AN ANALYSIS OF OPPORTUNITY

Tata Motors Explores FDI into Romania

Mark BaginTim DuBoff

Khurram HasanEugene Pangalos

Jeff Steckmest

STRT 571May 3, 2010Section 44

Tata Motors Overview

Who is Tata? 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? 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 Two-tiered strategy of competing in the luxury cars segment (acquisition of

Jaguar - Land Rover) and the low-cost cars segment 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

Current Distribution Network

EU Auto Market and Romania

Where should Tata sell and produce?

Demand increasing for small passenger cars in the EU Production in Romania has many advantages:

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? Build a new auto plant in Romania Manufacture cars in Romania and export to the EU

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*EU 15 and EFTA

Cars Sold in Europe 2006-2009

On Euro

Current Possibilities Implications

CurrencyRisk

Leu (have not started ERM 2)

Adopt euroIncrease 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 non-EU 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

LaborMajor cost advantage

Labor costs increase w/euro adoption; increased unionization

Euro accession decreases labor cost advantage

CurrentFree Capital

Flow

Pegged ExchangeRate

Sovereign Monetary Policy

Romania’s Trilemma

The Overall Picture

Unfavorable Business Considerations 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 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

Recommendation 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