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Tata Motor buy JLR


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Tata Motor buy JLR

  1. 1. Introduction Tata Motors is the largest multi-holding automobile company in India and it is the fourth largest truck producer in the world. In addition, Tata Motors is also the second largest bus producer in the world, with the revenues of US$ 8.8 billion in the financial year 2008. Since its establishment in 1945, Tata Motors has grown significantly in the past 60years with the strategies of joint venture, acquisition and launched new products in different market segments (i.e. passenger cars, commercial vehicles and utility vehicles). A significant breakthrough for Tata was the development and commercialization of the truly Indian cars and they are Tata Indica (1998) and Tata Indigo (2002). Tata Motors has experienced many joint ventures with Daimler Benz, Cummis Engine Co. Inc., and Fiat and successfully acquired Daewoo Commercial Vehicle Co. Ltd. In the year 2008, there were two most significant events which have had a momentous impact on the scale of the Company’s operations and its global image. The launching of Tata Nano, the world cheapest car and the acquisition of Jaguar and Land Rover, the two iconic British brand have made Tata Motors well known to the people in the world. Tata Motors has proven excellence over the years through continuous strong financial results, market expansion, acquisition, joint ventures and improvement and introduction of new products, it seems to have a promising future. But it failed the expectation as the company was in trouble right after the acquisition of Jaguar and Land Rover (JLR) in June 2008 due to the arrival of global financial crisis. The bridge loan of US$ 3 billion which used to fund the acquisition of JLR was due on June 2009 and yet at the end of the
  2. 2. year 2008, Tata was only able to repay the US$ 1billion. The declining revenues and a tight credit conditions was hurting the company’s cash flow. The questions arise is that whether Tata Motors able to repay the bridge loan? Will it be able to build up investors’ confidence and increase sales in the future? Could Tata Motors survive or going under bankruptcy? And we would analyze and discuss these further in the report. Before we look into the reasons behind Tata Motors acquired JLR, let us take a look on what makes Ford Motors to make the decision to sell JLR to Tata Motors. Reasons behind Ford Motor’s decision to sell JLR In 2006, reports said that losses at Jaguar stood at USD 715 million. Jaguar was not performing well as it was unable to provide any profit for Ford due to high manufacturing costs in United Kingdom. The wellbeing of Land Rover's profit, on the other hand, was boost up by the record sale of 226,000 vehicles, an 18% year over year growth in 2007. "Bringing down production costs and turning around the company successfully will be the challenge,” analysts said. It was a test that Ford failed. Ford is combining both the brands since the products and manufacturing of vehicles for Land Rover and Jaguar is so intertwined.
  3. 3. The table below shows the number of sales of JLR after acquired by Ford: Numbers 2005 2006 2007 Jaguar 86,651 72,680 57,578 Western Europe 46,789 41,367 33,024 57% America 32,131 22,136 16,836 29% Rest of Word 7,731 9,177 7,718 13% Land Rover 170,156 174,940 202,609 Western Europe 97,303 95,399 109,785 54% America 51,634 53,638 57,092 28% Rest of world 21,219 25,903 35,732 18% Total 256,807 247,620 260,187 Western Europe 144,092 136,766 142,809 55% America 83,765 75,774 73,928 28% Rest of word 28,950 35,080 43,450 17% From the table, we may see that the sales of Jaguar are decreasing dramatically from 2005 until 2007. After intertwined Jaguar and Land Rover, sales from year to year fluctuated without certainty of growth. This is one of the reasons that lead Ford’s decision to sell JLR to Tata Motor. The table below shows the cost of production for JLR:
  4. 4. From the table, we may observe that Ford failed to reduce production costs as major proportion of cost is material cost and they unable to bought cheaper materials from suppliers. This however is very different if Tata Motor takes the ownership because they are utilizing country’s vast natural resources. The rationale to acquire JLR
  5. 5. After the acquisition of the British Jaguar Land Rover (JLR) business, which also includes the Daimler, Lanchester and Rover brands, Tata Motors had obtained numerous benefits and advantages. Below are the reasons behind Tata Motors’s decision to acquire JLR: 1. Long term strategic commitment to automotive sector which Tata Motors want to become a major player in the international automobile market. 2. Opportunity to participate in two fast growing auto segments to fulfill part of Tata Group’s ongoing strategy of internationalization. 3. Increased business diversity across markets and products. 4. Land rover provides a natural fit for Tata Motors’s Sport Utility Vehicle (SUV) segment which attracted Tata Motor. 5. Jaguar offers a range of “performance/luxury” vehicles to broaden the brand portfolio internationally. 6. Benefits from component sourcing, design services and low cost engineering by obtaining intellectual property rights related to the technologies. 7. Improved corporation’s image and increased its public reputation. Subsequent to the acquisition of JLR, Tata Motors benefited: 100% stake in Jaguar & land Rover Business Tata Motors has acquired the business & initially they will be operated independently of the partner. Three plants in UK Tata Motors will directly own these two well invested plants by Ford. Two advanced design & engineering center 4000-5000 engineers engaged in testing, prototype design & power train engineering, development & integration.
  6. 6. Twenty six National sales company Both existing national sales companies of JLR and also those that are carved out of current Ford operation would be owned by Tata Motors. Intellectual property rights These covers all key technologies to be transferred to JLR & perpetual royalty free license on technologies shared with Ford. Capital Allowance Capital allowance with a minimum guaranteed amount of US $1.1 billion to be carried forward for future tax savings. Support from Ford Motor Credit Ford Motor Credit will continue to support the sales of JLR for the next 12 months Pension Contributed by Ford Ford will contribute US$ 600 million of the Pension Fund to the workers in United Kingdom After analyzed the case study, we believe that the main reason influence Tata Motor’s decision to acquire JLR is to go global by acquiring famous international brand to increase its global image. By acquiring JLR, Tata Motors able to obtain intellectual property rights related to the technologies from JLR at the meantime improve corporation’s image and increase its public reputation. It is not wrong to possess such ambitious corporate mission and vision with aggressive strategies and strong support from the high working capital. However, there are always some questions being asked which form a doubt feeling among public. The questions are sound like -- Have Tata Motors make enough pre-acquisition jobs such as risk measurement and macroeconomic study before acquisition of the British Jaguar Land Rover (JLR) business on a cash free and debt free basis? Are there any problems company could face in financing acquisition? Would Tata Motors face problems after the acquisition of JLR? We would discuss these in the further sections.
