STUDY PROJECT ON INTERNATIONAL MARKET FOR TATA NANO

Submitted in March 2011 As part of Course INTERNATIONAL MARKETING Term VI (PTPGPM) To Prof. J.N.GodinhoMayuresh Sharma (09PT2-65) S. Raveesh (09PT2-79) Sameer Gupta (09PT2-83) Manoj Jindal (09PT1-114)

Venkataramana.G (09PT2-108)

Executive summaryThe mini cars are a revolution as they are cost effective, low maintenance. The manufacturers are planning to launch the new cars with advanced technology and various other added features. The small cars also help prevent traffic congestion which is a great problem in European and Asian countries. These cars are made to reduce consumption and pollution and can cover a distance of 30 km per litre. With stagnant growth in the US, Europe, and Japan, automakers are targeting emerging markets by offering no-frill cars (LCCs priced at USD 6,000 or less) to a larger section of the population. Even though margins are razor thin (23% in the case of Tata Nano), volume potential is huge. As a result, companies like GM, Bajaj, Nissan, and Renault are quickly venturing into this segment. The cars priced lower than USD 5,000 have a very high volume potential in emerging markets of South East Asia, China and Brazil. This sector has seen incredible growth historically and is expected to reach 17.5 million units globally by 2020 largely driven by Asia, especially India, with the exception of China, which has experienced a 5% decrease in this segment over the past five years due to increasing disposable income. While there are immense opportunities in terms of volume considering the lower number of existing players, there are also numerous hurdles, the foremost being very low margins and development of an alternate distribution channel compared to conventional ones. The market development strategy needs to be tailored for the particular country as well as for exporting to other potential regions such as the Middle East, Africa, and various countries in emerging markets. So any wrong calculation during the launch of the product can erase margins completely. The scope for established auto component manufacturers is the redesigning of their existing product portfolio so as to avoid falling in the low cost trap. This would entail designing of components from scratch.

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TABLE OF CONTENTS

CHAPTER 1 - TATA MOTORS: ABOUT THE COMPANY............................................................................. 4 CHAPTER 2 - ABOUT THE TATA NANO ........................................................................................................ 7 CHAPTER 3 - WORLD MARKET FOR SMALL CARS ................................................................................. 12 CHAPTER 4 - DEVELOPED COUNTRIES...................................................................................................... 14 CHAPTER 5 - EMERGING ECONOMIES ...................................................................................................... 19 CHAPTER 6 - FUTURE OUTLOOK ................................................................................................................ 26 CHAPTER 7 - ENVIRONMENT ANALYSIS................................................................................................... 28 Political risk .................................................................................................................................. 30 Brazil ............................................................................................................................................. 30 Thailand ........................................................................................................................................ 31 Tariffs & Regional Economy ........................................................................................................ 32 Thailand Economy ........................................................................................................................ 32 Indonesian Economy ..................................................................................................................... 33 Brazil Economy ............................................................................................................................ 34 Factor costs & Labor conditions ................................................................................................... 35 Cost structure ................................................................................................................................ 37 Environmental regulations ............................................................................................................ 38 From Euro 4 to Euro 5 standards .................................................................................................. 38 Tax incentives to reduce emissions............................................................................................... 39 How does Nano fair in terms of emission? ................................................................................... 40 Foreign exchange .......................................................................................................................... 40 CHAPTER 8 TATA NANO: ESTABLISHING AN INTERNATIONAL FOOTPRINT ............................... 42 CHAPTER 9 - MARKET ENTRY STRATEGY................................................................................................ 46 CHAPTER 10 - GEOGRAPHIC EXPANSION STRATEGY ........................................................................... 50 CHAPTER 11 - DISTRIBUTION CHANNEL STRUCTURE .......................................................................... 51 CHAPTER 12 - DATA ANALYSIS ................................................................................................................... 55 CHAPTER 13 - REFERENCES ......................................................................................................................... 51

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CHAPTER 1 TATA MOTORS: ABOUT THE COMPANYTata Motors Limited is India's largest automobile company, with consolidated revenues of Rs. 92,519 Crores (USD 20 billion) in 2009-10. It is the leader in commercial vehicles in each segment, and among the top three in passenger vehicles with winning products in the compact, midsize car and utility vehicle segments. The Company is the world's fourth largest truck manufacturer, and the world's second largest bus manufacturer. Established in 1945, Tata Motors' presence indeed cuts across the length and breadth of India. Over 5.9 million Tata vehicles ply on Indian roads, since the first rolled out in 1954. The Company's manufacturing base in India is spread across Jamshedpur (Jharkhand), Pune (Maharashtra), Lucknow (Uttar Pradesh), Pantnagar (Uttarakhand) and Dharwad (Karnataka). Following a strategic alliance with Fiat in 2005, it has set up an industrial joint venture with Fiat Group Automobiles at Ranjangaon (Maharashtra) to produce both Fiat and Tata cars and Fiat power trains. The Company also established a new plant at Sanand (Gujarat). The Company's dealership, sales, services and spare parts network comprises over 3500 touch points; Tata Motors also distributes and markets Fiat branded cars in India. Tata Motors, the first Company from India's engineering sector to be listed in the New York Stock Exchange (September 2004), has also emerged as an international automobile company. Through subsidiaries and associate companies, Tata Motors has operations in the UK, South Korea, Thailand and Spain. Among them is Jaguar Land Rover, a business comprising the two iconic British brands that was acquired in 2008. In 2004, it acquired the Daewoo Commercial Vehicles Company, South Korea's second largest truck maker. The rechristened Tata Daewoo Commercial Vehicles Company has launched several new products in the Korean market, while also exporting these products to several international markets. Today two-thirds of heavy commercial vehicle exports out of South Korea are from Tata Daewoo. In 2005, Tata Motors acquired a 21% stake in Hispano Carrocera, a reputed Spanish bus and coach manufacturer, and subsequently the remaining stake in 2009. Hispano's presence is being expanded in other markets. In 2006, Tata Motors formed a joint venture with the Brazil-based Marcopolo, a global leader in body-building for buses and coaches to manufacture fully-built buses and coaches for India and select international markets. In 2006, Tata 4

Motors entered into joint venture with Thonburi Automotive Assembly Plant Company of Thailand to manufacture and market the Company's pickup vehicles in Thailand. The new plant of Tata Motors (Thailand) has begun production of the Xenon pickup truck, with the Xenon having been launched in Thailand in 2008. Tata Motors is also expanding its international footprint, established through exports since 1961. The Company's commercial and passenger vehicles are already being marketed in several countries in Europe, Africa, the Middle East, South East Asia, South Asia and South America. It has franchisee/joint venture assembly operations in Kenya, Bangladesh, Ukraine, Russia, Senegal and South Africa. The foundation of the Company's growth over the last 50 years is a deep understanding of economic stimuli and customer needs, and the ability to translate them into customer-desired offerings through leading edge R&D. With over 3,000 engineers and scientists, the Company's Engineering Research Centre, established in 1966, has enabled pioneering technologies and products. The Company today has R&D centers in Pune, Jamshedpur, Luck now, Dharwad in India, and in South Korea, Spain, and the UK. It was Tata Motors, which developed the first indigenously developed Light Commercial Vehicle, India's first Sports Utility Vehicle and, in 1998, the Tata Indica, India's first fully indigenous passenger car. Within two years of launch, Tata Indica became India's largest selling car in its segment. In 2005, Tata Motors created a new segment by launching the Tata Ace, India's first indigenously developed mini-truck. In January 2008, Tata Motors unveiled its People's Car, the Tata Nano, which India and the world have been looking forward to. The Tata Nano has been subsequently launched, as planned, in India in March 2009. A development, which signifies a first for the global automobile industry, the Nano brings the comfort and safety of a car within the reach of thousands of families. The standard version has been priced at Rs.100, 000 (excluding VAT and transportation cost). Designed with a family in mind, it has a roomy passenger compartment with generous leg space and head room. It can comfortably seat four persons. Its mono-volume design will set a new benchmark among small cars. Its safety performance exceeds regulatory requirements in India. Its tailpipe emission performance too exceeds regulatory requirements. In terms of overall pollutants, it has a 5

lower pollution level than two-wheelers being manufactured in India today. The lean design strategy has helped minimise weight, which helps maximise performance per unit of energy consumed and delivers high fuel efficiency. The high fuel efficiency also ensures that the car has low carbon dioxide emissions, thereby providing the twin benefits of an affordable transportation solution with a low carbon footprint. In May 2009, Tata Motors ushered in a new era in the Indian automobile industry, in keeping with its pioneering tradition, by unveiling its new range of world standard trucks called Prima. In their power, speed, carrying capacity, operating economy and trims, they will introduce new benchmarks in India and match the best in the world in performance at a lower life-cycle cost. Tata Motors is equally focussed on environment-friendly technologies in emissions and alternative fuels. It has developed electric and hybrid vehicles both for personal and public transportation. It has also been implementing several environment-friendly technologies in manufacturing processes, significantly enhancing resource conservation. Through its subsidiaries, the Company is engaged in engineering and automotive solutions, construction equipment manufacturing, automotive vehicle components manufacturing and supply chain activities, machine tools and factory automation solutions, high-precision tooling and plastic and electronic components for automotive and computer applications, and automotive retailing and service operations.

