Saturday 10 September 2016

When in Crisis..Call for Concessions

Tata Motors’ small car plant at Gujarat’s Sanand has an installed capacity to make up to 200,000 cars per year. The capacity however remains vastly underutilized with the Nano’s sales averaging a little over 1,000 units per month! In March,  2017 Tata Motors sold just 174 units of the Nano.

No wonder, after attempting and failing to stimulate demand for the Nano in a sluggish car market, Tata Motors is now looking at producing other automobiles at its factory in Sanand. In fact, recent reports in the media indicate that Tata Motors' management’s entire focus is now on new platforms such as Tiago and upcoming launches. There has been reports that the that the company is no longer investing in the Nano.

The company, reportedly in 2015 was already exploring options to to make amendments to the so-called state support agreement it signed with the Gujarat government in 2008 before starting production of the Nano in Sanand, where it moved after abandoning its plant in Singur. Under the agreement, Tata Motors could avail of tax benefits and soft loans from the Gujarat government exclusively for manufacturing the Nano.  Besides Nano, the Sanand factory now manufactures the hatchback Tiago. As per a PTI report production of Nano has been curtailed to 10 % of the Sanand unit's small car capacity.

Last year, on 22 February 2016, nearly 400 permanent workers of the company at the Sanand plant had called the flash strike, demanding re-instatement of 28 suspended workers, two of them were suspended in December, 2015 on charges of indiscipline. After an extensive consultation with Sanjay Prasad, Principal Secretary, Labour Department, Government of Gujarat along with Tata Motors officials and other labour department officials, the striking workers decided to call off nearly a month-long strike on the night of March 22, 2016.

CIRCA 2009

Credit rating and market research firm Crisil on January 29, 2009 had downgraded the ratings of both Tata Motors and Ashok Leyland's debt. As per Crisil's official release, while it attributed the downgrade in Ashok Leyland's rating to the company's business and financial risk because of the expectation of "continued weak demand for medium and heavy commercial vehicles, coupled with its ongoing debt funded capital expenditure"; in case of Tata Motors, the downgrade reflected the "significant impact of the weakening business environment on the company's global and Indian operations", and the resultant strain on its financial risk profile.

"Significant impact of the weakening business environment on the company's global and Indian operations"...Indeed!

For Tata Motors, the problem had got even harsher due to some of their high profile but expensive acquisitions in the overseas market. After the takeover of European steel major Corus by Tata Steel, Tata Motors had acquired the British auto firm Jaguar Land Rover (JLR) in June 2008, paying a hefty sum of $2.3 billion. Since then, their sales had fallen 22 %, production had been slashed by 60 %, 1800 jobs had been cut and Tata Motors have had to pump in $1.2 billion of working capital into JLR. As the condition did not improve, in March 2008 the company had then approached the British government for a loan guarantee of $730 million. Added to this, back home, the sales of the Tata Motor’s heavy vehicles had fallen by 60 % (may be to utilize the excess capacity, Nano was then being assembled in their Pantnagar plant). All these factors had put the company into a severe crisis and Standard & Poor’s had downgraded the credit rating of the company days after it launched the world’s cheapest car, the Nano. The downgrade, had put Tata Motors deeper into “junk debt” territory, highlighting the view that the Nano will contribute "little" to profits soon despite hopes it will one day revolutionize travel for millions of people.

It needs to be recalled in this context that in March 2006, Tata Motors had announced their intention of establishing an automobile plant at Singur in West Bengal and the company had planned to roll out a small and cheap car priced at around US $2000 by 2008, . According to the then Managing Director of Tata Motors, among other sites, they had chosen Singur for its location advantage - link to a metropolitan city like Kolkata, an international airport, major ports (Kolkata and Haldia), railway and the golden quadrilateral. The company had thus planned an ambitious project of rolling out ‘250,000 vehicles per year with flexibility to raise it to 350,000 per year; targeting both foreign and domestic markets. However, as indicated in the earlier paragraph, like all other steel and automobile companies across the world, Tata Motors and other Tata Group companies too had been affected adversely by the recession that the global economy had been passing through since 2007-08. Tata Motors management, therefore, definitely needed to buy some crucial time- till the economy showed some genuine signs of recovery, and one definite way that time could be bought could have been only if the small/mini car project got delayed, which would naturally delay the launch date of the Nano. Any delay in project implementation due to reasons ‘beyond their control’, would not only secure the much needed time but also justify a rise in the price of the car. Besides, taking advantage of this impasse, possibilities of getting better financial incentives from other states, which compete with each other following a ‘race to the bottom approach’ for attracting investment, could also be explored.