  7. 7. Problems a company could face in financing acquisitions Complexity in raising fund Normally, before the financing acquisition take place, company would have problem in raising fund. The most common finance method is directly applying loan from the commercial banks or investment banks. However, banks would have to go through some of the details and documentations of the company before the loan is approved. Basically, banks would have to analyze company’s performance, equity, current ratio, liquidity ratio in order to determine the ability of the company to pay back the loan. Company which is not doing well or having higher liquidity ratio probably may face more challenges if raising fund from applying loan from banks. Therefore, company may need to have an extremely well strategic plan in order to convince the bankers to approve the loan for them. On the other hand, company itself has to go through some process too before the finance acquisition actually take place. In most of the case, company may have to analyze the fees and costs of the finance, make comparison between different finance methods, in order to find out which finance method is the best for the finance acquisition activities. These activities are complex and time consuming since it has to go through a lot of process and do a lot of analysis. Indeed, company will face a great challenge if they wish to do the finance acquisition. Incur higher cost
  8. 8. Furthermore, bidder should understand and realize that the interest rate will be penalized toward the maturity of the debt taken. The compounding of interest rate could increase the financing acquisition’s expenses incurred by the acquirer relatively. Fundamentally, the longer the maturity of the debt, the higher the interest expenses will be incurred and vice versa. Therefore, the interest rate on debt in financing the acquisition became a burden for the bidder indirectly and that is not a simple decision to be made on whether financing the acquisition is the right method to achieve. Uncertainty In the whole process of M&A, it involves many uncertain factors which should be concerned by the bidders. Normally, it comes from macro environments and also micro environments. Marco environments include the changes of national economy policy, periodic fluctuation in economy, fluctuation of interest rate and inflation rate as well as the exchange rate. Meanwhile, the micro environments involve the changes of management condition, fund raising and condition, price of purchasing, technology, management in culture and harmonization after acquisition. All these changes could differentiate company’s value before the acquisition and after the acquisition toward the goal planned. Uncertain factors are objectively created and rise up the cost of the company in order to implement the changes. Therefore, this high cost of implementation could lead the possible loss affected by the volatility of the outside and inside factors, which restrict the decision makers’ to make their judgments. Fundamentally, bidders should consider and analyze what is the current change toward the environment in current situation and the changes in future time as well before making
  9. 9. the decision to take control over another party. The basic changes that could distort the decision making in financing acquisition are the interest rate. Therefore, bidders should aware and make a precise judgment toward their decision in acquisition activities Increase of default risk Default risk means the possibility of a company unable to pay back its debt. Financing in term of borrowing will definitely increase company’s liabilities, which in turn lead to higher default risk. Let make an assumption that company able to get loan for the finance acquisition. After that, the problem that may concern by the company is that the possibility of unable to pay back the loan if the stock price didn’t increased and acquired company does not provide return as expected. Normally, this is even worse if economic crisis happen right after the acquisition. For instance, global financial crisis hit the world right after Tata Motors acquired the Jaguar Land Rover, which lead to Tata Motors faced its first losses in 8 years. Indeed, this would be a problem to the company which acquires other company through financing. High default risk will decrease the credit rating of the company by the bank and may force it toward bankruptcy subsequently.
  10. 10. Problems faced by Tata Motors and its probable solutions Problem 1: Lack of access to credit to repay the bridge loan of US$3 Billion
  11. 11. Solutions 1 i) Merge with Mahindra & Mahindra The probable way to be cash-rich for Tata Motors might be merged with the other company in the automobile industry. By merging with other cash-rich company, Tata maybe can access to the working capital and get another piece of income from the merged company to repay the bridge loan. To remain as the Indian owned multinational company, we would suggest Tata Motors to merge with Mahindra & Mahindra (M&M) as the company is one of the leading tractor brands in the world and it is also the largest manufacturer of tractors in India (Wikipedia, 2010). During this global economic crisis, the Asia countries were not hurt badly, so it is a possible move to merge with M&M, as the merger requires no cash, and would have opportunity to gather fund through M&M. However, we would disagree that this is the best solution as merger will make Tata hard to make decisions for the future planning due to the conflict of objectives between the two companies and finally caused the disruption in running the business. ii) Divestment To raise capital to repay the bridge loan, there is another possible move which is divestment and this could mean that the company could sell part of its subsidiary or assets. Many would think that forgo a profitability subsidiary or assets will cause the company lose the future benefits from that subsidiary. Hence, this should be done with proper investment analysis to identify which one to let go. If possible, sell the subsidiary to the Tata group as an intra-group transaction, so it would benefit only the group
  12. 12. member and this move will give chance to Tata Motors to buy it back in the future when there is a right timing. ii) Combination of raising funds from public and refinance Raising funds from public could be a good idea as the debt market is frozen and Tata Motors actually had taken this step to raise fund and repay the bridge loan. Tata Motors offered the 11 percent annual interest on three-year bond to raise money from the public whereas government bond with same maturity offers a 6.97 percent yield. (Anand, 2008) Besides, Tata Motors could think of refinancing to cover the bridge loan which is comes to the due date maybe by using the long term loan to cover the short term loan. Under the tight credit conditions, Tata Motors may accept the loan with a slightly higher interest rate in order to get the money from the banks. Offer a higher interest means it will increase company debts, but we believe that Tata Motors is able to survive under the worldwide recession as they have good strategic planning and strong financial results over the years since their establishment. The rationale behind these is to extend the debt repayment period by settling the short term debt first and during the extension period, the company is able to earn money from the launched of Tata Nano, the cheapest car in the world to fight with the global economy crisis. As the time gone, the crisis will then ended and the demand for the cars will increase and here comes the cash to settle the long term debt. Problem 2: Global financial crisis has severely impacted the global automobile industry especially the luxury cars segment
