The game plan

ON A WHITEBOARD in a corner office at Tata Technologies, Pune, scrawled with a black marker is a series of revealing scribbles. “UV vehicle (new), Tata Compact Utility Vehicle (CUV new), Pixel, Manza CS Soft Trim, New Indigo CS, New Manza Facelift”. Off-limits for visitors, Tata Technologies is the top-secret ideas lab where auto concepts begin their journey before being engineered in steel and plastic. One of the few of its kind in India, it’s a technology and engineering firm that designs automobiles and auto components for companies such as Porsche, General Motors, Honda, and of course, Tata Motors. Its executives routinely joke that it is the hidden jewel in the Rs 4.76 lakh crore Tata group, a bit like what Tata Consultancy Services once was. Typically, companies work on a three- to five-year roadmap for auto design and subsequent launches. And that nondescript whiteboard reveals the future of Tata Motors. Sure, some of the projects may not take off. But those scribbles signal that Tata Motors is back to building new cars.

The past few quarters have been bruising. Tata Motors is a Rs 1.71 lakh crore behemoth with more than 6 million vehicles plying on Indian roads since its trucks rolled out in 1954. It’s supported by three distinct product lines: trucks and buses (Ace, 407, Starbus), passenger cars (Indica, Indigo, etc.), and luxury cars (Jaguar Land Rover). “But right now, they have just one engine firing, that of JLR,” says Vikas Sehgal, managing director and global head of automotive, Rothschild, London.

JLR delivered record sales in developed and emerging markets with sporty, feline models such as the F-Type, new aluminium Range Rover Sport, and Sportbrake, and has become the cash spigot for the company, delivering as much as 90% of profits and 70% of sales.

But for all of JLR’s successes, back home, the passenger cars business has been hurt, with market share sliding from 17% in 2007 to less than 14% now. The company has also lost 4% of the commercial vehicles market (it currently has a 60% share) due to competition and cutbacks in infrastructure spending. At the company’s recent annual general meeting, Cyrus Mistry, chairman of Tata Sons, the holding company of the group, struck a cautious note, saying that the bad times will stretch into 2014.

Various reasons can be attributed to Tata Motors’ slide (the economy, lack of leadership, competition, etc.). But the one that gets universally acknowledged is the company’s failure to launch new cars. (Company officials insist that the commercial vehicles slump is cyclical, and not brought upon by lack of products.) In automobiles, that’s the kiss of death. But that’s changing. And in it lies the seeds of a remarkable turnaround.

Indeed, this may be a good time to buy the Tata Motors stock, despite some negative cues. Its price has been range-bound between Rs 250 and Rs 320 over the past six months. From a low of Rs 25 in November 2008, the stock has increased some 10 times in value. Saagar Bajaj, a technical analyst at Nirmal Bang Securities, an equity research firm, says the share demonstrates “classic triangle formations with higher tops and bottoms in recent weeks. Such activity from a share is typically the pause before a momentum begins”. Other stocks that have shown similar patterns include HDFC, Lupin, and Sun Pharma.

Mehraboon Irani of Nirmal Bang Securities says investors also need to realise that Tata Motors is not an Indian company anymore. “It’s now the holding company for JLR and that is what every fund manager and analyst is looking at.” What it means is that even when things are bad (like now), there’s at least one business that will hold fast and support earnings.

Goldman Sachs recently upgraded its outlook for Tata Motors from “stable” to “conviction buy”; at around the same time, Standard & Poor’s downgraded its outlook on the company from “positive” to “stable”. Domestic brokers are equally conflicted.

Despite all the hand wringing, it’s often forgotten that at its core, Tata Motors is a remarkably resilient organisation, as perhaps any commercial vehicles outfit should be. This is all the more striking because it suffers from all big company ills such as bureaucracy and fiefdoms. But as a senior executive once explained, when the chips are down, the company responds as one. Its chief financial officer, C. Ramakrishnan, told Fortune India, “The company may have seen different heads, but it’s never been brainless.” Back in 2001, the company rallied behind Ratan Tata to execute a spectacular turnaround. The numbers show that Tata Motors is similarly placed today.

