The Financial Times has reported that TATA Motors has successfully secured the desired full $3bn sum in what are obviously turbulent lending times. This spans beyond what many saw as an expected immediate credit agreement of $2bn to cover the J-LR sale. The $3bn comes from a myriad of underwriters led by Citi and JP Morgan and reports state that TATA will be seeking a further $1bn in due course, the details of which are at present sketchy.
Given the present squeezed credit conditions, there is liquidity but only for the most compelling of investment arguements, so could that extra $1bn be used as part of an extended alliance rationale between specifically well matched TATA & FIAT groups, to possibly including Ford when advantageous on a project by project basis?
Such a TATA-FIAT-(Ford) agreement could effectively 'bolt-on' any FIAT-Ford JV projects - such as the small 500/ Ka cars and Iveco-Ford trucks - into a broad strategic picture between the Indian and Italian conglomerates. The very fact that Ratan Tata sits on the FIAT Board and has now forged a relationship with Ford seniors means that the Duo are seriously looking at extending their nascent relationship and possibly including the US company when agreeable.
However, although a potential tri-regional, 3-party alliance looks good on paper the realities of consistantly operating as such a fully integrated 3 headed beast are far more complex than a paper exercise would suggest. Hence the 2 + 1 arrangement suggested, based on solid 2 party alliance grounds.
On this basis TATA and FIAT well recognise the opportunity and challenges in expanding their current inter-relationship.
Relationships are created as much through human contact, credibility and belief as through commercial rationale, so a TATA-FIAT expansion and integration of interests could be effectively sealed through the ‘marriage’ of 2 of the contemporary ‘industrial royal families’: the Tata’s and the Agnelli’s - represented by Sergio Marchionne. However, it should be noted that there is a very important 3rd personality dimension to this seemingly dual-family equation, and that is the (oft hidden) presence of the Indian businessman Pallonji Mistry and his 18.35% stake in Tata Sons – compared to Ratan’s <1% share. He has historically been reportedly a sleeping partner, happy with TATA's international alliances, but he obviously wields influence, so must not be conveniently discounted.
Very basic analysis recognises that the two conglomerates share distinctly similar characteristics regards respective portfolios of industrial interest, with both direct mirror-images in specific sectors and segments (ripe for consolidation) as well as the ability to plug each other’s areas of operational weaknesses (beckoning mutual assistance). Thus such a 'marriage' has definite merit.
From the perspective of TATA Motors - a singular division within a 7 sector, 98 company-wide Group - the breadth of activities spanned and depth of the value chain covered has been key to self-reliance and internally supported growth, an ethos of the TATA Group's domestic rise. Activities include:
a) Materials – Steel and Composites (advanced materials)
b) Chemicals – Agro-Chem, Food Additives, Soda Ash, Pigment, Pharma-Drug
c) Engineering – Automotive [Motors, Auto-Components], Eng Services, Eng Products
[inc TAL Manufacturing Eng & Construction Equipment]
d) Energy – Solar, Power Generation/Distribution, Oil & Gas
e) Information Systems – inc TCS [Consulting (Auto)], Technologies [Eng & Design],
Elxsi [Product Design Dev]
f) Consumer Products – Personal Accessories, Retail, Tea, Ceramics, Publishing
g) Services – Hotels, Residential Construction, Reality & Infrastructure, Financial Services, Quality Mgmt, Central TATA Services [GA etc]
Looking at the TATA immediate coverage alone (even without FIAT) highlights the amount of internal industrial collaboration, technology transfer and value-adding integration that could emerge. The very fact that the Group previously targeted Close Bros Merchant Bank for take-over demonstrates the corporate will to expand financial services, become closer to The City and utilise such an internal investment banking function to maximise individual company and group value extraction.
Against this multi-divisional powerhouse, even Fiat Group looks more constrained with fewer and less complex divisions, yet it has greater market penetration and influence on relative markets. To summarise FIAT Group includes:
1) Automobiles – FIAT, Abarth, Alfa Romeo, Lancia, Maserati, Ferrari & Fiat Professional MCVs and LCVs.
2) Trucks, Commercials & Buses– Iveco, Iveco-Magirus, Astra, Irisbus
3) Agriculture & Construction – Case New Holland
4) Components & Production Systems – FPT, Magneti Morelli, Teksid, Comau
5) Publishing and Communications – La Stampa, Publikcompass
With such a comparitive context as the thesis, the following very basically reviews the potential for cross-company integration &/or alliance throughout the value chain.