  13. 13. The automobile sector in India was severely impacted by the global financial crisis in the Indian and global business environment. GDP growth slowed down substantially from 9 % in year 2008 to 6.7% in year 2009. Followed by high inflation and high material cost which lead to higher vehicle prices and fuel prices, unavailability of finance or higher cost of finance as well as gloomy economic conditions had slumped the demand badly. (Annual Report 2009) These factors have tremendously pressured both Tata Motors’ commercial and passenger vehicle industry which lead to sales declined. Jaguar and Land Rover faced severe demand contraction due to the negative wealth effect. As the fuel price and interest rate increase plus the continuing credit squeeze, consumers would buy low cost and low fuel consumption car rather than luxury and high fuel consumption car like JLR. So, the problem occurs as the JLR could not generate working capital to Tata Motors and the recessionary trends deepened the domestic vehicle sales. The industry performance in the domestic market during FY08-09 and the Company’s share is given below: Source: Society of Indian Automobile Manufacturers report and Company Analysis * including Magic and Winger sales # including Fiat branded cars The Company’s exports also declined by 38.6% during the year 2009, due to the meltdown in major international markets and the consequent swings in foreign exchange rates. The graph below shows the dropped of sales which affected the net profit margin:
  14. 14. The automobile sector in India was severely impacted by the global financial crisis in the Indian and global business environment. GDP growth slowed down substantially from 9 % in year 2008 to 6.7% in year 2009. Followed by high inflation and high material cost which lead to higher vehicle prices and fuel prices, unavailability of finance or higher cost of finance as well as gloomy economic conditions had slumped the demand badly. (Annual Report 2009) These factors have tremendously pressured both Tata Motors’ commercial and passenger vehicle industry which lead to sales declined. Jaguar and Land Rover faced severe demand contraction due to the negative wealth effect. As the fuel price and interest rate increase plus the continuing credit squeeze, consumers would buy low cost and low fuel consumption car rather than luxury and high fuel consumption car like JLR. So, the problem occurs as the JLR could not generate working capital to Tata Motors and the recessionary trends deepened the domestic vehicle sales. The industry performance in the domestic market during FY08-09 and the Company’s share is given below: Source: Society of Indian Automobile Manufacturers report and Company Analysis * including Magic and Winger sales # including Fiat branded cars The Company’s exports also declined by 38.6% during the year 2009, due to the meltdown in major international markets and the consequent swings in foreign exchange rates. The graph below shows the dropped of sales which affected the net profit margin:
  15. 15. Solutions 2 In order to survive in this sluggish economy condition, Tata Motors only has few options which are laid off workers, cut productions, cut cost and boost sales with cheaper cars. i) Lay off workers and cut productions In fact, Tata Motors laid off 850 employees at JLR and stop production for few days to stop pilling up the inventories in order to cut cost as JLR was hardly to generate revenue at this point of time. Here the debatable ethical issues raised as the workers were jobless because of the company’s action to survive. ii) Launch low budget cars in the developing countries There is a need for Tata to launch the low budget cars in developing countries to boost up sales and generate working capital. The Asia countries have less impacted by the recession, so it could be the opportunity for Tata to boost sales. This effort should be led with innovative models like Nano (the world cheapest car).
  16. 16. iii) Focus on new product development and continue to introduce new products in the marketplace While the financial stimulus announced by the Government, particularly for commercial vehicles, has had a positive impact. Hence, Tata should focus on new product development in the commercial vehicles in order to grab the first bite of revenue when the demand for commercial vehicles starting to increase. Besides, introducing new products into the market would grab the attention of consumers and they would buy the cars if they are affordable. Problem 3: Increasing materials and fuel prices have slow the demand of vehicles Due to the impact of tighter money supply with higher interest rate, there will be meteoric rise in fuel and materials (e.g.: steel, tyres) price. High fuel price has caused Tata Motors to feel the heat of slowing demand. Decrease in sales volume and increase in cost as well as bearing the increment of short term debt would easily kill Tata Motors. Therefore, a probable solutions would keep them survive and grow.
  17. 17. Both graphs above show the steel and fuel price pattern from the years 2007 and 2000 until 2010. Solution 3:
  18. 18. i) Hedging or Joint Venture with the materials suppliers It would be good if Tata Motors could have a forward contract with the suppliers to hedge their exposure to the price of steel and tyres. This would definitely help Tata to save a large amount of money if compare to the competitors. By using forward contract to avoid the price fluctuation, Tata is able to reduce the cost and offer a car which is more competitive in price. Joint venture with steel companies would also help Tata Motors to get a slightly cheaper steel price than other competitors and this would then to introduce low budget car which might help in boosting sales. ii) Launch new products with fuel economy In the consumer point of view, they will postpone purchase when the fuel price is high if the cars in the market are not fuel economy. Hence, it would be a probable solution to deal with the high fuel price if Tata Motors could launch new product with fuel economy. iii) Continuous research and development in developing vehicles that running on alternative fuels If Tata is able to be the first who developed the cars that running on alternative fuels like CNG, LPG, and bio-diesel, ethanol blending or developed vehicles fuelled by hydrogen. Tata would soon be the leader in the global automobile industry as the sales of vehicles will increase tremendously. Problem 4: Share price dropped drastically and affect its global image
  19. 19. As the debt market was frozen, Tata Motors turn to the equity market to raise fund. After the issuance of ordinary shares with right basis where existing shareholders could get one ordinary shares for every six shares held, the earning per shares of the company dropped. This is due to the company earnings dropped (effects of the global economic crisis) and the number of shares outstanding increase. The dropped of shares price and EPS caused the investors and public losing confidence on Tata and later it had affected its global image. Now, everybody is in doubt whether Tata Motors able to survive and increase the EPS in the future and would think twice before investing in Tata Motors. The share price of Tata Motors dropped drastically after the issues of ordinary shares on the right basis. Solutions 4 i) Boost sales and increase company’s earnings
  20. 20. In order to boost sales, launch new products with fuel economy and low budget cars as mentioned above will help to achieve the target of sales increase. When the sales increase, the earnings will increase and hence the EPS will increase. Besides, when there is a sign of revenue growth, the public will have their confidence on the company increase and finally they will build up again its global image. ii) Expose the future strategic strategies through media release Smart investors will do a company analysis before they invest in that company and normally they will get information from the annual reports, newspaper, and electronic devices. Hence, it is a probable way to build up investors’ confidence through media release to announce the company future profitable plans. Tata Motors always have good plans to provide the best value of money to its shareholders and customers where it can be proven from its past sales history. They always make the good decision in acquisition the right firms and joint venture with the high technology-based auto-maker firms. Hence, investors would be convinced to pump in fund to the company and it would also help in gaining trust from the financial institutions to lend Tata a huge loan for refinancing. Problem 5: Relocation of Nano’s factory from West Bengal to Gujerat The factory of producing Tata Nano was set up at West Bengal in order to launch the product on October 2008 but due to the violent political agitation in West Bengal over the land issue, Tata Motors was forced to relocate their prestigious Nano project to Gujerat.
