The Indian Economy Blog

May 26, 2008

Guest Post: Big Brand Acquisitions And The Tata Group’s Strategy

Filed under: Business,M & A — Prashant @ 2:33 am

Mritiunjoy Mohanty, Assistant Professor at IIM, Calcutta and a visiting scholar at Institut D’études Internationales De Montréal (IEIM) of the Université du Québec à Montréal (UQAM) sends us this guest post, in response to the debate raised by Kiran’s post on the Tata’s LandRover/ Jaguar acquisition.

I don’t agree with Chaitan Kansal that joint ventures are a particularly good way organising technology transfers. Unless the JV partners in question are roughly similarly situated in terms of market power and have technology profiles that are complementary, JVs as vehicles of technology transfers do not work. Outright purchase is a much better mechanism if, and this is a very BIG if, integration issues can be sorted out. And one of the key reasons is that control issues that normally bedevil a JV are absent in an outright purchase.

In my earlier postings on this blog, I’ve pointed out that the Tata group has been very strategic in its purchases, which form part of a big picture. Equally importantly, the group takes integration issues very seriously and technology and business practice innovation are at the heart of their acquisitions strategy.

Two recent news articles that talk about these issues might be useful. The BBC had a piece about the integration of Corus into the Tata group while the Business Week article spoke about the nature of innovation in the Tata Nano.

In the BBC story, notice how carefully the Tatas have thought about the big picture. Corus which the Tatas bought a year ago is the major supplier of steel to Jaguar and Landrover that they bought recently! The big picture is NOT about low cost production. Simply focusing on low cost production is a dead-end. Cost-saving and low cost production are not the same thing.

The Business Week story is about innovation in the Tata Nano. Not only has Tata Motors innovated, but it has brought its SUPPLIERS on board in this process of innovation and forced them to innovate. This is why the the Nano is a low cost but high quality product.

And that is is precisely why I had argued in my Rediff.com piece of 4th January, before the launch of the Nano, that Tata Motors had the potential of being a disruptive innovator.

The Tatas understand that successful integration is a vital element of their M&A push. However, what is really driving their M&A strategy is the same focus on quality, technology and innovation. They may yet stumble, but they have certainly given that strategy some thought.

10 Comments »

  1. Global M&A strategy has never worked very well (70% of all the deals have failed to create any value for the company’s )

    Time will tell whether TML manages to create any value out of it.

    Comment by Sachin — May 26, 2008 @ 8:24 am

  2. The Nano is masterpiece. From what we know! And that is/was its intro to the public and some specs and production details. The by far biggest test is with the customers. So I do not know how you can say it is a “high quality product”.

    Buying Jag is a vain folly. These days I get a yawn when I see a, well, what is it? Is it a Jag?

    Comment by Hans — May 26, 2008 @ 8:57 am

  3. Yep. I agree that Tata’s strategy is more based on quality, innovation and technology. Their planned move in buying out Jaguar / LandRover was efinitely done with careful thought. They also take their integration very seriously and ensure all proper guidelines are put in place during the process of transition.

    Comment by Avinash — May 26, 2008 @ 9:29 am

  4. Tata products suck. Indica and Indigo are lousy pieces of metal with wheels attached to them. so do Mahindra vehicles. I won’t buy them for Rs.1 lakh, forget Nano. If Nano is a masterpiece automobile, then there should be plenty of buyers in the largest market in the world for such masterpieces (US). Toyota Prius is what I call a masterpiece. I would hold on to my complements until it’s out for a lil while…

    Daimler-Chrysler marriage resulted in a cheap ass version of Mercedes hatchback selling for 23k or something. I won’t even imagine what’ll happen to Jag/Landrover after the sarkaari looking management team of Tatas gets on the ground

    Recent wave of foreign acquisitions and mergers are only examples of mental bankruptcy that Indian family based business tycoons are facing. They all look at each other before “foraying” into organized retail, LBOs, Telecom service, Insurance business…and rest of the time they are collecting all kinds of stupid awards and debating on future on india

    Comment by sponge bob — May 26, 2008 @ 10:56 pm

  5. sponge bob, the Nano is genius. In auto circles the Nano is a landmark event on par with the introduction of the Ford Model T.

    Say what you want to say about the Indica and the Indigo but one look at the roads and you will see that they are “made for the market”. How many Honda Civics do you see outside your window? Then count how many Accords? Indicas and Indigos are not very high on any international car lists but in India these are cars made for the particular demands of this market.