It was as if destiny seemed to be in favour of Tata Motors, and in keeping with destiny's favour, it was on July 18, 2006 that Ms.Mamata Banerjee, the chief of All India Trinamool Congress, had sown paddy near Singur to show her first mark of protest. Soon after on December 3, 2007 Ms.Banerjee had announced an indefinite hunger strike on the issue. However, after 25 days following personal appeals by the then President and Prime Minister of India Ms.Banerjee had called off her indefinite hunger strike on the Singur issue. However, subsequently on August 24, 2008 Ms.Banerjee had re-initiated the dharna (this time around an indefinite oneat Singur and remained steadfast on this cause. 

Finally on October 7, 2008 Tata Motors announced the shifting of the car plant from Singur to Sanand, Gujarat. The most crucial gain for Tata Motors was to get those seven crucial months between November 2008 (when the launch was initially scheduled) and March 2009 (when the Nano was actually launched). These additional seven months, in hindsight, appears to have had benefited the company in three ways:
  1. Firstly, the production cost could be reduced. Now, in March 2009 the cost of production could be much less compared to the beginning of 2008. Since January 2008, the prices of two major inputs namely cold rolled steel and rubber have decreased by 28 % and 19 % In addition to this, the Government of India too had slashed the excise duty from 16 % to 8 %. Moreover the price of crude oil too had decreased by over 51 % in the said period.
  2. Secondly, Tata Motors had an opportunity to mobilize funds, at a negligible cost, by asking the prospective buyers of Nano to place deposits in advance. This had been made possible at a time when the company has been facing severe financial crisis. It was estimated that prospective Nano customers, combined, were expected to place deposits worth up to $1 billion with Tata Motors at the time of placing order for the car. The company would retain that amount, without paying any interest, for at least three months before the first phase allocation of limited numbers of cars could be completed. And only those willing to be considered for the second batch would be paid interest, but below the market rate, and after one year. Had Tata Motors launched the Nano, as per their their original plan, in the month of November 2008 at a time when the economy was worst hit, the company is unlikely to have been successful in mobilizing such a huge sum of money and at such a negligible cost. By the July–August of 2008, Tata Motors management could realize that the impact of the prevailing global recession would be severe. It may be recalled that the crude price per barrel had risen up to $147 in July 2008. Certainly that (November 2008) could not have been the most opportune time to launch a motor car that was targeted at the price sensitive middle-class customers.
  3. Thirdly, the decision to abandon the Singur project had helped Tata Motors extract huge concessions from the State Government of Gujarat. It is widely speculated that the benefits the company had secured from the Gujarat Government were much higher than the prohibitively large concessions which Tata Motors had obtained from the Government of West Bengal. It may be noted that governments are often driven to offer concessions to multinational corporations since promoting such mega investments, typically served the political interests of host-state politicians. Attracting big ticket investments benefit specific constituencies, from whom politicians derived support.  Tata Motors could assess accurately the political interests and compulsions of the competing state governments in India. They simply utilized such weakness to their advantage. Even in 2006 they had successfully deployed the same strategy before selecting the Singur site. At that time, Tata Motors had projected Uttaranchal as another likely contender for the Nano project. The West Bengal Government out of desperation, had ended up offering huge economic concessions to the company, and in the process committing an act that the Honourable Supreme Court of India has now (in 2016) judged as illegal - land acquisition in Singur by the  former CPI(M)-led government in West Bengal towards the allotment of nearly 1,000 acres to Tata Motors in 2006 for the company's now aborted project to start a car plant in Singur.

Disclaimer / Caveat: Whatever I have stated is publicly available information and does not represent the view of the firm I work for.
(This post is not copyrighted and may be reproduced freely with appropriate attribution of source)

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