  21. 21. This has eventually delayed the launching of Tata Nano in October and increase the cost of setting up factory and facilities to produce Nano. Solutions 5 Due to the political issues problem, Tata Motors has no power to control this external factor environment. Therefore, Tata Motors can only change its internal variable and reallocate its resources in order to continue its operation for Tata Nano project. Therefore, the factory which uses to produce Tata Nano had shifted to Gujerat at the end. Reasons of global financial crisis and its impact on the economies of developed and developing countries
  22. 22. Bursting of housing bubble, drastically drop of stock price, large financial institution collapsed, government intervention to bail out the financial system, slowdown of Gross Domestic Product (GDP) and so on are the serious issues that indicate the economic recession which cause by the global financial crisis 2007-2010. Although it started at United State American, the negative effect of financial crisis sweep away around different regional’s economy no matter developing or developed countries due to dependence of those economy system on the USA’s financial condition. Between year 1997 to 2006, the price of typical American house increased by around 124%. This housing bubble and low trammel of borrowing requirement, incite those home investors refinancing their home loan with lower interest rate (some even lower than market interest rate) by taking out second mortgages secured by price appreciation. However, when interest rate start raise and housing price began drop moderately in year 2006-2007 sweep around U.S., housing bubble busted and refinancing become more
  23. 23. difficult. Such condition resulted in homes worth less than the mortgage loan and lead to foreclosure epidemic which happen in late 2006 continuously drain wealth from consumers and erodes the financial strength of financial institution. Moreover, defaults and losses on other loan type had significantly expanded the crisis from housing industry to other part of the economy especially the banking industry which incurs huge number of subprime mortgage loan. The financial crisis 2007-2010 culminated on September 2008 with Lehman Brother filing for bankruptcy. In the beginning state, global financial crisis was resulted by the insufficient of regulation and monitoring implement by the government and financial institution in the housing industry and banking industry.
  24. 24. After the bursting of housing bubble and bankruptcy of Lehman Brother, the U.S. was in bear market. The U.S. stock market drop drastically. U.S. Nasdaq index and S&P 500 index were drop around 25% from year 2007 to 2008 and it went worse in year 2009 (decrease around 11% again). Besides that, the import and export of U.S. also decrease
  25. 25. seriously. All this bear market effect will influence the GDP of U.S. and continuously influence other economic system and countries. Since U.S. is the largest economic system and operate huge international trade with other countries (U.S. ranked as the biggest international trader by WTO). The table shows information about the top partner of U.S. for international trading. Any bad performance of U.S. economy includes the decrease of GDP and stock price will pressure the economic performance of those countries no matter developed or developing countries. The global financial crisis started at U.S. will reduce the purchasing power of U.S. international traders and also investors who loss confident with the economy. This will resulted in declining of U.S. foreign direct investment in other countries and also the drop of import and export of U.S. Reducing of that capital or income will affected the income of those countries which directly depreciate the value of GDP and companies’ stock
  26. 26. price. As the result of it, the global financial crisis had created the recession for the world’s economy. This also the reason for how financial crisis in U.S. globally affected other economic systems. The global financial crisis go worse when the import and export of other countries declining and pull down the stock value of the countries. This will further reduce the purchasing power of consumer and investment quantity of investors. And these reduce or slowdown the GDP growth of those countries. For the first quarter of 2009, the annualized rate of decline in GDP was 14.4% in Germany, 15.2% in Japan, 7.4% in the UK, 18% in Latvia, 9.8% in the Euro area and 21.5% for Mexico. This is the reason of how the world suffering recession cause by the U.S. financial crisis. The following graph shows the some decreasing of GDP growth of Asia and Pacific.
  27. 27. The following graph shows the GDP performance of Latin America countries as a total. According to the Overseas Development Institute, the global financial crisis affects the developing countries in two possible ways. First there could be financial spillover and contagion for stock markets in emerging market. For example, India stock market declined by 8% in one day as the Brazil and U.S. plunged; the Russian stock markets had stop trading twice. Those examples clearly show that, no matter developing or developed countries, the stock market across the world had dropped substantially since May of 2008. Second impact is due to the worse condition in developed countries which influence the developing countries. It could be in severe ways: 1) Trade and trade price Recession will cause inflation and reduce the real value of currency. This will cause the commodities price increase especially those items like oil, copper, and
  28. 28. so which highly demanded by China and India. The graph shows the increasing of price of commodity and petroleum during year 2007 to 2008. 2) Remittances Since condition in developed countries is in recession, fewer migrant will move to developed countries. For instance, less job available in England during the recession cause a lesser amount of people from Turkey and East Europe seeking work in England. This kind of situation will reduce the remittance to developing countries (which reached a record $251 billion in 2007, but have fallen in many countries since). 3) Equity investment and foreign direct investment (FDI) Effects of recession incite the drop in confident level of investors with investment. Unstable economic environment had refrained investors putting in their money in stock market or any fund investment due to high risk in real value of currency. Investors would tend to invest in assets such as gold and other. This
  29. 29. resulted in less working capital and credit availability in the market. Developing countries will face credit crunch. The following graph shows the decline of investment in India during the global financial crisis. 4) Commercial lending Since bankruptcy of Lehman Brother and the financial collapse of Iceland due to high debts, banking industry of developed countries was under pressure in not be able to lend as much as they done in past. U.S. banks losses were forecast to hit $1 trillion and Europe banks is around $1.6 billion. Under such condition, low credit availability will force companies in both developed and developing countries into trouble of insolvency and further slowdown or postpone the projects or investments.