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CHAPTER 2 ABOUT THE TATA NANOTata Nano is a rear-engine, four-passenger city car built by the Indian company Tata Motors. Tata Motors began selling its "one-lakh car" in March, 2009. The engine is placed at the rear and drives the rear wheels. The advantage of placing the engine in the rear was that we could build a roomy passenger compartment within a given footprint by placing the wheels at the corners of the car thus maximizing occupant space. The whole car is only 122 inches long (sixteen inches longer than a Smart), but with the engine under the rear seats and virtually no nose, almost all of that is usable cabin space. The cheapest car in the world today, though the price continues to rise due to increasing material costs, is a concept involving deep frugality and a willingness to challenge conventional wisdom. Seeing an opportunity in the great number of Indian families with two-wheeled rather than fourwheeled vehicles, Tata Motors began development of an affordable car in 2003. The purchase price of this no frills auto was brought down by dispensing with most nonessential features, reducing the amount of steel used in its construction, and relying on low-cost Indian labor. The car's exterior was designed at Italy's Institute of Development in Automotive Engineering. The Nano has so far recorded sales of 200,000 units in the domestic market.

Model versionsNano is now available in three versions:

Basic Std priced at 142,000 (US$3,081.4) has no extras Deluxe CX at 171,000 (US$3,710.7) has air conditioning Luxury LX at 195,000 (US$4,231.5) has air conditioning and power windows

No Frills Car Low cost advantageThe Nano's design implements many cost-reducing innovations.

The Nano's trunk is only accessible from inside the car, as the rear hatch does not open. One windscreen wiper instead of the usual pair 7

No power steering, unnecessary due to its light weight Three lug nuts on the wheels instead of the usual four Only one wing mirror No radio or CD player No airbags 623cc engine has only 2 cylinders

Nano EuropaThis export version of the Nano was first shown at the 2009 Geneva Motor Show but has yet to go on sale. The basic version has been upgraded to meet EU safety and emission standards. This car will have a number of improvements over the standard Nano, including an extended wheelbase, a new 3cylinder engine, power steering, an anti-lock braking system (ABS) and an improved interior and exterior. The Nano Europa will be more expensive, heavier, and less fuel efficient than the standard Nano with prices said to be around US$6000. With a length of 3.29 metres and width of 1.58 meters, the Tata Nano Europa continues to be stylishly petite but surprises with its spacious interior and generous leg space. The slightly longer wheelbase of 2.28 meters combines excellent space and maneuverability, further improving on the benchmark standard set by the Tata Nano. The enhanced spaciousness is complemented by redesigned interiors, marked by smooth curves and a high tech yet gentle feel. To meet the driving needs of its target customers, the Tata Nano Europa will be powered by a 3cylinder sporty all-aluminum MPFI engine matched with a 5-speed automatic transmission, and electric power steering. The gasoline engine will be class-leading, providing high fuel efficiency and low CO2 emission of less than 100 gm / km meeting the twin goals of being environmentally friendly and stylish -just like the Tata Nano. The Tata Nano Europa meets all safety regulations. In addition to the all sheet-metal body, its energy absorbing design, use of advanced restraint systems, ABS, ESP and Air Bags will enhance passenger safety.

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Just like the Tata Nano, the Tata Nano Europa incorporates exterior compactness with interior comfort and seeks to provide motorists the pleasure and utility of personal mobility combined with affordability and environment-friendliness, in a world where smaller, fuel-efficient cars are emerging as a preferred choice. It looks similar to the regular Nano but gets an extra cylinder (up to 3), redesigned interior, a host of safety equipment and an "all sheet metal" body. The basic Nano model lacks luxuries such as airbags, air conditioning and a radio. However, more up market versions will eventually be available, including the slightly bigger Nano Europa, due in 2011 and expected to cost around $4,000.

ManufacturingTata Motors owes its leading position in the Indian automobile industry to its strong focus on indigenization. This focus has driven the Company to set up world-class manufacturing units with state-of-the-art technology. Every stage of product evolution-design, development, manufacturing, assembly and quality control, is carried out meticulously.

Sanand plantTata Motors plant for the Tata Nano at Sanand, in Ahmadabad district of Gujarat, marks the culmination of the Companys goal of making the Tata Nano available to hundreds of thousands of families, desirous of the car a safe, affordable and environmental friendly mode of transport. The capacity of the plant, to begin with, will be 250,000 cars per year to be achieved in phases, and with some balancing is expandable up to 350,000 cars per year. Provision for further capacity expansion has also been incorporated in this location. Built in a record time of 14 months starting November 2008, the integrated facility comprises Tata Motors own plant, spread over 725 acres and an adjacent vendor park, and spread over 375 acres, to house key component manufacturers for the Tata Nano. In line with latest world-class manufacturing practices, the Tata Nano plant has been equipped with state-of-the-art equipment. They include sophisticated robotics and high speed production lines. 9

Exhibit 1 Product specificationsEngine: 2 cylinder petrol with Bosch multi-point fuel injection (single injector) all aluminum 33 horsepower (25 kW) 624 cc (38 cu in) Value Motronic engine management platform from Bosch Compression ratio: 9.5:1 Power: 35 PS (26 kW; 35 hp) @ 5250 rpm Torque: 48 Nm (35 ftlbf) @ 3000 +/-500 rpm Layout and Transmission Steering Performance Rear wheel drive 4-speed manual transmission mechanical rack and pinion w/o servo, Turning radius: 4 metres Acceleration: 0-60 km/h (37 mph): 8 seconds Maximum speed: 105 km/h (65 mph) Fuel efficiency (overall): 23.6 kilometers per litre (4.24 litres per 100 kilometers (66.6 mpg-imp; 55.5 mpg-US)) Seat belt: 4, Trunk capacity: 150 L (5.3 cu ft) Front brake: 180 mm drum Rear brake: 180 mm drum Front track: 1,325 mm (52.2 in) Rear track: 1,315 mm (51.8 in) Ground clearance: 180 mm (7.1 in) Front suspension: McPherson strut with lower A arm Rear suspension: Independent coil spring 12-inch wheels

Body and dimensions Suspension, Tires & Brakes

Tata Motors has invested around Rs2, 000 crores for the Sanand plant which is spread over 1,100 hectare. The initial capacity of 250,000 per year will be reached in phases. Sanand is making 200-300 Nanos a day, likely to be scaled up to 1,000-1,200 cars a day by March 2011. It has an installed capacity of 2,50,000 cars annually, to be expanded to 3,50,000 and eventually, depending on demand, to be scaled up to 5,00,000 cars annually (at 1,000-1,200 cars a day, the plant is likely to touch around 3,50,000 cars a year by March 2011, considering 295 working days in a year). The Nano cars were earlier produced at the Pantnagar plant in the north Indian state of Uttarakhand with plant's capacity 50,000 vehicles a year.

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Low cost of productionIndian labor is cheap. Second, there's no safety equipment; no air bags, antilock brakes, or stability control. But in comparison with a scooter, doors and seatbelts count as safety features. And third, there's a lot of clever thinking that went into this car. There's no trunk or fuel-filler hatch; too many stamped panels, springs, and latches. So instead, all the fluids are refilled under the tiny hood, and you get at the small trunk by flipping the rear seats forward. There's only one wiper and just three bolts per wheel. And it's designed to be cheap to manufacture; the entire rear mechanical package - engine, transmission, suspension, the works - attaches with just four bolts. The only factory options are airconditioning and electric windows; everything else, including the radio and the optional aluminum wheels, will be fitted by your dealer, who will also be able to add A/C later if you can't afford it at first. Identify the bare minimum standard of accommodation, appearance, and performance, take out everything that is unnecessary, and rethink everything that has to stay. The Nano won't compete with "normal" cars on dynamics or quality or anything other than smarts, because it doesn't have to. But it will do 80 percent of what an $8000 Korean city car will do at about 30 percent of the price. All of that assumes, of course, that Tata can hit its price target. The Nano imparts that peculiar sense of self-satisfaction you get from experiencing something wilfully different and clever, such as an original Mini or a Citron 2CV, both of which were paradigm-shifting cars.

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CHAPTER 3 WORLD MARKET FOR SMALL CARS Current scenario, Demand & Supply, Future Outlook Small car market in the world this year is predicted to reach 76.5 million units, up 6 percent from 2010, which sold 72 million units. Despite the small growth, but the total estimate that is a new record and the highest for five years. Of the 72 million units achieved last year, the largest contribution coming from the market in developing countries reached 51 percent and could increase this year. China became the largest contributor to sell 17.2 units or control 30 percent of the total. Rising fuel prices and unprecedented competition among automakers have resulted in some distinct trends that are sweeping the global markets. The most noticeable among them are a growing preference toward smaller cars and the shifting of manufacturing bases to Asia. According to an industry estimate, sales of small cars (with engine displacements below 1.6 litres) are likely to grow twice as quickly as those of big cars in the coming decades. Competition among automakers has resulted in pressure on price and hence companies are progressively shifting their production to lowcost bases. China continues to be a market that must be considered in Asia and as the motor of world growth. Chinas auto sector is still rising as of last year, despite a slight decrease from 2010. Beside China, India is also potential in Asia, with sales increasing 30 percent to 2.7 million units. This year, the domestic juice market grew 18 percent to 3.2 million units. But, the number was still less with the United States with expected sales of 13 million units (up 12 percent).

