets, India, China, Latin America and Western Europe, which are at different stages of growth and maturity. Tata's with there current competencies, including the Daewoo CV, are equipped to enter the stage I and II markets.

Cyclic Nature of Commercial Vehicle Business:

Commercial Vehicle (CV) business is cyclic in nature. The larger the market share of a company the more severe is the cyclical impact; also the more liberal the markets, the more pronounced is the cyclical impact.

By the global operations of Tata Motors this cyclical phase is lagged across different geographies. Spreading the business to different countries will act as a hedge against cyclical trends because when the domestic CV business is in a slump, things will be looking brighter elsewhere. This is an excellent hedging strategy employed by Tata in long run of the business.

Global Business

For the Global business of Tata Motors in CV market, Tata's needed the correct portfolio of products in its range. Predominant by light commercial vehicles developed for India and selling at few countries in Africa they lacked the higher tonnage of CV portfolio in above 4 tonnes. Is requires millions of dollars to develop and launch product of such scale, and more importantly establishing a brand name in such category especially if the company is from India.

Daewoo at $102 million offered the right match where its product portfolio was marked by heavy CV's specifically designed for more advanced markets which have such infrastructure to support the movement of such heavy CV's. Tata's can now go to the international markets with a range of products to cater to every segment. Daewoo will be used as a manufacturing hub for exports to India, South Africa, Russia, China and Latin America. Tata Motors struck out of India to get a foothold in the developed world and compete against the advanced products in Europe and Asia.

At the same time while Tata's are introducing its Daewoo CV's globally, the Tata range of 1-tonne pickups could find a new market in Korea and the rest of the region. Daewoo isn't present in that segment yet and this is one of the biggest segments of the market. This gives a new break for 1-tonne CV's in South East Asia, which was previously unexplored.

Because of this bulk purchase Tata's are more likely to receive quantity discounts in purchasing raw materials and other intermediaries. Also they can now put tenders on global scale for better receipt of offers.

Entry into Worlds fastest growing economy

Tata's had made an ambitious entry into China, the world's fastest growing CV market. With their expressway system in plan, the Chinese markets can be forayed by sophisticated trucks, Daewoo makes, which are with payloads of 8 tonnes and above. The Tata's can now enter all the big, sophisticated markets with a full product range. Also they have the skills to enter the Western European Markets.

Market Ready for India

This is further fuelled by India's Golden Quadrangle Project, which when ready Tata's will be ready with heavy tonnage vehicles for transportation of goods. Also there position is strengthen against competitor Volvo, where now Tata has come up with there brand new product "Novus" aggressively priced at 40.5 lakhs against a 54 lakhs Volvo. Further with due conformance for stricter norms of Euro III in times to come, Tata's will be product ready. This will be enhanced by multiple offering of tractor trailer & multi axle trucks.

Importantly will be the integration of the Daewoo platform trucks into Indigenized Jamshedpur factory for Tata Motors for CV's. This is already proven by the new product for India the "Novus".

Changing the outlook of Indian Industry

The acquisition had significance for the whole manufacturing in India. This was the first test of whether India could graduate from making low-cost, low technology products for developing markets to making products for developed markets as well. Daewoo acquisition also showed that Indian manufacturers could make the transition to a truly international mindset. While most firms prefer to "export and sell", instead of thinking about local manufacture-assembly-and selling. Tata Motors accepted the challenge of making and selling components/products under their brand name in a foreign market to local customers and demonstrated visible success as a representative of the industry/country concerned.

All these efforts of diversification and consolidation the aim of Tata's is to arrive at an optimum scale of operations of overseas operations and Indian markets.

Tata Daewoo Merger: Risk

Mergers and acquisitions involve risks, including:

* Unforeseen contingent risks or latent liabilities relating to these businesses that may only become apparent after the merger or acquisition

...