1. Mineral Extraction & Commodities
TATA Petrodyne Oil & Gas exploration and production provides a stable, first-phase foothold for industrial conglomerate fundamentals in terms of securing an integrated lowered-cost base for conventional fossil fuel energy generation and the use of the ‘black-gold’ as a base for petro-chemical activities.
2. Power Generation
Although seen as ‘dirty’ by green lobbyists, the truth is that conventional power generation methods using gas, oil and coal/coal extraction is the cornerstone of the Asian growth scheme. Although alternative energies are being evaluated, for the foreseeable future, little is expected to change. The reason that low cost (technologically and profitability) known methods take economic precedence as part of massively powerful and relatively inert industrial frameworks; yet to be politically committed to the notion and workings of carbon capping & trading.
3. Metals - Steel and Aluminium
From 1907 the Indian group has developed an array of steel products including, for automotive, conventional offerings such as the standard hot & cold rolls/sheets for BIW and various rings and bearings, aswell as more advanced ferro alloys and assessing ferro-chrome and titanium opportunities. In what has historically been a slim sector, TATA’s prime goal is to be the lowest cost steel producer in the world achieved through foreign firm M&As (eg Corus, Millenium Steel, NatSteel ) and JVs, providing economies of scale in product lines and ‘localised’ global plants. Another aim is to develop steel business away from its commodities perspective with new product developments to better segment the sector and brand titles to differentiate. Thus TATA Steel seeks to gain competitive advantage and increase its order book from the global auto-industry.
Under Italian state development policy through the 20th century, FIAT never built-up capability so far ‘upstream’, and so has always bought-in its flat and section steel. The decline of the (small) domestic Italian steel industry demanded sourcing from elsewhere, initially primarily within the EU and latterly BRIC regions, especially so Brazil given FIAT’s #1 automotive market standing and domestic procurement volumes. Relative to Latin America, and specifically Brazil’s ambition to increase production by 135% by 2018 through “irreversible investment”, we see the ongoing ‘Steel Wars’ unceasing between Brazil, India & China. With this in mind FIAT may be able to decrease its historical ‘over-payment’ for its steel by leveraging the TATA relationship and requesting that Brazilian steel producers keep competitively on par.
Given the massive price hikes of 51-69% demanded by iron ore miners that were largely unchallenged and the likelihood of consolidation in the mining sector giving greater price fixing power, TATA and FIAT and in a good position to redress the balance of power and ‘buy-in’ pricing mechanisms if they can raise steel production capacity and so gain further leverage over supply from TATA Steel’s suppliers.
Lastly, beyond the similar flat hot/cold sheet steel requirement, FIAT’s Teksid division, specialising in steel and aluminium engine castings, could be matched against TATA’s casting capabilities to evaluate the possibility of IPR, technology and projects transfer between both parties to individually ‘raise their game’. Just a singular example of the “seeking to plug mutual weaknesses” ethos of an enlarged relationship.
4. Plastic/Composites Production
Here TATA, not surprisingly given its heavy industry origins and diversity of corporate interests, has holds the ‘centre of gravity’ between the 2 multi-national corporations under the banner of ‘Automotive Composite Systems International’. This division specialises in vehicle skin panels (to class A surface quality) aswell as NVH parts and structural parts, and much of the learning has been evolved through business links with Germany’s respected Menzolit-Fibron, seeking to create a similar capability in SMC, BMC and ‘long thread’ at greatly reduced expense.
Given the global ‘Green Squeeze’, especially prevalent in Europe, demanding that European automakers reduce vehicle weigh and so corresponding CO2 output, the use of recyclable plastic fenders, door skins, vanity panels etc is expected to increase. Since FIAT sits alongside PSA as Europe’s ‘greener’ VMs, there could be much to exploit by integrating ACCI’s applications knowledge. The learning from this stretching of design-development parameters in Europe could then be latterly introduced within TATA’s own mass market vehicles to in turn raise their environmental credentials. However, in the meantime, Jaguar and Land-Rover would benefit greatly with increased use of high quality composites to reduce vehicle masses in aim of their respective brand and vehicle performance ideals.
TATA’s ‘Advanced Composites’ division also operates in designing and manufacturing for specialist hi-performance requirement fields such as the defence sector (bullet proof clothing and vehicle armouring* of relate to Land Rover’s SVO and Military functions), aerospace and medical electronics. A FIAT relationship would see this division develop materials for Ferrari, Maserati and Alfa Romeo at probably reduced cost, and serve to expand the division’s capabilities into the performance car sector spanning much from specialist bespoke for say Ferrari F1 to volume runs for sportier Alfa variants This would promote ‘Advanced Composites’ as the leading light in the Asian automotive composites market.