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From a global perspective, the market in 2010 reflected the market recovery and positive growth in developing countries. Growth this year was predicted for last year, but remained stable in all parts of the world, because the recovery of several automotive markets in many countries. The global markets are shifting to smaller cars because of the soaring interest rates, liquidity crunch, growing costs and mounting oil prices. So these global markets are shifting from bigger cars to smaller and more economical cars

Aspiration Index to own a car

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Source: AT Kearney report

CHAPTER 4 DEVELOPED COUNTRIESUnited States of AmericaAmericans buy small, fuel-efficient cars with the right kind of financial incentive. Armed with rebates of up to $4,500 from the federal government, consumers snapped up such models as the Honda Civic with the transverse engine placement of its 1169 cc engine and front-wheel drive, like the British Mini, the and Ford Focus. The same scenario existed last summer when gasoline prices in the U.S. roared past $4 a gallon. It is hard to make decent money on small cars unless you have a long history of selling them. U.S. automakers do not, and it was instructive to see what happened to General Motors when high gas prices created a miniboom in these vehicles last summer when small-car sales surged six percentage points, to 17% of the U.S. market. Suddenly GM had decent economies of scale: Cars that once lost as much as $3,000 apiece were closer to break-even despite discounts of up to $900 each. But the gas price shock had worn off by August (though oil prices didn't begin their historic retreat for a few more months), and small car sales slumped. Before long, GM was forced to furlough the third shift at its Ohio small-car plant, added only five months before. Carmakers badly believe that Americans like small cars. In America, where nearly half of new vehicle buyers purchase pickups, minivans or sport utility vehicles, Polo car may seem like a dolls car. But overseas they are no oddities. Besides believing small cars to be unsafe and cramped, Americans also see them as rides for people who can't afford better. So carmakers are loading up small models with creature comforts and technology in the hopes of winning customers and charging them a premium. In the United States, however, compact cars not even mini by European standards account for less than 10 percent of the market. Nearly one in five passenger vehicles sold in the United States is an SUV. Ford's Focus compact and Fiesta subcompact will feature hands-free calling and navigation and the so-called SYNC system that lets drivers load music onto an in-dash hard drive. The new SYNC14

equipped Focus will fetch $2,000 more than the old one. "Small cars have been appliances in the U.S. for the most part, but we've seen one can get better prices if you make them exciting and functional, as well as fuel-efficient. GM's Buick compact will feature leather seats, electronic gadgetry. If the coming wave of small cars doesn't wow Americans, U.S. automakers will be ducking it out on price with their better-positioned rivals. And those mini cars could lead to mega losses. Entering (by any model) the US market is very tough due to very stringent security and consumption regulations. Many Chinese car makers had earlier tried to enter US, but could not as they faced problems.

EuropeIn Europe, mini cars are all rave. Some 35 percent of all car sales on the continent are minis. That is understandable in a region that is far more compact than the United States, where gas prices range from the mid-two dollars per gallon to well over $4, and where public transportation is generally more convenient. The European market is more like the Indian market as it is big on small cars. Most European cities, being old, have narrower roads and a huge traffic problem. Also, fuel costs, being high, makes maintaining a small car a sensible idea. Even so, the popular European mass-segment small cars are actually premium hatchbacks in the Indian context. This is because; being a developed market with a higher disposable income, the European consumer's expectation of quality standards and features is much higher than in India.

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One of the more widely anticipated effects of the car Scrappage schemes popular in Europe as stimuli for the industry in 2009 was the increase in market share of A and B-segment small cars. The data shows that the predicted swing transpired to a significant degree these small cars comprised 45 per cent of 2009s registrations in the zone, compared with 39 per cent in 2008. In terms of passenger car tyres, it seems the trend must follow in Western Europe, though we predict the general growth in small car rim-sizes will mitigate this factor somewhat. Returning to DBs report, all countries within Western Europe with the exception of Greece posted an increase in the small car segment of the market. Germany was the big mover, with small car penetration shifting 10 per cent upwards. This only tells part of the story, since sales in the segment saw an improvement of 70 per cent in year on year comparisons. The analysts believe that the boost experienced by German market volumes in 2009 was largely generated by small cars, which made up 84 per cent of the improvement. France, Italy and the UK all saw significant upward movement in the segment too, while Spanish small cars registered only a 1 per cent improvement in market share. Tata Motors is active on the Romanian market through Isotlar Motors, which imports the brand on the Romanian market and sells cars and car parts. Tata Motors and the Nano model would become 16

competition fort Dacia Renault, which sells Dacia cars on the Romanian market, currently the cheapest options for new cars in the country. The European automotive industry is getting smaller. According to the European Automobile Manufacturers Association (ACEA) the market share of smaller cars in Europe raised from about 38.8 per cent in 2008 to 44.9 per cent between January and November, 2009. Both average engine size and power decreased too, with the average displacement dropping to 1,626cm3 from 1,706cm3 and average power falling to 82kW from 86kW. A total of 14.5million new cars were registered in 2009 with only Austria (up 8.8 per cent), France (up 10.7 per cent) and Germany (up 23.2 per cent) showing any growth compared to 2008, primarily due to scrapping incentives. Italy (down 0.2 per cent), the UK (down 6.4 per cent) and Spain (down 17.9 per cent) enjoyed better than expected results, also due to their respective Scrappage schemes. For millions of motorists in Europe, such mini cars are simply a way of life, born out of economic necessity. With steep gas prices, narrow streets and a history of thinking small, even a Volkswagen Golf is considered a big car in Europe. In, Italy, the streets are so narrow, not much else will fit. So, Volkswagen created an even smaller, just-for-Europe version the Polo, which gets 45 miles per gallon. But VWs adventures in shrinkage didnt stop there. For the really economy-minded, Volkswagen produces the Lupo a three-door hatchback for around $16,000 that gets between 78 mpg and 90 mpg and seats four. In the United Kingdom the top five selling super mini cars were the Ford Fiesta, Vauxhall Corsa, Peugeot 206, Renault Clio and Fiat Punto. The Smart car just started being sold in Britain in October 2000. The top-selling car in Europe was the Fiat Punto, which starts out at around $12,000. In Britain, company cars about half the car market are now being taxed on emissions, forcing people to buy more fuel-efficient cars. Some of the smaller and medium sized car markets showed strong growth in car sales in 2010. The small Irish market was up by more than a half while the Portuguese, Swedish, Danish, and Latvian market increased by over 30%. The larger Dutch and Belgian markets also showed solid growth in 2010. 17

However since car models sold in India are different from those sold overseas, with some technical changes made to the suspension or engine power, the Indian version of the Nano will also be tuned to suit standards set by some of the developed markets in the US and Europe.

JapanIn Japan, mini cars have become very popular among cost conscious customers because of their low price, lower taxes, high fuel efficiency and overall lower running costs. Also, these small cars are well suited to narrow roads in Japan. Mini cars are fitted with engines that have capacities 660 cc or less. In the past couple of years, there was a big demand for bigger hybrid cars in Japan, because of the tax incentives offered by the Japanese government. However, these tax incentives are going to end soon, and there would be an increasing number of customers shifting to small cars. Of the overall auto market in Japan, mini cars sales were to the tune of 37 percent up from 32 percent in 2004 so auto makers in Japan cannot ignore the small car market. Toyota plans to sell roughly 60,000 mini cars in its first year of introduction. Though this number may look very small compared to its global sales target of 7.5 million vehicles for 2010, this is definitely a great strategic move by Toyota.

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CHAPTER 5 EMERGING ECONOMIESChinaNano should not be considered for China market because it would be a matter of time before we would be out in that market. Declared competition apart, China will throw up a challenger to the Nano, with a similarly rock-bottom price. Chinese manufacturer Geely plans to unveil a budget city car which would cost less than the Indian-made Tata Nano. The new Geely IG would sell for around $2,250 when it goes on sale in China in 2012. China will resume levying a 10 percent purchase tax on vehicles with engine sizes of 1.6 liters or less beginning in 2011 as the country rebounds from the financial crisis and the economy has regained its rapid growth.

