Tata Motors Explores FDI
into Romania
AN ANALYSIS OF OPPORTUNITY
STRT 571
May 3, 2010
Section 44
Mark Bagin
Tim DuBoff
Khurram Hasan
Eugene Pangalos
Jeff Steckmest
Tata Motors Overview
 Who is Tata?
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Maker of passenger cars, buses, trucks and tractor-trailers
Largest Indian car manufacturer, maker of Tata Nano, which is the cheapest car in the world
(priced at approximately $2,500)
Consolidated revenues of Rs.71 thousand crores (USD 14 billion) in 2008-09
Acquired the Jaguar and Land Rover brands from Ford for about $2.3 billion
 What are Tata’s key strengths and weaknesses?
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Strong position in its core Indian market
Strong R&D capability and industry leader in low-cost car design and production
Saddled with a large debt load from its recent acquisition (high debt-to-equity ratios vs.
industry)
Lack of significant manufacturing base in any country outside India
 Tata’s strategy and reasons for FDI
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Two-tiered strategy of competing in the luxury cars segment (acquisition of Jaguar - Land
Rover) and the low-cost cars segment
Current Distribution Network
Expansion into global markets beyond the core Indian market.
Tata has already entered into distribution alliances and acquired
brands or manufacturing facilities in countries such as UK,
Spain and Thailand.
Planned introduction of Nano Europa in Europe in 2012
EU Auto Market and Romania
produce?
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Demand increasing for small
passenger cars in the EU
Production in Romania has many
advantages:
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Cars Sold in Europe 2006-2009
Number of Units Sold*
(in Millions)
 Where should Tata sell and
Low labor costs $2.23 per hour
Romania vs. $2.75 for Tata motors
In EU (geographic advantage)
Immunity from tariffs (10% for firms producing outside of EU)
 How could Tata take advantage?
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Build a new auto plant in Romania
Manufacture cars in Romania and export to the EU
*EU 15 and EFTA
Romania’s Trilemma
Current
Currency
Risk
Leu (have not started
ERM 2)
Possibilities
Implications
Adopt euro
Increase in aggregate price levels with euro
accession; however currency exchange risk
eliminated
Leu devalued
Low cost of inputs and wages
Political
Risk
Low (relative to nonEU Eastern Europe)
Acceptably low – political crises
have minimal long-term impact on
domestic business environment
Euro accession may increase political risk
(Greece). Per capita income level of $11,000
and EU membership mitigate this concern
Labor
Major cost advantage
Labor costs increase w/euro
adoption; increased unionization
Euro accession decreases labor cost advantage
On
Current
Euro
Pegged Exchange
Rate
Free Capital
Flow
Sovereign Monetary
Policy
The Overall Picture
 Unfavorable Business Considerations
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Investment Scale Exceeds Current Capability:
 Inability to purchase any existing auto production plants will force Tata to invest in
a brand-new facility costing ~$600 million
 Large debt load will makes it unfeasible to undertake such a large FDI at this point
Long Timeframe to Recoup Investment: NPV analysis reveals an unreasonably
long-time frame of 12 years to recoup investment
Unproven Demand for Tata: While the overall European demand for low-cost cars
is increasing, Tata’s brand is unproven in Europe
Recommendation
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Although Romania remains a favorable political and macro-economic
environment, analysis of business factors reveal a different picture
Recommendation is to NOT pursue FDI in Romania at this point
until European demand solidifies and Tata finances improve