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AUTOMOTIVE Co-drivers Wanted The Indica project won't break even this year because...
By Brian Carvalho. Hush! Don't call it Telco any more. And certainly not Tata Engineering and Locomotive Company. Just say Tata Engineering. That's what everyone-from managers at its Bombay House corporate headquarters, the shopfloor workers at K-Block in Pune (where the Tata Indica is made), and, of course, Chairman Ratan Tata-prefers to call this Rs 7,249-crore commercial vehicle major. It's part of a statement that Tata wants to make: the company today doesn't make axles, gearboxes, transmission systems, et al, any longer, but is just in the business of developing, assembling and marketing vehicles. Yes, most of those vehicles are still trucks. But last year over 40 per cent of them were cars. Indeed, if hot cakes actually do sell, then the Tata Indica certainly fits the bill. Last year, Tata Engineering sold close to 56,000 of what has now earned the rather enviable tag of India's first indigenously developed small car. In the process, the company emerged from nowhere to become the country's second-largest car seller (when you include sales of other Tata passenger cars like the Sierra, Sumo, and Safari). Not just that, the Indica managed to grab 9 per cent of the entire passenger car market last year, and a handsome 21 per cent in the Rs 3-4.5 lakh price segment, which includes the Santro, the Zen, the Matiz, the Wagon R, and the Fiat Uno, but excludes the Maruti 800. If you include the Maruti 800, Indica's marketshare stands at 12 per cent. The smooth run continued in the first quarter of the current year too, with Tata Engineering selling 85 per cent more cars than it did in the first quarter of last year. So is it party time at Bombay House? Has Ratan Tata's grand gameplan for the Indian passenger car market worked like a charm? Hmmm. True, the sales figures may indicate that the wheels are moving smoothly for Tata. And marketshares may show that the Indica could be on the road to emerging as India's premier small car. But there's one story these figures don't tell. That the Rs 1,700-crore Indica project will find it virtually impossible to break even this year, as had been targeted. What's more alarming is that the car foray is sucking Tata Engineering into a vicious loop: as its losses keep mounting, the break-even target keeps getting pushed back further. As things stand today, analysts point out that to make money, Tata will have to sell close to one lakh cars-against the original target of 90,000 cars-and that the project cost has escalated to over Rs 2,000 crore. ''The losses keep getting added to the project cost, and that pushes the break-even point further,'' explains Sachin Gupta, 23, Research Analyst, First Global. So what should Tata do? The solution, say the analysts, is simple: hive off the car project into a separate subsidiary, and then invite a foreign car major to buy a stake in the company. The benefits of such a move are many: first, it can shield Tata Engineering's shareholders from the ravages of the car project. But that's only a short-term, incidental benefit. More important, the partner can help Tata introduce more models (along with new technology) in the Indian market, tap major export markets, and, of course, pitch in with finances. Hitting the break-even blues To understand why Tata Engineering needs to do all this, let's first examine why the car project is finding it tough to break-even. The biggest road-block, which neither Tata nor any other carmaker can do much about, is the drastic slowdown in demand. Against last year's sales growth of 60 per cent, in the first quarter of the current year, the industry grew by just 9.7 per cent. Apples-to-apples, the growth is 20 per cent lower than it was in last year's first quarter. Maruti Udyog ceo Jagdish Khattar says that the boom in 1999-2000 was largely an aberration because of ''postponed and preponed buying. When the industry climbed out of a recession last year after three-to-four years, the buyers went on a spree''. So, to expect growth rates of 50-60 per cent in the years ahead will be unrealistic. Which also means that Tata's task of selling over 90,000 cars in the current year becomes virtually impossible. Rajiv Dube, 38, the marketing chief of the passenger car business unit, agrees that a break-even in the current year ''looks difficult given the market conditions. But it's not impossible. In fact, we can even break even by selling 70,000 cars.'' That the volume growth has slowed down hasn't dampened Dube's spirits. For he's got two other potential weapons in his armoury. One is the room for a price hike, and the second is cost-cutting. Dube feels that the Indica's edge over its rivals in the ''high-end hatchback segment'' is price. ''We are giving a diesel car at the same price as a petrol model. So we are surely the cheapest car on the road.'' Tata Engineering currently has six models of the Indica on the road, three diesel and three petrol, with the diesel models making up close to 90 per cent of production. Tata has already leveraged the price factor once early this