China - with 70 percent growth in the first quarter of 2010 - is racing far ahead of the United States, the former perennial number one car market. The market is projected to reach 16 million cars and trucks this year - three times the size of Japan. Demand for car sales in China grew 46 percent in 2009, the same year in which most of the world experienced its greatest economic reversal in 80 years. Chinas auto industry also made more than $6 billion in profit in 2009 - another all-time high. In the auto market, the government has halved the tax on purchases of cars with engines less than 1.6 liters, to 5 percent, until the end of the year. It is spending 5 billion Yuan (about $730 million) on subsidies to farmers replacing their three-wheeled vehicles or outdated trucks with small, 1.3-liter or less vehicles. The push is to promote more energy efficient vehicles while improving the competitiveness of the country's highly fragmented auto industry: some 10 billion Yuan ($1.5 billion) is going into upgrading automakers' technology and developing alternative energy vehicles. Global car brands and their Chinese rivals are hurrying to add new plants. In the past two years, almost every foreign carmaker has declared an ambition to increase mainland production. Market19

leading Volkswagen revealed plans this week to lift its capital expenditures in China to 6 billion Euros from a previous level of 4.5 billion. This fresh money will pay for two new plants in Guangdong, Chinas largest provincial car market. Traditionally, the domestic industry has been weak, fragmentedChina has over 120 (mostly small) car firmsand technologically primitive. Some 90% of cars sold in China are foreign brands. But China's government has long aspired to create global car champions. One big firm, Shanghai Automotive (SAIC), which has joint-ventures with both VW and GM and plans a $1 billion overseas listing of its shares this year, is busily buying foreign car technology most recently from Britain's failed MG-Rover. Firms unconstrained by foreign partnerships are even more aggressive. Chery (part-owned by SAIC) and Geely are both accused of blatantly copying foreign car technology. GM says that Chery's popular small QQ model is a direct rip-off of its Chevrolet Spark. Both GM and Toyota have failed to win court protection in China for their intellectual property. Geely, the privately-owned Chinese carmaker that recently announced a binding agreement to purchase Volvo, is preparing an onslaught of new products to be channelled to customers in one of three new brands: Emgrand, Englon and Gleagle (Global Eagle). BYD, the Shenzhen-based Chinese maker of small cars, offers an excellent illustration of the extreme pace of growth. The company sold 170,000 cars in 2008, more than doubled the number to 460,000 in 2009 and expects to top 800,000 in 2010. Chinese firms are cornering the crucial market for the small, cheap cars that now appeal to middleclass buyers no longer able to borrow heavily to pay for a bigger vehicle. Two of the three top-selling models were Chinese brandsChery's QQ and FAW's catchily named TJ7101U. They are undercutting the foreign firms by using more cheap labour relative to capital. Chery, which already sells 8,000 cars a year abroad, plans to enter America and has its eyes on Europe.

Chinese consumer behavior

Most customers still pay in cash. An estimated 75 percent of new car buyers purchase without a loan from the bank. 20

Buyers are young. The average BMW buyer in China is in his mid-thirties. The majority of Mini Cooper owners are twenty-something. Inland cities are a genuine, new catalyst. According to companies, most of the current growth is driven by cities off the coast, like Chengdu, Wuxi, Kunming and Shijiazhuang. Demand is uniformly strong from small cars to luxury models. The 2009 tax cut car with engine size of less than 1.6 litres definitely spurred higher sales of small cars. But luxury makes are also on a tear. Mercedes-Benz achieved better than 105 percent growth in the first quarter of 2010.

Latin AmericaEach country in South America has unique tastes and requirements for vehicles and the challenge is to meet those divergent needs in the best way that one can. Consumer tastes and political realities can vary wildly across national borders. The only common denominator here is complexity. South America is the fourth largest automobile market, after North America, Asia and Europe, and is growing faster than any of them. Demand for cars and trucks in the region are expected to grow from 3.1 million units last year to 3.7 million units in 2012. South America is booming because of surging global demand for the agricultural and industrial commodities produced here. In many countries on the continent -- though not all -- this has helped usher in an unprecedented era of political and economic stability, giving more people the money they need to buy a new car.

BrazilBrazil this year overtook Germany as the fourth-biggest car market in the world -- and foreign investors see huge potential as the Latin American giant becomes increasingly prosperous. At the end of 2010, a total of 3.45 million vehicles were sold in Brazil, nearly 10 percent more than last year, according to the national automobile manufacturers' association Anfavea. That positions Brazil behind China, the United States and Japan in sales of cars and light trucks, and just ahead of Germany.

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This in itself is already big attraction for a growing market, with a low density of vehicles per inhabitant. Brazil, with a population of 192 million, had approximately one vehicle per seven residents, leaving plenty of room for growth. While Brazils market remains dominated by very small, no-frills popular cars, consumers and legislators are beginning to demand more safety and other features, entailing costs that carmakers acknowledge they will only partly recoup. This will put further pressure on their margins. There are some 30 million vehicles in total in Brazil, and the world's big car companies expect that fleet to balloon as the country's economic boom creates more consumers. The Brazilian market is still dominated by the four firms that have been there longestGM, Ford, VW and Fiatand they have always managed without local partners. Last year their combined share of a market of 2.45mn light passenger vehicles was 80%. To underline the corporate optimism in Brazil, Fiat last December announced it was building a second factory in the country to the tune of 1.8 billion US dollars. That was part of a 5.9-billion-dollar investment plan for Brazil that Fiat is rolling out between 2011 and 2014. Fiat is intent of keeping its number one status in the Brazilian market, where it accounts for 23.1 percent of sales. Germany's Volkswagen is a close second with 22.7 percent, and US group General Motors is in third place with 21.2 percent, according to the national car dealers' federation. In terms of manufacturing, Brazil is the sixth-biggest vehicle producer in the world, turning out 3.64 million units under 17 different brands. That base looks set to expand further with South Korea's Hyundai and China's Chery poised to also open factories.

Argentina: New Old WorldArgentina shares a common border with Brazil, but little else. Nearly everyone in Argentina is of European descent, a fact that influences their taste in everything from architecture to automobiles.

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Argentina is also a more middle-class country, lacking Brazil's extremes of poverty and wealth. If its capital seems a little threadbare, it is because the country is bouncing back from one of the worst financial crises in its turbulent history -- one in which private bank accounts were frozen by the government and many Argentines saw their life savings evaporate overnight. The memory of that has made Argentines conservative consumers. Though the country's per capita income is higher than Brazil's, the cars and trucks on Argentina's roads tend to be larger but older. That means margins are higher for automakers in Argentina, but volumes are lower. It's a very sophisticated market and Argentina is not a small country, but the internal demand is not big enough to absorb all production. However, the quality of production, together with our competitive cost structure has given Argentina the opportunity to increase exports. Many of those Argentine exports end up in Venezuela, where an oil boom of Middle Eastern proportions has transformed a once-struggling economy into another South American dynamo. At present, nine OEMs are active in Argentina, producing automobiles and trucks of European design. In 1991, Argentina and Brazil signed the Automotive Industry Cooperation Agreement which allows for the integration of production but limits imports of automobiles and parts from third countries. The nine local manufacturers are FIAT with 5.6 percent of the market, Ford 12.8, General Motors 20.1, Iveco 1.0, Daimler Chrysler 5.6, Peugeot-Citroen 28.5, Renault 12.5, Toyota 11.4 and Volkswagen 7.9. In 2007 they produced 500,000 units of which approximately 60 percent is exported, mainly to other countries in the region. Annual sales, of locally made plus vehicles imported from Brazil reached 570,000 in 2007. 65 percent of the new cars sold in Argentina are imported, of which 95 percent originate in Brazil. The market for used automobiles is unusually high when you consider the total size of the market: it reached one million in 2007. One of the reasons is the delay in the delivery of new cars. Used automobiles, parts or components cannot be imported into Argentina. Restrictions have always existed, historically, on imported automobiles.

South East Asia Thailand23

Welcome to the "Detroit of Asia", a vast area 120 kilometres east of Bangkok, where durian orchards have given way to car plants over the past decade and vehicles are made for export to more than 200 countries. Global vehicle makers committed about 32.5 billion baht ($1.1 billion) to Thailand in 2010, down 20 percent from 2009, but holding up well despite political unrest that disrupted Bangkok for several months early in the year. Thailand's car production is expected to rise nearly 22 percent to 2 million units in 2011 and reach 2.5 million units in the next five years. Of those 2 million units, about 1.15 million will be for exports, driven by new pick-up truck models and small fuel-efficient cars. Domestically, sales are targeted to rise to 900,000 from about 850,000 in 2010.

However when it comes to small cars, Thailand faces some challenges. Small cars contribute just 25% of the total production in Thailand. The excise duty charged on pickup trucks is significantly lower than that imposed on passenger cars, making the former more attractive. This has resulted in the production of passenger cars, especially small cars, lacking economies of scale. The entire automotive industry is therefore geared toward the production and export of pickup trucks rather than cars.

IndonesiaIndonesia is the third largest automotive market in the region after Thailand and Malaysia and according to a recent report by Frost & Sullivan, passenger vehicle sales in the country are expected to increase at a compound annual growth rate of 8.6% from 2010 to 2015. The increase was attributed to increased demand for multi-purpose vehicles (MPVs), sports utility vehicles (SUVs) and entry of low-cost economical cars.

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Global Passenger Car Sales Forecast 2003 2020 (in million units) including ULCC

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CHAPTER 6 FUTURE OUTLOOKDespite the U.S. slump in small car sales this year, analysts expect the super mini market to return with a vengeance when gas prices go back up, as they periodically do. Moreover, fuel economy standards coming in 2016 will mandate that gas mileage for all cars must rise from 27.5 mpg to 37.8 mpg, heightening U.S. demand for smaller cars. Within 5 or 10 years, it is expected that the so-called global carssmall vehicles that are best-sellers everywhere elsewould register greater inroads in the U.S. market. In January 2011, Fiat will be returning to the U.S. market for the first time since 1995 with the launch of its popular 500, which will sell through the company's network of Chrysler dealerships. (Fiat acquired Chrysler in 2009.) For now, though, small car dealers may need to stock patience on the sales front, the small car market is probably one of the riskiest parts of the market right now.