    The lessons that Tata has learned in this market will help them flog developed markets once they have the products in place. This is where the JLR acquisitions come in. The Tatas are vertically integrated in the area and if there are any companies capable of the pulling it off it is the Tatas.

    I don’t understand your grouse against Indian companies making acquisitions. Its been going on for years. When Cisco bought Webex is it because of mental bankruptcy?

    Comment by Nikhil Nayak — May 28, 2008 @ 1:09 pm

  6. A stuied report by prof Mohanty. Tatas innovation technique in Nano, Integration stimulus in Corus deal and Jaguar propsitions are their forte. Corus ,as stated is the major supplier to Jaguar.best strategic acquisitions.They are mow into raising funds. A very bold step.wish them success

    Comment by Meena — May 29, 2008 @ 8:02 am

  7. nikhil, honda civic and accord are a different category than indica and indigo. And yes, i do see plenty of suzuki swifts, altos, hyundai santros, wagonRs on the street and in fact own one of them and believe they are all world class products. especially the alto for indian market. honda doesn’t compete on price..hence the large premium on their civic model. they would not produce a sub-standard product just to beat indica and they do know few things about customizing products which is why honda accords (or ‘hindu’ accords in US!) and civics are so popular world over.

    I am not against indian companies making acquisitions. It’s the fact that they all see the need to do things like acquiring or entering new markets after seeing their peers. aka “collective stupidity”.

    Comment by ashutosh — May 29, 2008 @ 12:39 pm

  8. The Nano car is a masterpiece and will shatter all records in the coming time. It is being heralded as the Model T of small cars. In times of oil crisis and recession, only Nano car will do good.

    Comment by Chirag — June 3, 2008 @ 10:56 am

  9. The western businesses are selling their scrap, out of fashion businesses to Indians and we Indians are feeling elated. This includes the rusty steel plants, down in the dumps auto plants/brands, small niche pharms formulation plants, etc. Start crowing only when the Indians take over companies like Oracle, Microsoft, Google, Boeing,etc.

    Comment by Cool Head — June 6, 2008 @ 6:20 pm

  10. Dear Professor,

    I was making three points in my earlier post (http://indianeconomy.org/2008/03/29/opportunities-from-big-brand-acquisitions/#comment-265372). First of all, at first glance, there is little synergies between the R&D priorities of a global luxury car brand with an Economy segment manufacturer such as Tata. Second of all, even if there are some needs like a diesel injection technology, these needs can be fulfilled by licensing or perhaps buying a black box component as part of a joint venture. Third of all, I questioned the timing of the deal given an impending recession.

    That was in April 2008.

    Today, four months later, it seems like the third point has eclipsed the other two. Let me first say that I agree with Mritiunjoy that for the joint-venture to succeed, both parties need to bring something to the table. But is outright purchase the best way to get access to innovation & technology? I would not agree to that as a blanket statement. However, as a management consultant, I am more of a fact driven person and I am sure that we can find business examples within the automobile sector that depict both successes and failures in technology transfers, so I believe a fact driven position can be taken for each side of the argument.

    Now, has Tata group being extremely strategic in this purchase? With the benefit of hindsight – I would say NO. Facts: US auto sales tumbled 18% in June compared to 2007. Everybody is suffering including Toyota whose sales fell 21 per cent. (http://online.wsj.com/article/SB121484164201916119.html). There is absolutely no doubt that with half of the global economy steering down an ugly recession (as per a report out today from Goldman Sachs), consumption of discretionary high ticket items are such as automobiles will continue to suffer.

    Now, I know what some of you are thinking. But please don’t tell me that a “luxury consumer is immune to such slowdowns”. Recent analysis of residents worth more than $1.5 million indicates (http://econompicdata.blogspot.com/2008/08/more-millionaires-in-florida-than-in.html) that a significant portion of wealth is invested in real estate. For example, 40% of the assets for California millionaires are invested in real estate. Guess what!! These so-called buyers of luxury car brands are probably not gone out to buy the second or third land rover because a significant portion of their wealth in real estate is down 20% to 30% with no bottom in site.

    So, time will tell if the biggest challenge for Tata is integration or the fact that they just made a questionable acquisition at an extremely bad time!!!

    That said, as an Indian, I wish them all the best and sincerely hope that they succeed

    Comment by Chaitan Kansal — August 22, 2008 @ 3:13 am

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