  30. 30. 5) Unemployment High commodities price and low investment rate as well as low credit availability had reduce the income and profit of many companies and force them to reduce the working capital by layoff the employees. This type of strategic will increase the unemployment rate of the countries and further deteriorate the economic circumstance. It will also incite more crime, weaker health systems and higher poverty which will construct an unstable social condition bring negative impact on economic recovery. The impact of global financial crisis on the developing and developed countries will vary. It is depend on the respond of those countries’ government in deal with the crisis. The government has to modify the policies and regulation as well as changing the fiscal policy and monetary policy to reduce the effect of financial instability and recover the economic condition.
  31. 31. Impact of global financial crisis on the automobile industry Worldwide slumping in Automobile’s sales and production The global financial downturn was primarily affected the American automobile manufacturing industry followed by the European and Asian automobile markets in October when the sales of the automobile industry slummed in year 2008. However, in 2007, the signs of the economic crisis started to reveal. All was begun by the sales dropped incurred in Japanese and US motor vehicle from 2006 until 2007. The pressure of the global financial crisis totally distracts the automobile markets finally when this industry faced negative growth rates in sales and production for 2009. The economic downturn boiled over in 2008 from the North countries of the world and continues spread to the South countries in 2009. Furthermore, global production and sales in the automotive industry is expected to fall in 2009 (table: -21.5% and -16.4% respectively). The sales of the South America were most affected by the crisis which is dropped from 3.2% to -29.6%. While, Japan were more severely affected in productions downturn incurred a slumping percentage from -0.3% to -32.5% in 2009 and this relates to the export surplus that has been involving for the NAFTA area. Western Europe, Africa (Middle East) and Asia-Pacific (excluding Japan) is assumed to have least affected areas in terms of the car sales and incurred a minor decrease in vehicle production
  32. 32. Japan In December 2008, Japan’s fourth biggest car manufacturer-Suzuki Motor Corporation, announced that it will cut their production in Japan in about 30,000 units due to failing in demand. Nissan, another leading Japanese car manufacturer, declared to slashing production of its output by 80,000 vehicles in the first quarter of 2009. Beside, Bloomberg reported that Mitsubishi Motors move to reduce planned output by 110,000 vehicles in the year ending of March 2009 because of tumbling sales in Japan, the US and Europe With a weak US economy and high gas prices in the summer of 2008, Toyota reported a decline in sales for the month of June, as well as same figures reported by the Detroit Big Three. Toyota claimed that, these were attributed mainly to slow sales of its Tundra pickup, as well as the shortages of its fuel efficient vehicles such as Prius, Corolla and Table World car sales and production by sub-regions 2007-2009 ( change in %, year on year basis) Source: Automotive World Automotive Passenger Car OEM Quarterly Data Book, Q2, 2009. Reclassified data calculated from rounded off data Note: #) NAFTA and South America figures (include light trucks)
  33. 33. Yaris. On December 22, 2008, Toyota slashed profit forecasts in sales and their sales in the United State were down 34% and were drop 34% in Europe as well for the year ending in March 2009. France The French automobile manufacturer, PSA Peugeot Citroen, foresee the falling of sales volumes by at least 10% in 2009, following a 17% drop in the last quarter on 2008. The European domestic sales fell 4% and the world wide sales drop by 7%, which is forcing Renault to abandon their 2009 growth targets. South Korean Despite a global economic slowdown, Hyundai-Kia, the South Korean automakers, have been successfully managed its rapid growth in 2009. It is unusual for Hyundai-Kia’s continued success when most automakers facing in sales falling. Hyundai-Kia took significant advantage of the crisis by creating affordable and high quality with well designed vehicles while indirectly attracts the customer confidence to invest in their markets. Nonetheless, South Korean automakers were not completely immune to the crisis and Hyundai Motor Company had begun reducing production in US, China, Slovakia, Turkey and India since the demand of motor vehicles was badly affected by the financial crisis. India The pressure of global downturn affects the State Bank of India to reduce the interest rates on automotive loan in February 2009 citing falling production quantities. Tata
  34. 34. motors conducted a widespread marketing campaign toward the Tata Nano, which is classified as “the people car”, while the manufacturer hopes this low cost product will encourage customers to purchase the vehicle in the credit crisis period. 2008 and 2009 - The bad period for automobile manufacturer General Motor (GM) and Chrysler faced the reducing cash flow and falling in profitability during the automotive industry crisis in the late of 2008 due to the global financial downturn. Consequently, the huge negative impact faced by both giant automotive manufacturers (GM and Chrysler) in USA was bringing about bankruptcies and bankruptcy protection claims under the US Chapter 11 clause. While, another well known automotive manufacturer-Ford, managed to stay in an independent condition due to the previous debt restructuring process. Capital restructuring with a condition of high possibility for being unable to pay debt, the external government intervention, supplier defaults and falling in customer confidence extremely affect the automotive industry in the midterm and long term period. Subsequently, through reduced in R&D investment, slumped the capacity and capability of the organization will lead to falling in competitiveness and further decline in the automobile markets performance. Automotive firms’ actions The economic crisis generally affected the automakers and auto-parts suppliers within the entire global countries to implement the standard crisis management. Obviously, interrelated between the automobile manufacturers around the world is widely conducted.