The ultra low cost car segment (ULCC) will grow by 24.3% per year to 14 million units in 2020 Strong trend towards downsizing (e.g. 4-instead of 6-cylinder) in existing vehicle classes E-vehicles and hybrids will play a significant role

Small cars are likely to play a big role in the global market in the future. If Thailand wants to achieve its ambition of reaching the two-million production mark by the turn of the decade, a focus on small cars will be a rewarding strategy. Mitsubishi Motors is spending 16 billion baht ($535 million) to build its new "Global Small" car and will begin production of a new model in 2012. Nissan spent 5 billion baht to develop its "March" model, which went into production last year at a plant near Bangkok. In March, Honda will launch its Brio "eco-car".

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General Motors is getting ready to roll its first diesel engine out of a recently opened factory in eastern Thailand. Nearby, Ford Motor is building a manufacturing plant and Suzuki Motor aims to start producing environmentally friendly cars at a new factory in 2012.

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CHAPTER 7 ENVIRONMENT ANALYSISGovernment support to play important roleEven though the automobile sector is expected to see an upswing from 2009 and 2010 onwards, government support will remain crucial. The governments role should not only be limited to reviving automobile demand but also making sure that demand is sustained. In response to the economic downturn, governments of most nations have been implementing a wide range of emergency economic measures, including tax incentives, subsidies, low carbon measures, and initiatives aimed at local revitalization. These measures will need to be continued in the future so that companies can sustain their business activities even amidst declining demand. Governments have been providing support through various ways to rejuvenate the sector. For example, the Japanese government introduced tax incentives and announced a stimulus package. On April 1, 2009, the government reduced the tax on the purchase of new vehicles that met pre-defined fuel efficiency and emissions criteria. In addition, EVs and HEVs are exempt from taxes, providing a tax reduction of 150,000 yen (USD 1,685). The government also announced a stimulus package of 56.8 trillion yen (USD 626.6 billion) to promote old vehicle replacement and subsidies for new vehicle purchases. The Russian government is offering subsidized auto loans, which translates into subsidies on interest payments. This amounts to two-thirds of the Central Bank of Russia (CBR)s refinancing rate, which currently is 11 percent on car loans. The government has also decided earlier to subsidize interest payments on cars worth up to 600,000 roubles (USD 20,293) instead of 350,000 roubles (USD 11,837) and lowered the minimum down payment on a car to 15 percent from 30 percent. Similarly, the US government has also announced a stimulus package of USD 2.4 billion for electric vehicles, which is in line with the governments goal of putting 1 million plug-in hybrid vehicles on the road by 2015. However, government support has not been entirely effective in all countries.

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Some countries have seen an artificial demand for cars, which has now dried up. For example, the German government provided a USD 7.13 billion stimulus package in January 2009 where customers received USD 3,250 for scrapping their old cars and purchasing new ones. As a result, 2009 sales picked up in a big way and are estimated to be 3.5 million cars for the year. With the stimulus fund drying up in September 2009, sales are expected to take a hit in 2010 with the number of cars sold falling to 1 million. Similarly, in the US, this had set aside USD 1 billion for the Cash for Clunkers Program (USD 4,500 discount for a new car) and then had to forcibly add another USD 2 billion to the discount kitty. With the funds for discounts dried up and fan fare diminished, car makers such as Toyota have cut their production by 10 percent and have even shut down some plants. These kinds of stimulus packages were more of a temporary upsurge in demand. The role that governments are likely to continue to play in shaping this industry into the future is hard to assess, but there is sure to be substantial and active governmental involvement. Thailand has one of the largest automotive industries in the world. The Thai automotive industry has not developed solely on its own initiative. The industry is a collaborative effort between large Japanese automobile manufacturers and their Thai partners. The industry has also been helped along with Thai government support. As the largest automobile manufacturer in Southeast Asia, Thailand has also become the largest market for vehicles in Southeast Asia. Through exports, the industry is also an important generator of export revenue and national wealth for Thailand. Bright light on the horizon is the development of small cars. The industry for small cars here in Thailand is several manufacturers who have, in line with government policy, to promote the production of small cars locally - what they call the eco-car programs. There are several manufacturers that have put in place plans to move production here for small cars. Japan's Nissan recently confirmed plans to transfer production of its key subcompact car to lowercost Thailand. All output for the vehicle would be shifted to Thailand and then exported to Japan. The Thai Board of Investment has also given approval for production in Thailand of six ecocar projects, including Nissan, Suzuki, Honda, Toyota, Tata and Mitsubishi. 29

Indonesias economy continues to grow at rates double that of the developed world and there are tremendous opportunities for investors across all sectors. The automotive market in Indonesia is big and interesting for investors. In support, the government is developing an environment- friendly and fuel- efficient vehicle program. The automotive sector has the potential to bag investments worth Rp 10-15 trillion until 2012. Indonesian government is now turning its attention to attracting investment in more eco-friendly automotive technologies, including smaller cars, low-emission engines and alternative fuels (like biofuels). The government plans to offer incentives for the production of low-cost, eco-friendly cars. Incentives will be offered to promote the production and sale of hybrid and electric vehicles, as well as small energy-efficient vehicles and the use of bio fuels such as diesel blends. Indonesia has the largest market in Southeast Asia for small and medium-sized MPVs and has the potential to become an important export base for alternative-fuels models. With four cargo ports, six passenger ferry terminals, a freight airport with Indonesias longest runway, and a modern road and bridge network, the zone is well-served with transportation infrastructure. With Singapores thirst for space, Malaysia experiencing labour shortages, and labour costs in China rising, Batam is strategically placed for growth.

Political risk BrazilBrazil has some of the highest hiring costs in the world, forcing employers to commit large sums to pension funds and to pay enormous penalties for firing workers. This places an additional burden on foreign investors. Brazil's external financial position will continue to bear watching. Including amortization of the debt, financing needs remain very large and continue to grow sharply. Although the country will be unlikely to experience any great difficulty in covering those needs, a high proportion of the foreign capital generally involved is volatile in nature and vulnerable to a crisis of confidence in the markets. A sudden flight of capital could cause the real to depreciate. Although Brazil's ample foreign 30

exchange reserves would provide it with good capacity to cope with such a situation, the risk nonetheless bears watching in view of the implications for the capacity of private Brazilian companies to repay the debts.

ThailandWithout a doubt, Thailand's political situation is a mess and Thailand's political outlook for 2011 and beyond does not look pretty. For just over four years Thailand has endured an intensely adverse domestic political climate. For most of those four years there has been political turmoil between various factions; most notably between the political parties backed up by citizens who are poor and come from rural settings and other parties representing the more wealthy and burgeoning middle class from urban areas. Finally in May 2010, Thailand's domestic political climate became so out of control, the current prime minister ordered a severe crackdown on the opposition that resulted in a relative calm. Thailand's military and police have a congenital inability to keep out of politics -- the country has had 18 actual or attempted military coups in 77 years of on-off democracy. A surprise decision last September by a Thai court to suspend 56 projects -- initially 76 -- at the Map Ta Phut industrial estate, the world's eighth-biggest petrochemicals hub, has raised concerns about bureaucratic unpredictability and the competence of a government fighting fires on multiple fronts. According to the forecast of the Economist Intelligence Unit, GDP growth in the Thai economy will come in around 4% in 2011, with political uncertainty continuing to undermine consumer and business confidence. However, as in the first half of 2010, although political risks could hinder future investment, business operations in Thailand (particularly in the countrys industrial zones) are likely to be generally unaffected in any direct way by political unrest. Thus, as long as global demand continues to grow, Thailands export-oriented manufacturers should continue to reap the benefits. However, according to the Economist Intelligence Unit, Thailand's political problems do not appear to be over and Thailand's political outlook for 2011 does not seem to be a positive one Even though Thailand currently enjoys a relative calm following the violent end to antigovernment protests in mid-May, Thailands political crisis does not appear to be nearing an end. Recently, 31

Thailands current Prime Minister managed to strengthen his hand, but he does not appear willing to risk calling an early election. The government will continue to run a budget deficit for the next two years; the shortfall will average 2.8% of GDP. The Bank of Thailand (BOT, the central bank) will tighten monetary policy.