5. Low-Value Parts
The fundamentals of the mutuality between FIAT and TATA in this realm have been proven by their JV already underway in India - focused on the slightly less sophisticated but robust Palio and Sienna cars. Given India’s previous long-lasting technology gap, it has relied upon what are comparatively basic engineering solutions and so ‘low-end’ parts that have changed little in 50 years. These suppliers have long been under pressure to drive up economies and down prices, so India and TATA is seen as a global Mecca for low-value parts such as wheel and engine bearings, hub and engine block/head castings, differential cases, transmission gear-sets, U & box section channel etc etc.
VMs have for years been assessing Indian manufactured items for cost/quality and been pushing the western-supply chain to form JVs and M&As of their Indian peers. TATA recognised this and so intervened by building up its own Auto-Components division (Auto-Comp) which includes JVs with the likes of Johnson Controls and Visteon, so it could offer foreign VMs aswell as itself a lower-cost (though probably not lowest-cost) ‘one stop shop’ effectively developing into a whole vehicle-capable Tier1 and Tier 0.5 supplier.
To negate too much detrimental cross-pollination of IPR and technology, it is understood that the likes of Johnson Controls and Visteon have not divulged advanced systems and parts, instead keeping them as their USPs back in the US.
So in reality, TATA ‘Auto-Comp’ could be said to have developed beyond simply yesteryear low-end items. That capability exists in abundance elsewhere in India, but TATA were cogniscent in not getting trapped completely at the low-end of the parts value chain. To date FIAT have been major beneficiaries of the Auto-Comp business model in making Palio and Sienna happen, and will undoubtedly seek to expand it’s use in the increased localised production of other vehicles for India
6. High-Value Parts
In contrast to low-end and mid-value parts, high-value offerings are proffered by FIAT and its Components and Production Systems. Done so through its dedicated 4 company network of FIAT powertrain (3.1m engines/2.5m transmissions annually), Magneti Morelli (powertrain, electrical, chassis, exhaust etc), Teksid (castings of steel blocks & aluminium cylinder heads) and Comau (automated/robotic production systems). The 4 company divisional Sub-Group states that it is committed to consolidating and investing in emerging markets.
There’s scope for more FIAT-TATA collaboration beyond the obvious powertrain initiative, Teksid probably able to deliver much to TATA Steel’s castings section and the previously mentioned expansive ‘AutoComp’ division. Indeed, given the level of synergistic potential, the compelling argument for an IPR and technology trickle-down from FIAT Components & Prod Systems to TATA is undeniable.
7. Engineering Design & Development
Similarly, given the cost-down drives of western VMs, FIAT would look to evaluate in which exact areas TATA Technologies (its automotive Design & Engineering Consulting division) could assist. This Indian ‘D&E’ service, based in Pune, was specifically created to provide a dramatically reduced low-cost out-sourcing service to western VMs and its supplier base. As such it has carved a new niche of value-orientated, price specific basic engineering service, that sits below the increasingly whole car project based likes of MSX and the top tier advanced engineering consultancies that specialise in specific vehicle systems.
Although the D&E’s business model was created from a need for lowest cost ‘bums on seats’ engineering, it is well recognised that it must walk-up the value-chain, so has focused on developing knowledge-based services (inc CATIA V5, UGS NX, and it’s own internally developed KNEXT systems) through collaboration with renowned European and US Eng IT business partners. However, there could be said to be a level of marketing spin in describing some of these systems as truly value-added given their accordance to basic industry standard software. However we are unfamiliar with KNEXT, this may provide truly unique engineering insights and IT capabilities. But essentially D&E is about creating the basis for whole-car development facilities and slowly eating into MSX’s market territory, possibly seeking a down the road alliance.
8. Information Technology
In a similar vein, given India’s prevalence with IT, it’s not surprising to see much multi-company presence within TATA’s IT/IS division. TCS has grown in stature and global recognition, more internationally renowned than other sibling companies that
Serve the IT needs of domestic banks, airlines and corporate bodies. Relative to automotive, we mentioned TATA Technologies that sit under the IT umbrella, but another is TATA Elxsi, strongly geared toward IT-based product design, especially for car, truck and bus with the largest styling team in India.
IT has obviously become a sin quo none of industry, and as such today underpins TATA Group developments in the knowledge sphere as perhaps the first listed oil and gas operations in the physical dimension. It is here that TATA could once again assist in plugging FIAT’s future IT requirement as it possibly seeks to best understand the Italian company’s core and out-sourceable future IT needs and best fulfil them.