  35. 35. While the reputation and performance in the automotive markets should be well manage in order to maintain the standard and quality of the organization. However, the insufficiency of working capital to face the global financial crisis lead to planning in reduction of output(parts, vehicle) management by most automakers in order to survive from lack of ability to funding the business activities. Decreasing in production lead the management of the company turn to reorganize the human resource management involving internally eliminating shifts of working hours, reducing overtime, performance based bonuses, temporary worker layoffs and contract employees. Furthermore, the automakers also manage the external’s relationship by way of managing the upstream value chain (business services, suppliers) and downstream value chain (dealers, transport, after sales services, logistics vehicle financing and insurance as well as recycling). Finding Alliances and other alternatives Some of the automotive manufacturers attempt to consolidations, mergers and acquisitions within the same industry’s parties while finding alliances to back up the automotive industry. The global financial crisis lead the automobile manufacturers to renegotiation of existing contracts, loans and credit lines as well as the company restructuring system. These could slightly assist the company to stabilizing and balance up the ability to continue the business activities.
  36. 36. The negative impacts and massive distraction caused by the global economic crisis critically repositioned the automakers’ capability to growth in the global markets. If we realize that, DaimlerChrysler disbanded, Suzuki and Fiat (potential acquisitions) was abandoned by General Motor (GM), and Ford has been reduced its engagement in Mazda. Subsequently, these changes exposed for new formations including the alliance taken by Chrysler with Fiat, Suzuki and Volkswagen (VW) are becoming allies acquiring equity from each other, and Mitsubishi Motor Corporation is linking up with PSA in the year of 2000 due to the global financial crisis effects. Development of new trend has been introduced where, automakers from the South countries seeking foreign direct investment of automobile capital in the North countries to undertake their asset. For instance, South Korean (Ssangyong) has been acquired by Chinese (SAIC) in 2004. In 2008, Indian Tata Motors also acquires Jaguar Land Rover from Ford. Meanwhile, General Motor (GM) has sold the Hummer to Chinese Sichuan Tengzhong Heavy Industrial Machinery Company in 2009. Furthermore, Ford also trying to selling its subsidiary, Volvo, by negotiating with Chinese Geely. Get support from government Consequently, the impacts of the economic crisis blow up the car manufacturers’ intention to have the reinforcement from the government in order to stable the momentum in consumer demand of motor vehicles. The President of the automobile industry’s trade association, ACEA, and the CEO of PSA Peugeot Citroen, Christian Streiff has claimed his statement in a press release subsequent to an ACEA board meeting
  37. 37. in Paris at the motor show. He mentioned that the governments should respond and stimulate the economy while, remove the credit crunch in order to restore the consumer confidence. This can be the method to let the consumers have the confidence to buy and invest indirectly in new vehicles produced. Meanwhile, the secretary general of the automobile industry’s trade association, ACEA, Ivan Hodac, added, due to the regulatory requirements strengthening actions, the global downturn adds to an extensive pressure on car production in Europe.
  38. 38. The influence of macroeconomics environment on business Macroeconomics is one of the general fields in economic which deal with the structure, performance and behavior of the whole economy of a country even the regional and the whole world. Understanding the macroeconomics environment is necessary for a business to be success in what they are doing because macroeconomic factors can be obstacles for business but sometime it can also be the opportunity for business to success. Gross domestic product (GDP), unemployment rate, and prices indices are some of the important aggregated indicator in macroeconomics’ study. It build up models to explain the relationship between factors such as consumption, unemployment, inflation, investment, saving, national income, national policies and international trade. Those factors will significantly influence the successfulness of a business no matter locally or go international. First, we will focus on how inflation rate influence the business. Inflation is an increase in the universal level of prices of goods and services in an economy over a period of time. This means that, inflation will erosion in the purchasing power of money, each unit of currency can buys fewer goods or services. So, the weakness of purchasing power will increase the cost of production (the cost of materials, transportation cost and so on) cause the price of goods and services become higher. Moreover, sales of goods and services will also decline due to the high selling price and low purchasing power of consumer.
  39. 39. With the same income level, consumers have to become more careful in purchasing and avoiding any luxury goods and services. This effect of inflation will lead to drop in both revenue and profit of business. In such condition, company has to be cautious with the economic changes. The following graphs show the decline of industrial production, retail sales and also world trade in between year 2008 and year 2009. It also includes the consumers’ confident level about the market.
  40. 40. Besides decreasing of real value of currency and other monetary items, inflation also discourage the investment and saving due to uncertainty of future real value of monetary items. This negative effect will possibly lead to decline in investment of productive capital and saving in non-producing assets. For instance buy gold and sell stock. Low investment and saving rate also influence the loan or debt availability in the market. Consequently, company will become harder to gather the working capital from neither borrow from financial institution nor raise fund from public and at the same time, their value of companies fall due to high underselling transaction of stock. Without the necessary working capital, company cannot operate well and miss those opportunity of good investment. This will deteriorate the profit and earnings per share (EPS) of business
  41. 41. which had been reduce in fall of sale and high production cost. This condition will become worse when investors lost confidence with the market and business. Companies will go bankrupt if they don’t handle it well. Basically, in order to avoid going bankrupt, companies normally will try to reduce their working capital. The most common way is to layoff their employees ethically or unethically which will raise the unemployment rate all around the economy (The following graph reflects the negative employment rate during year 2008 to year 2009). Unemployed individual are unable to earn money to meet financial obligation. Increasing of unemployment rate mean that people become poorer in purchasing power which mean less goods or services they will consume. It cause consumption fall and deteriorate companies’ sales. Besides that, some social issues may occur due to high unemployment rate such as illegal immigration, crimes, and so on. This will create an unstable business environment which restrains the foreign direct investment and stock prices. It goes worse when the social problem boost become political issue include president resign and lost power of current government. This unstable political condition will destroy the whole economy of the country and influence the growth of business. So, companies have to pay attention on the unemployment rate in a country before they step in the market.