Tariffs & Regional Economy Thailand EconomyMore than 55 percent of Thailand's production is for export to the Middle East, Asia, Australia and New Zealand. Beyond the politics, one potential risk to this success story is a lack of skilled labour. Japanese investors are still very confident about investing here due to the high concentration of suppliers and strong market position, but what carmakers need is skills. Last year, auto exports contributed about 13 percent to Thailand's total exports of 6.18 trillion baht, making it the second-biggest sector after the electronics and computer parts, according to Commerce Ministry data. Tax breaks for firms making small passenger vehicles with mileage of at least 20 km/litre (47 mpg) should give the industry another boost, after the success of the pick-up truck Thailand is the world's second-biggest market after the United States. The industry accounts for 12 percent of GDP, the World Bank said in a report in November. Part of the attraction is the low cost of labour. The automobile cluster in Rayong is a small city, spread across 3,450 acres and packed with 25,000 employees toiling out of mammoth factories including those belonging to nine of the world's top 10 automotive suppliers, including struggling Japanese automakers burdened with a strong yen. Thailand is a major exporter of rice and rubber, and any boost to the agricultural sector is often reflected in vehicle demand by the country's largely rural population. Thailand automobile sector grew by 37% to 750,000 units in 2010 from 548,871 units last year. Among the reasons cited are the Thai governments decision to set up industrial estates that offer tax incentives, lower import duties,

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one-stop visa and work permit benefits. Furthermore, multinational investors are not required to have a local partner to set up base in the country. Where Thailand outscores India as an attractive location is the fact that it is part of the ASEAN Free Trade Area, which eliminates tariff barriers between 10 countries in the region. Japanese carmakers have constantly maintained that similar trade pacts would help Indian ancillary suppliers become part of their global sourcing plans.

Indonesian EconomyIndonesia, Southeast Asia's biggest economy, could overtake the Thai market as a regional manufacturing hub by 2014 because of a jump in economic development, growing national wealth and a more stable currency. Over the next three years, per capita income in Indonesia could rise to $3,000 from about $2,000, fuelling demand for vehicles. Indonesia is not affected that much by the external market. Their economy is driven by the domestic market, compared with Thailand, which is much more dependent on exports. The growth would also be fueled by the Indonesian governments recent announcement to implement more regulations to attract investments in automotive production facilities and to reduce import tariffs for CKD and completely built unit (CBU) units. Current tariffs on vehicles imported under bilateral and regional trade agreements such as the ASEAN Free Trade Agreement (AFTA) will not be affected. Duties on completely built (CBU) vehicles imported from qualifying member countries will remain at a maximum of 5 percent. MFN import tariffs on completely built up passenger cars will be cut from the current 45 percent to 40 percent, while those on completely knocked down (CKD) imports will fall from 15 to 10 percent. The WTO requires MFN rates be no higher than 40 percent beginning in 2012. Some of the smaller players in this market are expected to get a boost from the tax cut, especially those who assemble their vehicles in Indonesia and have to compete against the dominant Japanese manufacturers. 33

Brazil EconomyBrazils fast growing economy boosts continuous growth in the automotive sector, both in terms of production and in sales. However, each market is different, and carmakers have had to employ different strategies to succeed in them. Some governments in developing countries try to protect indigenous manufacturers or they force global car firms to invest in the development of national motor industries. In China, for example, the government has until recently insisted that foreign manufacturers can set up shop in the country only through joint ventures with Chinese partners. In other countries car firms have learnt that they have to be on the spot in order to understand local conditions. This is very important if a car firm wants to succeed in a country like Brazil.

Brazil is a market that will continue growing over coming years, and so is attracting a lot of investment due partly also due to their competent workers and the availability of primary materials for the end product. Brazil also with a dynamic economy provides controlled inflation and easy credit for car-buyers.

Because of high import taxes, carmakers chose to manufacture in Brazil. Besides of making some of their newest models, both Fiat and VW produce some cars specially designed for the Brazilian market such as the Fiat Palio and VW Golf. Brazil enjoys enviable dual role as both Latin America's biggest market, and a production and development hub for the region. Sixty percent of Brazil's auto exports go to Argentina, while another 20 percent go to other parts of the continent. In terms of vehicle imports, 50 percent come from Argentina, 22 percent from South Korea and China, 10 percent from Mexico and 6.5 percent from Europe and the United States. The panorama could change, though, as Brazil's currency, the real, continues to soar against the dollar and the euro. That makes imported vehicles sought after by class-conscious Brazilians more affordable, and makes Brazilian exported vehicles more costly.

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Factor costs & Labor conditionsThe average wages for manufacturing workers in China are $412.50 a month, compared with Thailand's $245.50, Malaysia's $666 and $129 for Indonesia, according to a 2009 report on the International Labor Organizations website. Indonesia ratified the law 13/2003 that governs the bargaining power of workers, specifies minimum standards for working condition, and sets rules for severance and compensation payments. The government has issued several regulations that expand or modify labour laws, including the decrees on the employment of foreigners, occupational health and safety, work competency standards and overtime standards and pay. Wages include a minimum wage, overtime pay, sick pay and holiday pay. Cash wages must constitute minimum 75% of the minimum wage, with the remainder typically allocated for food and transport.

Whilst low labour costs induce businesses to locate in Indonesia, often workers need training to optimise productivity. To train successfully, firms need to be culturally sensitive and willing to adapt. Across Indonesia, the ability to speak English increases a persons status; consequently, this training engenders loyalty and productivity in employees. A failure to provide an appropriate social environment in the workplace may lead to absenteeism.

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Measures hourly wage cost (index) in major agglomerationsRank Index, hourly wage cost (South Korea = 100.0)

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22

Indonesia Philippines India Thailand Mexico China Romania Argentina Malaysia Slovakia Russia Hungary Poland Hong Kong Turkey Brazil Czech Rep South Africa Taiwan Singapore Slovenia South Korea

14.0 17.2 18.7 20.2 23.2 29.2 33.8 35.9 38.3 50.8 53.3 54.8 56.1 59.8 64.9 65.8 70.5 74.6 76.3 80.4 86.2 100.0

* As on March 2009 (data unavailable for Israel, Pakistan and Saudi Arabia)

Thai labour laws are designed to protect workers and preserve their rights. These laws dictate the minimum standards for salary and benefits and the maximum amount of work hours and days. The 36

labour law provides a reasonable work environment and protects against labour exploitation. Minimum wage laws are structured to encourage investment outside the metropolitan area of Bangkok. The Thai government allows businesses to utilize inexpensive labour in other provinces in an effort to abate traffic, pollution, and infrastructure bottlenecks in the urban areas. Health care coverage is a main concern for many Thais. The Thai government recently made great improvements to its labour laws, granting better benefit plans and reducing the financial burden on the employee in case of illness or accident. Although unions are not generally viewed in a favourable light, they do play an important role in negotiating private sector employment contracts. In the past year, worker discontent has led to more strikes than in the previous five years. Termination procedures have been developed to protect both the employer and employee. Regulations are fair, requiring notification of termination as well as severance pay for an otherwise loyal employee. Although qualified employees are permitted recourse against unjustified termination, the company has no obligation to a negligent or malevolent worker.

Cost structureCost effectiveness is one of the main success factors for the automotive industry. South East Asia is well positioned to exploit this advantage. For parts such as hand-sewn seat covers, where labour accounts for about 45 percent of the total cost, low cost advantage is likely to remain significant.

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Environmental regulationsEuropean Union (EU) adopted catalyst-forcing standards for new gasoline-fuelled cars in the early 1990s (so called Euro 1 standards) and have gradually tightened them in several steps: Euro 2 in 1996, Euro 3 in 2000 and Euro 4 in 2005. Similar requirements were adopted for diesel cars and light and heavy commercial vehicles. In conjunction with the tightening of vehicle standards, fuel quality improvements were also mandated. In some cases, the fuels modifications are necessary to allow the introduction of vehicle technologies that are required to meet the new vehicle emissions standards. The EU has adopted strict new caps on pollutant emissions from diesel and petrol cars, limiting in particular nitrogen oxides (NOx) and particulate matter (PM) which poses the most serious health and environmental problems

From Euro 4 to Euro 5 standardsThe Euro 5 standards for cars will further restrict emissions, from both petrol and diesel cars, of carbon monoxide (CO), hydrocarbons (HC), oxides of nitrogen (NOx) and particulate matters (PM), which are considered harmful to human health. The tighter standards will apply as of September 2009 for new models of cars and in January 2011 for all new cars.

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Emission standards for Light duty (New vehicles)

Tax incentives to reduce emissionsMember states are free to introduce fiscal incentives to reduce emissions beyond the Euro 4 emission standards which have applied since January 2005. Germany, for instance, has a tax exemption of about 600 for new cars bought if particle emissions are under 0.0085g/km. Similar incentives are proposed in France, Austria and the Netherlands. In January 2005, the Commission issued a guidance document for the purposes of countries wishing to go beyond Euro 4. Emission standard for new vehicles in Thailand had been established since 1995 and are in line with European standards. As new vehicle standards are tightened, in-use vehicle standards should also be tightened and these in turn should form the basis for routine vehicle inspections.

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How does Nano fair in terms of emission?Years of work has resulted in a low-weight, low-carbon vehicle with many innovations. The Nano is powered by a two-cylinder, all-aluminum engine and weighs just 1,300 pounds. It emits just 103 grams of carbon dioxide per kilometer driven, compared with its nearest competitor, which emits 130 to 150 grams per kilometer.