9. Vehicle Production Plants
Fiat’s wholly owned and JV assembly plants are dotted around the world including: Italy, Poland, France, Turkey, Egypt, Brazil, Argentina, South Africa, China, possibly Mexico soon) and India. Its Indian connection goes back to a 1951 licensing agreement with Premier Motors, the relationship developed as a 1997 JV (51% FIAT) and a full buy-out by FIAT in 2001. Fiat India produces ‘clones’ of Brazilian models using 90% local content, and importantly in 2006 agreed that TATA would manufacture the Sienna & Palio cars and Sell them through its large distribution network
In contrast TATA seems very India-centric, which given its own history is surprising.
Plants are located in: Jamshedpure, Pune, Lucknow, Pantnagar and Ranjangaon (the FIAT JV home), and plans for Dharwad and Singur producing the new Nano small car. Abroad, M&As and JV such as: Land-Rover & Jaguar in the UK, MarcoPolo Bus/Coach in Brazil, Thonburi Pick-Up in Thailand and FIAT Commercial Vehicles in Argentina assist TATA greatly in gaining an expanding foreign footprint. Plus of course the acquisition of Daewoo CVs in S.Korea, an important step in re-balancing the truck businesses exposure to local sector cyclicity.
Thus, TATA-FIAT have already undertaken shared interests in engine & car production in India, and truck manufacture in Argentina…so what more to come?
10a. Passenger Cars
The degree of mutual advantage gained with the car initiative is obvious; TATA gains a collaborator in advancing its own car quality and plant capacity expansion, whilst FIAT gains a powerful entry-point into a rapidly growing regional market. Given TATA’s #2 domestic status, behind Maruti-Suzuki, it looks to be an ambitious growth plan to eat-away at Maruti’s dominance, and in due course, via FIAT’s global presence, allow TATA to introduce its cars into global markets. The synergies are apparent and already being speculated upon, from within the two Group’s boardrooms (remember Ratan Tata is on FIAT’s Board) and externally throughout the grapevine.
Given the current focus on acquisition of J-LR, minds are on Sergio Marchionne’s previous conjecture regards the potential for a Maserati-Jaguar tie-up. FIAT’s CEO’s speculation dampened down in recent months as TATA and Ford finalised the deal’s details and pricing. Suspect Ratan has a quiet word with Sergio so as not give cause to have Ford argue for a higher value deal at the last minute.
Beyond premium divisional synergies, which are all very real and deserve focus another time, the mainstream divisions economies of scale are perhaps the more immediate ‘big wins’ at top of mind in Turin and Mumbai. Talks about this issue will have undoubtedly been periodically re-visited, but quite understandably each company will look to maximise its own non-partner based strategic options first, squeezing efficiencies where necessary, to maintain relative independence in core operations, yet also seek meshing only where and when appropriate – in effect given ever changing conditions, consistently re-defining JV appropriateness.
Importantly, the new Abarth division could be used by TATA as a case-study template for its own endeavours in creating an Indian performance sub-brand, possibly even adopting the Abarth brand through a co-licensing deal or having Abarth ‘breath’ upon its own cars, so applying the re-born moniker, as Carl Abarth did originally for FIAT and other clients. Indeed it could eventually be the basis to introduce far sportier coupe variants into the TATA range as the customer-base so demand.
FIAT has historically produced 4WD versions of its utility cars and as SUVs became popular obtained its small SUVs from Mitsubishi (Pajero Pinin) and Suzuki (Sidici); so targeting smaller car-derived vehicles. Whilst it produces the Iveco badged old fashioned utility vehicle (that looks very Defender-esque) and has previously displayed a Hummer-esque concept called the Oltre, based in the Iveco light truck platform,
FIAT’s role in true off-roaders (in the Land-Rover/LandCruiser sense) has been limited. TATA however has focused in that arena, albeit with dated designs and technology. Thus, there may well be good opportunity for TATA-Land Rover-Iveco to identify alliance ventures, very probably starting with defence vehicles which, if contractually won can provide handsome income.
And further down the road is the ability to cross-share powertrains to enable each marque to possibly have a full compliment of ‘soft’ to ‘hard’ CUVs and SUVs.
10c. LCVs & Pick-Ups
The previously mentioned “criteria that defines JV appropriateness” is presently the stumbling block behind the hiatus on the jointly designed Pick-Up medium sized project for Latin America. This may be a test case that helps both parties better understand each other’s JV and business model boundaries.