In 1996-97, Tata Motors sold 100,000 vehicles and its total income crossed Rs 10,000 crore. Two years later, sales fell by more than 30% to Rs 6,815 crore on the back of an economic slump, not unlike what the country is witnessing today. The company posted losses of Rs 500 crore in March 2001, the largest ever by a private company in India. Ebitda margins crashed to 7.14% and the Rs 10 paid-up share traded at Rs 65. By 2006, after a series of tough measures (cost cuts, new launches, etc.) the stock was trading at Rs 2,200, boosted partially by positive stock market sentiment. The paid-up value of the stock has since been reduced to Rs 2.

Today, Tata Motors’ overall Ebitda stands at 14.1%, somewhat weighed down by the 8% margin of the standalone Tata Motors’ India business comprising commercial vehicles and passenger cars. Up to 2010, standalone Tata Motors Ebitda margins ranged between 12% and 15%. The world’s largest premium car maker, BMW, has seen an average Ebitda margin of 11% to 12% in the past two years. Last year, Volkswagen registered 10.33%, despite poor sales of commercial vehicles due to Europe’s economic woes.

Analysts value the India business at Rs 50 to Rs 60 for a Rs 2 paid-up share or Rs 300 for a Rs 10 paid-up. In 2001, the company’s receivables escalated after dealers, stuck with stock, were unable to repay the company. The working capital cycle was 100 days and creditors took as many days to pay for the vehicles they bought. With spiralling receivables and falling sales, the company ended up posting a loss.

This time around, the working capital cycle is 56 days, just 10% over the best ever achieved by the company. Creditor days stand at 79, six more than the least the company recorded in 2006. The standalone entity’s debt-to-equity ratio is down to 0.8 from 1.27 in 2001, giving the company more room to invest in long-term projects. Ramakrishnan says there’s Rs 3,000 crore to Rs 3,500 crore lined up for investment, much of which will go to the cars division.

Meanwhile, at JLR, by 2016, the company plans to have 40 significant introductions, including all-new vehicles, power train upgrades, and body/trim changes on existing vehicles; 14 of these happened in 2012. Eight new and refreshed products will be delivered in 2013, including the new F-Type. Studies are also underway to test the viability of a plant in Saudi Arabia. All that could help in doubling volumes and profits in the next four years, says Irani.

Ralf Speth, JLR’s CEO, adds that from 2014, the company will manufacture vehicles in a joint venture with Chery Automobile in China. China is JLR’s most happening market.

In effect, Tata Motors’ task is three-fold: fix the passenger cars business (easier said than done, of course), hope for a revival in the economy while innovating to keep the commercial vehicles business humming in a poor economy (an 11-tonne intermediate commercial vehicle called the 1109, a recent innovation, generated record sales of 7,000 vehicles last year), and maintain JLR’s winning streak. (JLR is likely to invest around £10 billion, or Rs 91,600 crore, on capex, new products, and R&D over the next four years.)

INSIDERS SAY Mistry has given Tata Motors MD, Karl Slym, enough space to operate. It’s generally believed that Mistry won’t interfere as long as Slym delivers.

Slym’s appointment itself is seen as the group’s acknowledgement of a new reality for Tata Motors. (JLR is run separately, under Speth.) In recent history, the previous MDs of Tata Motors were either passenger car experts like Carl-Peter Forster, or commercial vehicles specialists like Prakash Telang. (Ravi Kant, MD between 2005 and 2009, who played a stellar role in the company’s previous turnaround, wasn’t even an out-and-out auto man.) Slym, an Englishman from Derby, combines both; his passenger cars expertise comes from the time he headed General Motors’ India operations. He has also had a stint as executive vice-president of SAIC-GM-Wuling Automobile, General Motors’ joint venture in China that makes light commercial vehicles.

Those who work with him describe him as “intense”, a very different man from the backslapping exec he was at GM. Slym and team must launch cars that will outperform the market, and catch the imagination of new customers. They must do it fast, and get it right in a market that’s sluggish, and packed with aggressive competitors.