Foreign exchangeAsean nations are export-oriented. The region must strengthen cooperation to make their currencies more stable to sustain export growth. The currencies of Asean countries, particularly Thailand, Malaysia, Indonesia and the Philippines, have appreciated sharply. The Asian financial crisis, also known as the Asian currency crisis, started in July 1997 in Thailand, and affected currencies, stock markets, and other asset prices of several Asian countries, many part of the East Asian Tigers. Triggered by events in Latin America, Western investors lost confidence in securities in East Asia and began to pull money out, creating a snowball effect. Thailand, namely, was one of the nations most profoundly affected by the crisis. Following the crisis, it was decided that the

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baht be placed on a floating exchange rate which halved its value, to its lowest rate of 56:1 in January 1998. It stabilized again at a rate of about 40:1, which it has managed to stay at since then. As Indonesia is consistently plagued by high inflation rates, the central bank has put strong emphasis on a restrictive money supply, targeting an inflation rate of 3.5% in 2013. The currency, the Indonesian rupiah (IDR), is maintained under a managed-float exchange rate regime, although BI has issued regulations limiting speculative capital flows that may increase currency volatility. Over the past six years the exchange rate against the dollar was held relatively stable by means of accumulation of foreign exchange reserves, with the goal of stimulating export-driven growth. In late 2008 the Indonesian rupiah lost a fifth of its value against the dollar, but the slide has since halted. Save more, spend less -- and, for goodness' sake, don't do anything drastic! That was the main message that business leaders had for Brazil's incoming president, Dilma Rousseff, at the Reuters Brazil Investment Summit. While most said they were content with the overall direction of the booming economy, they urged Rousseff to rein in fiscal spending and avoid any major changes that could spark inflation or otherwise derail the good times. Other challenges cited include Brazil's overvalued currency, the real, which is damaging exporters; the relatively low national savings rate; high taxes; and Brazil's long-standing bugaboo, its sky-high interest rates.

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CHAPTER 8 TATA NANO: ESTABLISHING AN INTERNATIONAL FOOTPRINTThe introduction of a new product in a new product category that will potentially reach a new market of consumers is a tremendous challenge, and it is not unusual to encounter launch problems. The real test of a firm's capabilities comes in how it responds to these problems. The marketing and financing challenges are of a very different sort. These have to do with a new product category -- the low-cost car -- that will attract consumers who are new to cars, but will also possibly lure other consumers, like young people looking for inexpensive transport with a cool vibe. It will take the use of multiple marketing channels to exploit the full market potential of the Nano, as Tata is learning. But it is certain that the primary efforts should go to attracting the first-time buyer, since that is where the volume potential of the Nano is so great, and it is also where the entire concept of a low-cost car will be either validated or invalidated.

Why go Global?Tata Motors needs new markets for its Nano. So far the Nano has sparked imagination but not as much interest as expected at home. There was a slump in sales for the world famous mini car last year, which had some analysts concerned that Tata Motors had overestimated the domestic demand for the car. The Nano was designed and priced to give the average Indian family a safer transportation option than piling four people on a motorcycle. However sales rebounded recently after Tata Motors boosted advertising, extended the cars warranty period and lowered the cost of financing. Still auto parts makers felt Tata has to sell many more Nanos for everyone to break even on the project. Leverage the low cost advantage and spare capacity The Sanand plant has a capacity of 250,000 cars per year, and with some balancing is expandable up to 350,000 cars per year. Provision for further capacity expansion has also been incorporated in this location.

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Built in a record time of 14 months starting November 2008, the integrated facility comprises Tata Motors own plant, spread over 725 acres and an adjacent vendor park, spread over 375 acres, to house key component manufacturers for the Tata Nano. So far, there are 71,000 Nanos on Indian roads. Currently, the production is to the tune of about 5000 units a month and the company hopes to ramp it up to about 10000 units by March 2011. That will be the time when they need to start looking at the export markets. The average assembly line worker is paid a mere $3500 a year at the Sanand plant.

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Huge market potential in the emerging economies and also DEVELOPED COUNTRIES

Salient Features of Automobile Industry in Select Asian Countries

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Demand for small car sales by 2020 under different scenariosSource: Global Economic Intelligence Unit; BCG Analysis Triad market consists of Japan, North America and Western Europe. RDEs- Brazil, China, Indonesia, Malaysia, Iran, Mexico, Russia, South Africa, Taiwan, Thailand and Turkey

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CHAPTER 9 MARKET ENTRY STRATEGYThe Tata Nano is a perfect car for developing countries and Tata would look at many similar export markets which need low cost cars and where there are no stringent safety regulations. Tata need to initially target sales realization of approximately 10,000 cars per month in the South Asian market.

Direct export through overseas marketing subsidiary @ INDONESIAThis mode of entry is suitable based on the following factors: Nano can be exported as CKDs and capitalize on low import tariff Speed to market Very low margins in small car market Capability to establish a more permanent role in ASEAN market More control over marketing mix

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Market selection approach based on World Bank data (2010)

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Economies of scale and scope at Sanand plant Easy access to market in terms of geographic distance Tata Motors should look at exporting Nano as completely built units (CBUs). But eventually, they should start assembling the Nano in local markets to get the costs right. The Tata Nano is a perfect car for developing countries to start with and Tata should look at similar export markets which need low cost cars and have similar consumer preferences. Even if Tata Nano is exported to these countries as CKD or SKD units and assemble it in their countries making cosmetic technical changes to the suspension or engine power, they could still be able to capture the market and achieve the twin objective of generating employment and giving thrust to auto component industry. The assemblers would also be the dealers for the car and thus would eliminate one level.

Market AccessIF Tata Motors plans to go ahead with the export plans to Indonesia, they will get a very good foothold in adjoining markets of Philippines, Thailand and Malaysia. These Asian markets are highly untapped with huge potential for a car like the Nano. The Nano is ideal product in the South Asian market because of the product suitability and the buyer preferences, purchase decision closely match with that of Indian demographics. The Nano can later be exported to the right hand markets which include Thailand, Taiwan, Brazil and South Africa.

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To ADAPT or STANDARDIZE???US Price of Gasoline Low on maintenance Fun quotient Better performance Safety Europe Energy efficiency Scrappage schemes Narrow roads Safety CO2 Tax incentives Asia Rising middle class Changing lifestyle & aspirations Higher disposable income Low price Remarkable mileage Latin America Tax cuts on small cars Low interest rate Fuel efficiency Price sensitive Past experience + Media influence

Factors driving purchase decision of Small cars

Factors to be considered: Right hand driving practice in Indonesia Convergence in buyer preferences Market homogeneity Economies of scale in production and marketing to an extent Similar Emission standard (Euro 4 norms)

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CHAPTER 10 GEOGRAPHIC EXPANSION STRATEGYPRODUCT EXTENSION/ COMMUNICATIONS ADAPTATION DUAL ADAPTATION

INDONESIATHAILAND TAIWAN VIETNAM MALAYSIA

EUROPE MEXICO ARGENTINA BRAZIL

DUAL EXTENSION

PRODUCT ADAPTATION/ COMMUNICATIONS EXTENSION

POTENTIAL MARKETS FOR FUTURE EXPANSIONTarget market Indonesia Thailand Philippines Other ASEAN countries Brazil/Argentina/Chile South Africa Italy Eastern Europe (Russia/Romania) Mexico Western Europe US Priority Ranking 1 2 2 2 3 3 4 4 5 6 7 * Based on Analysis of World Bank data in Appendix A 50

CHAPTER 11 DISTRIBUTION CHANNEL STRUCTUREThe marketing channel for cars in Indonesia is relatively long, extending from sole agents/assemblers to sole distributors and dealers or car showrooms throughout the country. The distribution network is critical for Tata as independent dealers are influencing the consumer purchase decision. Tata should look at a JV with the leading local business partner in Indonesia, Astra International which can provide exclusive distribution for the Nano at affordable price and also capitalize on their well established after-sales service networks, and marketing excellence. Astra will be able to share their manufacturing facility and infrastructure where the exported CKD/SKD units of Nano can be assembled. Astra manufacturing facilities are well supported by parts centers, training centers, and tooling and die manufacturing facilities.

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WORLD DEVELOPMENT INDICATORS & GLOBAL DEVELOPMENT FINANCEWorld Development Indicators (WDI) is the primary World Bank database for development data from officially-recognized international sources. Global Development Finance (GDF) provides external debt and financial flows statistics for countries that report public and publicly-guaranteed debt under the World Bank's Debtor Reporting System (DRS). Passenger cars per 1000 people 1 3 6 11 13 13 18 22 42 52 54 103 108 158 167 206

Country Bangladesh Nepal Myanmar Philippines Iran, Islamic Rep. Vietnam Sri Lanka China Indonesia Thailand Hong Kong SAR, China Chile South Africa Brazil Mexico Russian Federation

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Production Workers: Indexes of hourly compensation costs in manufacturing, 33 countries or areas and selected economic groups, selected years, 1975-2008Country or Area Americas United States................................ Brazil............................................. Canada.......................................... Mexico1......................................... Asia and Oceania Australia....................................... Hong Kong SAR ........................... Israel............................................. Japan............................................. Korea, Republic of....................... New Zealand................................ Philippines................................... Singapore..................................... Sri Lanka....................................... Taiwan.......................................... Europe Austria.......................................... Belgium......................................... Czech Republic............................. Denmark....................................... Finland.......................................... France........................................... Germany....................................... Hungary........................................ Ireland.......................................... Italy............................................... Luxembourg.................................. Netherlands.................................. Norway.......................................... Poland........................................... Portugal......................................... Spain............................................. Sweden.......................................... Switzerland................................... United Kingdom............................ Trade-Weighted Measures All 32 Foreign Economies............ OECD ............................................ Europe ...................................... Euro Area ................................. Eastern Europe6........................ East Asia ex-Japan ......................7 5 4 3 2