However, there may be another reason. Perhaps the hiatus has occurred to integrate Land-Rover into the study so as to gain better results.
10d. MCVs/Light Trucks & 10e. Medium & Heavy Trucks & Buses
Tata is presently the world’s #5 in medium & heavy trucks, and #2 in medium and heavy buses, whilst Iveco stands known but not as renowned as the likes of Volvo. To this end it seeks to move from being an “international actor” to “global player”, primarily through expansion in Latin America and China.
As with cars, there are on the surface great synergies to be had, but a full and proper marketing and engineering analysis is required to properly identify best routes forward, whether via plant and distribution JVs as seen in cars, technical alliance for next generation vehicles, or simply leverage of each other’s supplier-base to obtain cost and technology advances.
The substantial TATA interests of Pollonji Mistry play a significant role here since his wealth was built via construction and property development projects and runs a very sizeable firm. This very well may have focused TATA development in this sector, spanning excavators (esp recently mini-excavators), back-hoes and tall crawler-cranes and asphalters, dominating the local market for such equipment. Once again collaboration has played a key role in getting TATA into these segments with Hitachi, John Deere, Libiro & CESAN.
FIAT’s New Holland, Case & Kobelco products, at first glance, seems to sit well as yet another contributor to the licensed/re-badged TATA equipment range, offering larger excavation plant than Hitachi derived machines and larger back-hoes. However, so do the the source suppliers, so TATA may, as is business practice, be using the FIAT link to best negotiate with the Japanese and US firms for expanded licensing agreement terms.
Although TATA involves itself in Agro-chemicals it doesn’t operate within the agricultural machinery sector, but given it’s Construction Sector interests and rapidly changing governmental agricultural policies for larger farming in India and across the world, it would seem only a matter of time before TATA looks seriously at this arena, if not doing so already. Of course FIAT’s Case, New Holland & Steyr agricultural machinery ranges would be a ready made sharing solution offering a myriad of specific tools (from tractors to combines) in varying sizes. Primary focus would probably be on Case given that it offers products better suited to large scale arable needs as opposed to the more specific and premium offerings from New Holland and Steyr.
13. Communications & Publishing
Given today’s media-centric, information rich world, it’s not surprising that both TATA and FIAT operate in these fields to both gain revenue streams and have an opportunity to have a voice for socio-political influence, as the Italian newspaper La Stampa undoubtedly does in current affairs and the Indian subsidiary of McGraw-Hill Publishig does in terms of educational books to help educate the mass of future workers.
When FIAT announced the TATA Motors agreement back in 2006, Milanese financial analysts from forms such as Rasbank SpA stated that they hoped the agreement would be wider in scope than just basic vehicle assembly. In that time local component supply to the Indian made products has increased and so reduced variable production costs for FIAT.
Additional alliance projects have been sought, and are being discussed, whilst further more are in the pipeline for in-depth analysis.
The fact is that, at this juncture of globalisation, with jittery consumer and financial markets, both ‘royal industrial families’ - the Tata’s and the Agnelli’s – recognise the need to best understand how to serve each other’s purposes without stepping on each other’s toes. The 2 MNCs are complimentary in many many areas and could undoubtedly plug each other’s deficiencies and so raise respective capabilities.
But of course, on a project by project basis, there are always other alternatives with perhaps other collaborators that may serve more immediate business plans or improve project or profit-centre revenues when viewed singularly.
The job of Rata Tata and Sergio Marchionne is to see past the small-fry (though it may not be anything such to local company management) and create, if feasible, new worlds of opportunities on the global stage. That is why Tata sits of FIAT’s board and why Marchionne has such an interest in TATA’s development plans.
Successful examples of “East meets West” business interlinks are easy to see, especially prevalent in China today but perhaps subtler in India given the far longer Indo-European industrial relationships that formed post WW2.
Institutional investors in both Group’s will be pushing the respective executives to seek out those opportunities for collaboration and so sector and market leverage, and it is of course the respective CEO’s duties to pay full and proper regard to such demands. But equally they should not be coerced into making specific possibly doubtful deals happen for investor sentiment, even if it means momentary rise in stock demand and share-price, when acumen states that there is doubt.
But of course, this is where the human element of bigger picture give and take comes into play between the Tata’s and Agnelli’s (via Marchionne) in the form of understanding, mutual respect and keeping an eye on the ideal of more “jam tomorrow” for both. So, even with the possible loss of the Mercosaur Pick-Up vehicle JV, there is a far greater picture to be, where amenable, co-operatively created that strengthens both Eastern and Western camps.