  42. 42. When the high inflation rate and unemployment rate occur in an economy as mention above, the economy will go down and economist named it as recession. During the recession, GDP of the country will fall and affect it import and export of goods, the currency exchange rate, and inflation of stock price and so on. This will influence other countries or region like the economic crisis 2007-2010 at United State of American which cause decline of USA’s GDP had badly effect the countries all around the world. In order to recover the economy from recession, government will change their fiscal policy and monetary policy. Fiscal policy is use of government expenditure and revenue collection to influence the economy. Where monetary policy is the centre bank of the country which is controls the supply of money, often targeting a rate of interest. The graph below is showing the deficit in the fiscal balance for those developing and developed countries and also the public debts. It clearly stated that government increases their expenditure during the financial crisis period. Changes of both policies above will influence the business. As business borrows money from financial institutions all the time, increase in interest rate will influence the business. Higher interest rate means companies have to incur higher costs to repay loan. Besides that, higher interest rate also reducing the individual loan appetite and indirectly decreasing the demand of goods and
  43. 43. services at market. Furthermore, government also may increase the taxation rate for certain aspect to increase government income. This will let government has more money to increase the government expenditure which will raise the aggregate demand of the country and raise up the GDP. So, companies will force to follow the tax rate incurred and force to follow pattern of resource allocation which designed by government in budget. This all negative effect of macroeconomics’ factors will require companies pay attention on it to survive and success. However, if a business can take advantage of the changes of macroeconomics’ factors, they will be success even in the recession. For instance, while inflation rate increase, the stock price of some companies will fall drastically. This is the golden opportunity for those big and wealthy companies to acquire those companies with low cost through acquisition or merge. This will benefit the companies in long-term. Moreover, when
  44. 44. government increases their expenditure through the budget, companies may have change to raise their sale and profit if they get those chances. So, in short, macroeconomic ‘environment will influence the business in both positive and negative ways. There is necessary for businesses to understand what happen around them, response to those macroeconomic factors, and grasp those opportunities and at the same time avoid threads.
  45. 45. The importance of global business environment for the success of organization Nowadays, there are many multinational companies (MNC) which operate in different regions and countries. In order to operate effectively and efficiently, these multinational companies definitely could not be run away from understanding the global business environment, especially on the environment of the countries which they are operating. Understanding business environment is crucial as it will give a significant impact on the success of an organization. Whatever it is, organization will not be able to control the external factors which caused by business environment. The only things that organization can do to ensure its success in business is that to adapt the external environment by changing its internal variables, such as resources, policies and business strategies. Thus, it is vital for an organization to analyze the business environment in their prospect countries before they start their operations in that particular countries as different countries would have different economic, currency, cultural, politic, law, regulations, and technological environment. Organizations can only success if they have well planned strategies and well allocate their limited resources to face the threat and grab the opportunities when it comes. Importance of global business environment for the success of organization would further be discussed in more details as follow:- Economic Development Before an organization starts its operation in another country, it is vital to understand the economic development of that particular country. The level of economic development will indirectly tell the organization the affordability of consumers. From there, they can
  46. 46. estimate and expect how many units product can sell and what reasonable profit can be made. Basically, level of economic development which reflected by standard of living can be measured by evaluated Gross National Income (GNI) per capita. It will generally show the citizen’s share of national income. Table 1.1 below shows the Gross National Income per capita at purchasing power parity. From that information, organization can roughly predict which country is suitable for them to sell their products by looking at the purchasing power of the citizens. It is very clear that citizens in United States have the highest purchasing power among the five countries. If Tata Motors want to sell their Jaguar and Land Rover cars, probably they will tend to focus on United States instead of China or India. On the other hand, if their product is economical car like Tata Nano, probably, they will tend to focus on China and India as well. List of countries by Gross National Income per capita at purchasing power parity in 2009: Table 1.1 Country US$ United States 46,730 Japan 33,280 Malaysia 13,530 China 6,710 India 3,230 Source: Wikipedia Currency Valuation and Exchange rates Currency and exchange rates would have a great effect on the organization especially for those who import vast raw materials or products from foreign countries. The cost of products may vary due to the changes of currency value. For instance, Tata motors buy engine from its subsidiary, Land Rover which based in UK. The exchange rate for 1 GBP
  47. 47. is 73.3696 INR. If Tata Motors buy engine from Land Rover which cost 10000 GBP, therefore it has to pay Land Rover for INR 733,696. What if Tata Motors delay its purchases for two weeks and the exchange rate at that time are 72.5980? Let’s just make a simple calculation again. It will cost INR 725,980 for Tata Motors if delay for two weeks of purchases. From a simple calculation above, it show that currency and exchange rates would have effect on success of the organization through affect its product cost. In reality, every company is trying to minimize their cost and maximize its profit. Indeed, analyze the currency and exchange rates is important before expand its business to other countries. Graph 1.2 below shows the exchange rates of Indian Rupees with US Dollar from year 2008 until July of 2010. Exchange rates are fluctuated from time to time. Apart from that, organization has to evaluate those factors that conducive to economic growth. For instance, is that particular country has reliable banking system and a strong stock market. Besides, does the government have policies that encourage investment and
  48. 48. does it has strong infrastructure such as telecommunication system, transportation, energy and social facilities. These are those factors that contributed to economic growth through attracting more investors. Indirectly, it will affect the success of an organization. Cultural problem Normally, when dealing in another country, the major problems that would be faced are language, time and sociability and intercultural communication problem. These problems are mainly due to the problem of different culture among the people who come from different countries and have different background. It is important for an organization to ensure their success in foreign countries if they could understand and adapt to the culture. Language As we know, the international language in business is English. However, some countries like Japan and China take pride in their own languages and cultures. Only those who are English educated would know how to speak in English. But in reality, we are commonly dealing with those people who cannot speak English. Therefore, it has made the business communicational process harder. Maybe they have to employ translator, which in turn make the business not efficient since it is not direct effective communication which will cause misunderstanding in certain meaning of word or lost of information when translating the language. Sometimes, it will create misunderstanding due to the different culture problem. For instance, a manager from US misinterpret message delivered by a Japan manager due to language’s misinterpretation. Time and sociability