1975

1980

1985

1990

1995

2000

2005

2006

2007

2008

100 103 23 94 12 33 48 5 53 14 5 6 74 93 101 81 76 68 76 101 106 143 27 40 115 98 53 61 68 77 81 8

100 93 22 90 16 35 56 10 56 16 2 11 93 121 112 88 96 80 85 119 125 141 23 59 128 115 76 66 73 95 99 11

100 89 12 66 14 29 49 10 36 20 2 12 60 64 63 64 61 58 60 59 68 88 13 36 75 76 48 50 55 59 60 12

100 112 10 91 22 52 84 26 57 26 2 26 120 120 123 139 107 97 121 107 121 151 27 75 140 140 82 77 85 109 114 23

100 97 8 88 28 55 135 44 60 5 45 3 35 148 149 15 144 132 115 152 15 98 97 136 139 147 33 72 125 170 79 84 91 120 128 37

100 18 85 11 72 28 58 110 43 43 4 37 2 31 101 102 14 109 90 80 99 12 78 74 89 95 114 14 25 53 105 107 85 68 74 88 88 14 34

100 18 103 11 106 24 52 90 56 63 4 31 2 27 127 131 26 147 122 104 121 22 118 103 116 124 156 19 32 74 129 131 105 79 86 113 115 22 36

100 21 109 12 108 24 52 84 64 60 4 36 2 28 130 133 29 153 126 106 124 22 121 105 116 126 164 21 33 77 133 130 107 82 89 116 117 23 40

100 24 116 12 119 23 55 79 67 69 5 34 2 26 140 141 33 168 134 114 131 27 130 112 122 133 182 24 35 83 143 131 116 85 93 123 124 27 40

100 27 116 12 127 23 67 90 55 68 5 38 3 27 152 154 40 178 147 123 141 29 140 122 130 145 193 32 38 92 150 145 109 89 97 131 135 34 37

1 For 2 3

Mexico, NAICS 31-33 excludes NAICS 324 Petroleum and Coal Products Manufacturing.

Hong Kong Special Administrative Region of China Refers to countries in this release that are members of the Organization for Economic Cooperation and Development.

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4 5

Europe refers to the European countries in this release. Euro Area refers to European Union member countries in this release that have adopted the Euro as the common currency as January 1, 2009. Eastern Europe refers to the Czech Republic, Hungary, and Poland. East Asia ex-Japan includes Hong Kong SAR, the Republic of Korea, the Philippines, Singapore, and Taiwan.

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CHAPTER 12 DATA ANALYSIS

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Country Name Cost to export (US$ per container) Cost to import (US$ per container) Road density (km of road per 100 sq. km of land area) Roads, total network (km) Passenger cars (per 1,000 people) Inflation, GDP deflator (annual %) GDP (current US$) in bn USD GDP growth (annual %) GDP per capita (current US$) GNI (current US$) in bn USD Employment to population ratio, 15+, total (%) Labor force, total in mn Population growth (annual %) Population, total in mn Country Name Cost to export (US$ per container) Cost to import (US$ per container) Road density (km of road per 100 sq. km of land area) Roads, total network (km) Passenger cars (per 1,000 people) Inflation, GDP deflator (annual %) GDP (current US$) in bn USD GDP growth (annual %) GDP per capita (current US$) GNI (current US$) in bn USD Employment to population ratio, 15+, total (%) Labor force, total in mn Population growth (annual %) Population, total in mn Country Name Cost to export (US$ per container) Cost to import (US$ per container) Road density (km of road per 100 sq. km of land area) Roads, total network (km) Passenger cars (per 1,000 people) Inflation, GDP deflator (annual %) GDP (current US$) in bn USD GDP growth (annual %) GDP per capita (current US$) GNI (current US$) in bn USD Employment to population ratio, 15+, total (%) Labor force, total in mn Population growth (annual %) Population, total in mn

Argentina 1480 1810 8 231374 9.98 307 0.85 7626 298 56.50 19 0.98 40276376 Denmark 744 744 168 72412 370 0.44 310 -4.89 55992 318 60.30 3 0.65 6 India 945 960 112 3316452 8 3.83 1310 7.66 1134 1303 55.60 450 1.34 1155

Australia 1060 1119 11 815074 545 4.94 925 1.29 42279 901 59.40 11 2.05 21874900 Spain 1221 1221 132 666292 485 0.22 1460 -3.64 31774 1430 48.60 23 0.88 46 Italy 1231 1231 162 487700 601 2.15 2113 -5.04 35084 2076 43.60 25 0.65 60

Brazil 1540 1440 20 1751868 158 4.79 1573 -0.19 8121 1541 63.90 100 0.91 194 Finland 540 620 23 78889 483 0.87 238 -8.02 44581 238 54.70 3 0.47 5

Switzerland 1537 1540 173 71354 524 0.28 492 -1.91 63629 512 61.20 4 1.09 8 France 1078 1248 172 951125 498 0.52 2649 -2.63 41051 2671 47.90 29 0.54 63

745 795

Chile

103 4.20 164 -1.53 9644 153 49.60 8 0.98 17

Japan 989 1047 316 1196999 325 -0.92 5069 -5.23 39738 5228 54.20 67 -0.11 128

Korea, Rep. 742 742 103 102061 248 3.36 833 0.20 17078 837 58.10 24 0.29 49

United Kingdom 1030 1160 172 420009 463 1.36 2175 -4.92 35165 2218 56.30 31 0.70 62 Sri Lanka 715 745 103 97286 18 5.65 42 3.54 2068 41 54.70 8 0.73 20

Hungary 1225 1215 210 195719 300 4.62 129 -6.30 12868 121 44.80 4 -0.16 10

500 545 36 3583715 22 -0.62 4985 9.10 3744 5029 71.00 777 0.51 1331

China

Germany 872 937 181 644471 566 1.40 3330 -4.72 40670 3377 51.70 42 -0.28 82 Indonesia 704 660 20 391009 42 8.44 540 4.55 2349 478 61.80 113 1.15 230

Luxembourg 1420 1420 201 5227 441 -0.27 52 -4.07 105044 37 51.20 0 1.87 0

Mexico 1472 2050 18 360075 167 4.28 875 -6.54 8143 860 57.10 47 1.01 107

Country Name Cost to export (US$ per container) Cost to import (US$ per container) Road density (km of road per 100 sq. km of land area) Roads, total network (km) Passenger cars (per 1,000 people) Inflation, GDP deflator (annual %) GDP (current US$) in bn USD GDP growth (annual %) GDP per capita (current US$) GNI (current US$) in bn USD Employment to population ratio, 15+, total (%) Labor force, total in mn Population growth (annual %) Population, total in mn Country Name Cost to export (US$ per container) Cost to import (US$ per container) Road density (km of road per 100 sq. km of land area) Roads, total network (km) Passenger cars (per 1,000 people) Inflation, GDP deflator (annual %) GDP (current US$) in bn USD GDP growth (annual %) GDP per capita (current US$) GNI (current US$) in bn USD Employment to population ratio, 15+, total (%) Labor force, total in mn Population growth (annual %) Population, total in mn

Malaysia 450 450 28 93109 225 -6.66 193 -1.71 7030 189 60.50 12 1.66 27

North America 1330 1488 68 443 -0.60 15461 -2.62 45365 15332 59.41 177 0.91 341

Romania 1275 1175 198817 156 6.54 161 -8.50 7500 164 48.10 10 -0.15 21

Russian Federation 1850 1850 5 933000 206 2.46 1232 -7.89 8684 1192 56.70 76 -0.07 142

Netherlands 895 942 372 126100 441 -0.34 792 -3.99 47917 774 59.30 9 0.52 17 Singapore 456 439 472 3297 113 -1.84 182 -1.28 36537 179 61.60 3 3.02 5

New Zealand 868 850 35 93748 615 127 -1.39 29352 121 62.70 2 1.09 4

Sweden 697 735 95 427045 465 1.96 406 -5.14 43654 413 57.60 5 0.89 9

Philippines 816 819 67 200037 11 2.55 161 1.06 1752 185 60.10 38 1.79 92 Thailand 625 795 35 180053 54 2.02 264 -2.25 3893 252 71.50 38 0.56 68

Korea, Dem. Rep. 21 25554

Turkey 990 1063 55 426951 88 5.15 615 -4.69 8215 607 42.30 26 1.21 75

63.90 12 0.37 24

United States 1050 1315 68 6544257 451 0.92 14119 -2.63 45989 14011 59.20 158 0.86 307

Portugal 685 999 90 82900 471 0.09 233 -2.58 21903 225 55.70 6 0.09 11

South Africa 1531 1807

108 7.33 285 -1.78 5786 279 41.10 19 1.07 49

CHAPTER 13 REFERNECEShttp://www.economywatch.com http://www.oica.net/category/production-statistics http://www.worldbank.org http://www.tatamotors.com http://www.atkearney.com

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