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.
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 one) at 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:
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:
- 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.
- 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.
- 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.
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