  49. 49. Meeting that discuss business issues normally will start and end on time for the Europe countries. Those people from these countries appreciate time very much and think that “time is money”. However, some Middle East countries would have different culture in term of time perspective. For instance, they tend to come late for the meeting. Intercultural communication Intercultural communication means the way of someone is talk, distance during communication and how direct when someone is speaking or delivering their messages. For some people especially Middle Easterners like to use body language, hand gestures and even raise their voice while talking to somebody. This is different from Northern Europeans who less raising their voice or have hand gestures while talking to somebody. Besides, some people tend to talk in a foot distance. But, American would prefer to have personal space while talking to others. In addition, the way of deliver message would be different for those people who come from different countries. For instance, American and Chinese tend to deliver their message in a more direct way compare to Japanese. It is very important to understand others’ culture especially in the countries that organizations are operating. Through understanding their culture, an organization can adapt itself to the culture environment in order to get more business. At the end, it will ensure the success of an organization. Legal and Regulatory Environment Different countries would have different sets of law and regulation. For those multinational companies which operating in foreign, it has to understand and abide with the foreign countries’ laws and regulations. It is vital to do so as it will give a significant
  50. 50. impact to the organization which violates the laws and regulations. Worst to worst, an organization may shut down its operation or leave the country if they fail to comply with the laws and regulations. In order to solve the legal and regulatory issues in foreign countries, an organization may employ some lawyers in order to give proper advice. For instance, Tata Motors which currently has its operation in UK, South Korea, Thailand and Spain would have to abide those countries’ laws and regulations too in order to survive and continuously grow in their operation. Technological Environment Technological environment refer to the materials and machine used in the production, receptivity of an organization to the new technology and last but not least, the adoption of technology by the consumers in a country. All of these factors would affect an organization’s productivity and volume of selling of its product. For instance, Tata Motors sell luxury cars like Jaguar and Land Rover which require high technology to manufacture in India, probably it may not achieve the expected revenue as most of the citizens in India are middle low income. They cannot afford to buy Jaguar or Land Rover which cost US$ 67000. Moreover, the technologies in India still not so advance compare to United Kingdom which can produce high end car like Jaguar and Land Rover. Indeed, organization who wishes to expand abroad has to analyze the technological environment also before they start its business over there. Definitely, it is one of the external environment factors that will affect the success of an organization. Is acquisition the right method to go global?
  51. 51. Right Method at the Right Timing Referring to many acquisition cases and conceptual theory, we believe that acquisition is a right method to go global if it is at a right timing. Acquisition to go global is a right method if it would yield the benefits like increase the company’s global image, learn from the acquired company in the form of highly invested research and development, own the facilities and assets without set up cost, have the intellectual property rights, and etc. For instances, General Motor under the control of William C. Durant (1908) and Alfred P. Sloan (1923) has over the years acquired numerous automobile companies worldwide namely Oldsmobile, Cadillac, Elmore, Oakland in 1909. Also in 1909, GM acquired the Reliance Motor Truck Company of Owosso, Michigan, and the Rapid Motor Vehicle Company of Pontiac, Michigan, the predecessors of GMC Truck. GM operated 150 assembly plants by 1980s. GM had brought the record of led in global sales for 77 consecutive years (1931 to 2008) before the latest financial crisis, longer than any other automaker. Acquisition must be made at the right timing in order to get the benefits mentioned above. We clarify that the right timing is the economy boom or when there is economy burst but the company does not get hurt and able to finance the acquisition without calling for default after the acquisition. If the acquisition happens in the right timing, it is truly a right method to go global.
  52. 52. Acquisition to go global could be a wrong method Acquisition to go global could be a wrong method if it does not create the above mentioned benefits. For instances, a small company is about to acquire a big company with huge financing and unable to pay the debt afterwards, poor risk management and no detail analysis on the target company. Consequently, the company would overpay for the acquisition and yet could not gain the desired benefits. Is buying Jaguar and Land Rover to go global a good move? In our opinion, we would say that it is a right method for Tata Motors to acquire JLR to go global simply because Tata Motors has recognized that these two British iconic brands, Jaguar and Land Rover, needed to retain their identity, design and technical independence as also their image in the marketplace, while at the same time integrate with the management of Tata Motors, and find synergies in the capabilities and facilities between the two companies. Considerable progress has been made in identifying sources of components from India, recognizing engineering and Computer Aided Design capabilities within Tata Motors and marketing synergies in various geographies. Tata Motors on the other hand has recognized the high level of technology and skills embedded in JLR which could be of great value to both companies. Conclusion According to Tata Motors’ annual report for the year 2008- 2009, the year under review would be viewed as in great despondency. The Company faces a major decline in demand across its product range; it must bear the burden of the major acquisition of JLR,
  53. 53. and faced with a major collapse in vehicle demand in Western Europe and the U.S. But to many in the Company this is yet another year of challenges with the excitement of meeting such challenges head-on. “The spirit, commitment and dedication of the whole Tata Motors team at all its locations and across all levels are truly phenomenal and this continues to be the company's greatest asset. I feel confident that if we can sustain our operations through this difficult period, taking whatever steps we need to take to see the year through, we could overcome all the obstacles in our path. I feel strongly that in later years we can look back on the JLR acquisition and say to ourselves that this was a very worthwhile strategic acquisition and one which has brought us considerable technology and global presence” Reported in Chairman’s Statement by Mr. Ratan N Tata. We believe that Tata Motors will surely rebound since it has the great leadership under Ratan Tata who has successfully managed to sail through many adversities in the past and bring Tata Motors to the global stage. References 1. C,Yongmei & W, Liwei. (2005, May). “Research on Financial Risk Identification and Assessment in Merger & Acquisition”. China-USA Business Review, Vol 4. 2. G. Duncan, K. Richard & M. Miller. (2010. January) “The Global Economic Crisis and Developing Countries: Impact and Response”. OXFARM Research Report.
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