year, when he hiked the Indica price by between Rs 6,000 and Rs 17,000 across the range. Can he do it again? Analysts warn a price hike in a depressed market won't be the cleverest of strategies, and Tata might well decide against such a move. Slamming the brakes on costs But there are plenty of options on the cost front. Last year, Tata cut costs at the firm by Rs 200 crore. This year he wants to trim the workforce by 2,500 via an early separation scheme. Tata has also freed capital from non-core businesses like axles, gearboxes, and construction equipment by hiving them off into separate firms. At the car project itself, several initiatives at value-engineering and making vendors more efficient are under way. Efforts to re-design high-cost components at a lower cost are being worked out, and overheads are being examined. But cost-cutting alone will not be a miracle-remedy. Analysts point out that Tata won't be able to make money with just one car. ''You need to have a range of products at various points,'' agrees Maruti's Khattar. Dube says that three-to-four variants on the Indica platform are being worked on, along with the three-box Sedan Magna. But the earliest you can expect to see them at your neighbourhood showroom is early 2002. By then, the Indica would have completed its third year of production, and Tata may have sold the 1,50,000 cars-he hopes to. At a time when car life-cycles are shrinking fast-thanks to the flurry of competition, a car's life-cycle is just about two to two-and-a-half years-Tata Engineering badly needs to have at least one more new product in the market by the third year. By tinkering with the existing model, Tata can at best extend Indica's life-cycle by half a year. What happens after that? Looking for a co-driver It's not the local market alone that Tata has to be worried about. Since he can't hope to break even by cutting production, if domestic sales flag, the Indica needs to be able to tap export markets in order to get economies of scale. And exports have to be to high-volume markets like Europe. With a global car major as partner, Tata Engineering can get a platform in overseas markets, access to newer technologies and much-needed financial assistance for building new models, which can be placed at various points on the price spectrum. Tata himself has suggested that the Indica could be swapped with models of other manufacturers. So, whilst the Tata Indica could be sold in global markets by the partner, Tata Engineering could market the partner's products in India. Dube agrees an alliance is needed in the 'premium segment,' but he can't understand the fuss being made about Indica's break-even. ''We knew that we wouldn't be making money for some time. Projects of this nature take three, four years to break even.'' Actually, the break-even positions of other car makers presents a pretty mixed picture. Daewoo, which has invested Rs 5,400 crore in the Indian market till date, is still some distance away from making money. Ford, which has pumped Rs 1,700 crore into India, expects to break even this year, but that's on a base of just 25,000 cars. But if comparisons have to be made, it's best to compare Tata Engineering with Hyundai-volumes are virtually the same, and the Santro and the Indica are at the same price points. One difference: Hyundai's project cost is double that of Tata's. Now, Hyundai expects to break even this year (the second full-year of production; it commenced production in October, 1998), by selling 78,000 cars in the domestic market. ''Hyundai's chances of breaking even in the second year are more realistic, despite its project cost being double that of Tata, simply as it has two models in the market,'' says an analyst. Another spanner that could be thrown into the works for Tata is the furore over diesel vehicles-that they are environment-unfriendly. Tata Engineering has taken massive strides in diesel-engine technology, which explains why 90 per cent of its car production is diesel. Any restriction on diesel vehicles could well sound its death-knell. Dube maintains that it is the quality of fuel that is to blame, and points to Western Europe, where diesel vehicles are gaining in popularity. Maruti's Khattar, however, points out that it's the price of diesel that determines its popularity in India. ''If the administered price mechanism is dismantled, diesel will lose its attraction,'' he says. What's more, as Dube himself points out, the petrol-vehicles market in India is five times the size of the diesel-vehicles one. That's why Tata is gradually increasing his presence in petrol. In the current year, almost 20 per cent of Indicas produced will be petrol. For the last three months-since Executive Director V.M. Raval retired-Ratan Tata himself has been closely watching the project, making regular trips to the company's Engineering Research Centre in Pune. Company managers point out that he can't keep up such interest for long, and that a head for the car business will be appointed soon. The road ahead is clearly long and bumpy, and if ever Tata needed to fill the co-driver's seat, it's now. |
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