There’s also the legacy to contend with. Tata Motors’ identity as a car maker has always been steeped in a culture of truck making. The first car it made, back in 1991, the Tata Sierra, was a three-door utility vehicle, which was more of a light pick-up. The following year, it launched the Tata Estate, a rugged station wagon powered by a 207 engine, the same used in trucks like the Tata 407. While these efforts were pioneering for a local car maker, the cars never held an emotional connect with consumers. It launched the Indica hatchback in 1998 and the Indigo sedan four years later, but was unable to create a design language that spoke directly to customers. On the road, its cars stood for fuel efficiency.

When asked what their cars stood for, all Tata Motors executives almost unanimously said “trust”. Trust is a key attribute when it comes to commercial vehicles (to a transporter, a broken axle means revenue loss). Passenger vehicles, however, call for a different thinking, which Tata Motors saw late.

In October 2010, Tata Motors launched its most expensive automobile ever: the Aria, a crossover that cost nearly Rs 17 lakh on road. Tata wanted the Aria to take on market leader Toyota Innova. The Aria looked good, with clean lines and a strong muscular stance. Expert reviews, almost all, agreed that the interiors and ride quality were on a par with competitors. The only hitch: Consumers didn’t want to pay so much for the Aria when they could get an entry-level Toyota Innova for around Rs 11 lakh. Tata Motors learnt, to its cost, that despite having a quality product with no discernible flaws, customers weren’t able to rationalise paying a premium. Slym is aware that they will have to focus on recreating their existing line-up and go for what he calls a “podium finish”.

On June 19, in the Pune plant, Slym and his team unveiled eight ‘upgraded’ cars at an event focussed on wooing customers. One of the cars on display was a wine-coloured Tata Safari Storme. The SUV featured a metallic grille and fog lights with leather interiors, Bluetooth systems, wood-coloured trims on the entertainment cluster, and chrome-finished door handles. The Storme’s adventure edition even comes with a touchscreen entertainment panel. At the same event, the new Nano was showcased in bright blue, with features such as keyless entry, twin glove-boxes, etc.

Ranjit Yadav, head of the cars business, says Tata Motors’ language for the future will be “power and performance”. He is an example of the new thinking; like Slym, he joined late last year. Yadav earned his stripes in a cut-throat industry, building market share for Samsung’s mobile phones. When he was brought on board, his directive was simple. “Tata Motors’ passenger cars was a problem child and it was my mandate to change that and push us into the top three,” he says.

AT THE 79TH Geneva Motor Show in Switzerland in 2009, Tata Motors unveiled the Prima, a concept luxury sedan created by Ferrari designer Pininfarina, which drew considerable attention. With its sleek silhouette, honeycomb grille, and stylish headlamps, it was easily the best-looking car Tata had ever showcased but the Prima never made it to production. Yadav says, “More than two dozen concept cars that were in the pipeline were done away with.”

Why did new products not reach the market, given that for any car maker keeping new models coming is key to pushing sales? Slym is remarkably candid: He calls it the “kids playing soccer syndrome”. When professionals play, they assume demarcated positions: halfback, centreback, left wing, right wing, and so on. But when kids play the game, it becomes a chaotic scramble with no regard for positions and everyone running with the ball. “The Nano was an all-consuming project that took everyone’s attention and we now have a void in our product portfolio. It is the growth engine for every auto player, and that’s a shortcoming for us.”

He adds that the company now has a robust product line-up. By the end of this year, Tata Motors would have launched 13 variants of existing models, including the D-90, a sportier rejig of the Tata Indica. It’s a throaty hatchback that comes loaded with a 90 Bhp engine (the existing model has a 53 Bhp engine) in cool colours like purple, sporting a slick minimalist instrument panel, and a touchscreen audio system. It’s still got lumpy bits such as plastic panels that are rough at the edges and cupholders that aren’t deep enough, but it’s a sign of things to come.

Slym acknowledges that despite being the first to build a business around SUVs (Safari, Sumo), Tata Motors lost sight of emerging trends. He’s hoping to change that with the launch of Tata’s new compact utility vehicle, but won’t say when.

Meanwhile, Japanese-style quality improvement has begun on the shop floor. A tour of Tata’s plant in Pune shows neat assembly lines, energised labour, and a lean team of managers. Slym is hard-pedalling his ‘One Team One Vision’ agenda, which seeks to blur the line between blue- and white-collar workers. He argues that in the end it isn’t shop-floor robots, or, for that matter, corporate slogans that make for better cars, but humans who understand car manufacturing and pay attention to detail. Slym has also set up the Program Planning Pricing and Marketing division to understand how consumers value products, product development, and so on.

To cue customers about the more fundamental changes afoot, there’s a plan to change the aesthetics of the showrooms. From the outside, the Concorde Motors’ showroom in Prabhadevi, Mumbai, can easily be taken for a trendy cocktail lounge. Inside, the floors are blonde veneer, the walls are trimmed with electric blue light, and the flat-panel TV screens show mini films that feature Formula 1 race driver Narain Karthikeyan (Tata is one of his biggest sponsors), and the company’s latest cars. There’s a coffee bar, and shelves piled with merchandise such as keychains and model cars. Slym says the idea was to get far away from the dull showrooms of yesteryear, which “were like showrooms where we sold trucks and buses”. By end of the year, the new look will be replicated in some 150 showrooms across the country.

Sylvain Bilaine, managing director with SyB Consulting, a boutique consultancy, and former general manager of Renault India, says a possible key objective for Tata is to build a car with potential for export. He adds that Mahindra & Mahindra is not all that different from Tata in quality, but unlike Tata, it focusses on product planning, marketing, and customer understanding. “Each of its new products manages to sell 9,000 or 10,000 units every month.” His point: M&M’s SUVs are priced smartly and targeted at niches. Bilaine says Tata Motors needs to enforce strict milestones when making cars.

This resonates within. “Meeting quality is table stakes for any car maker wanting to compete at global levels,” says Ankush Arora, senior VP, passenger vehicles business unit (commercial). “There is a clear mandate within Tata today that if it is not ready, we won’t do it.”

RAVI PISHARODY, a long-time Tata Motors exec who looks after the commercial vehicles business, can’t stop talking about the latest outlet set up by dealer Arvind Motors in Mangalore. It’s big. It has a 62-bay service centre. “It’s the largest commercial vehicle service centre in the country. Actually, it’s the largest automobile service centre. Full stop,” he says. Arvind Motors isn’t the only one building in a downturn. In Bangalore, Prem Chand Shenoy, owner of Prerna Motors, does about Rs 700 crore in sales. Shenoy has invested Rs 40 crore over two years into building showrooms, service centres, etc. Despite the downturn, his business grew by 31% over the past year, with commercial vehicles’ sales going up from 8,000 to 11,000.

By and large, the commercial vehicles segment tracks the economy. Last year, when heavy commercial vehicle sales crashed by 30%, the light commercial vehicles segment, which includes the ones like the Ace, grew by 20%. That’s because domestic spending in rural markets proved strong, says Umesh Revankar, managing director of Shriram Transport Finance. He adds that while interest rates impact passenger car sales more than commercial vehicle sales, the allocation of fresh coal blocks and jumpstarting of mining activities would stimulate commercial vehicles.

Meanwhile, competition is watching Tata. The entry of Bharat Benz (a Daimler brand), which sells strong, high-tech vehicles at competitive rates; the joint venture between Volvo and Eicher; and the emergence of smaller players like the Essar-owned AMW mean that this is no longer a market in which dominance is easy. The good news for Tata Motors is that it will be a while before rivals get up to speed. The average residual value of a Tata truck after 15 to 20 years is Rs 4 lakh to Rs 5 lakh, says Pisharody. That matters to companies that buy 100 to 200 new vehicles every year. Tata also has the largest distribution network: some 1,600 service centres across the country and 1,700 sales outlets.

As far as lighter vehicles go, Tata has no real competitive threat. There are players in this category, including the likes of Force Motors and M&M, but no real challenger. Pisharody says the Mahindra Geo, for example, has only sold 400 units to 500 units a month. “We are doing 4,000 to 5,000 Magics compared to them, and we came later,” he says.

There is no other company in the world like Tata Motors. Global giants like Volkswagen may cover premium and light commercial vehicles, but not low-cost cars. Daimler makes commercial vehicles and premium cars but no low-cost vehicles. Fiat, which owns Ferrari and Alfa Romeo, also manufactures volume cars for India such as the Punto and the Linea, but its range in commercial vehicles is limited to light vans and ‘people movers’. Tata Motors has all the parts. Now they all need to pull together.