In India, the early 1990s were defined by a handful of functional cars with boxy designs that often lacked personality. It was a time when the concept of SUVs hadn’t yet reached the country’s roads.
That was to change by the end of the decade. In 1998, Tata Motors— No. 6 on the Fortune India 500 list this year—introduced the Safari at an aggressive price of ₹8.25 lakh. It was, as Tata Motors CEO and MD Guenter Butschek calls it, “India’s first true SUV”. Not only was it the first time that people got a taste of a four-wheel drive by an Indian automaker, Tata Motors managed to prove its manufacturing prowess beyond trucks and heavy vehicles.
This isn’t the only time that India’s third-largest automaker (by volume) has led market innovation. The Indica was one of the first small cars to get a diesel variant while the Indigo became the first sedan to be introduced in the sub-four metre segment. As a company, it hasn’t shied from taking risks (remember the Nano?). As Butschek puts it: “Tata Motors has a rich legacy of introducing product innovations that have successfully created new categories and market segments. Several relevant examples can be quoted from our 75-year history—the S-series of trucks, 407 in the ILCV domain, Ace in the SCV segment, Nexon, India’s first GNCAP 5-star rated car, etc….”
Along with innovation, Tata Motors’ products are now being tailored to keep up with consumer preferences, and it is working. Even during the pandemic-led lockdown, in the April-October period of 2020, Tata Motors overtook Honda Cars India and reclaimed its third position in the compact segment—with its Altroz, Bolt, Tiago, Tigor, and Zest—by selling 44,941 vehicles; compare this to 32,230 in the same period last year, when it dropped to No. 4.
Things have, in fact, been on track for the auto major over the last four years. But the ride hasn’t always been so smooth.
In the decade between 2006 and 2016, the company was struggling. During that time, its domestic passenger vehicles (PV) business had faced headwinds due to issues of quality, cost, and inadequacy in its product portfolio. Its Indica platform, with its three models—Indigo, Marina, and Indigo CS—hadn’t been able to sustain competitiveness. The Indica and Indigo’s move into the fleet segment didn’t work either, because of a positioning dissonance with personal car buyers.
Enter Butschek, in 2016, who joined Tata Motors with a reputation for rebuilding. He had restructured companies like Airbus and Netherlands Car BV (a joint-venture between Daimler and Mitsubishi Motors Corporation), gearing them for sustainable growth. Along with this experience, the former COO of Airbus also brought in strategic learnings from the aeronautical industry. The concept of an ‘angle of attack’, for instance. The ‘angle of attack’ is the angle between the oncoming air and the aircraft wing that is a crucial factor in facilitating the lift of an aircraft—or, in this case, of Tata Motors, which had reported a loss of ₹2,800 crore in FY17. Butschek began by introducing “six relevant angles of attack”: top-line cost reduction, improvement of core processes, customer centricity, new technologies, business models and partnerships, and a lean and accountable organisation.
This helped start Tata Motors on, what he calls, “its transformation journey”. The intent, he says, was “to counter key business challenges that were accentuated by the developments in the external environment such as structural reforms in the economy [demonetisation, introduction of GST] and introduction of new emission standards [from BS III to BS IV to BS VI]. We planned a ‘turnaround’ to overcome these challenges and to prepare for the future by becoming more agile and nimble.”
The last four years have seen the transformation unfold in two parts. Butschek started with Turnaround 1.0, that involved structural changes in the organisation, and a strategic move away from an outdated portfolio to more viable product offerings. Turnaround 2.0 began in 2018 with a focus on redesigned models, cost reductions, wider integration with its subsidiary Jaguar Land Rover (JLR), and making the business more self-funded and profitable.
“We used to be seen as conventionallydesigned cars in the market,” says Shailesh Chandra, president of the PV business at Tata Motors. Now, its new range of products— Hexa, Tigor, and Nexon—reflect a fresh design and a more millennial-friendly sensibility. “The current set of portfolio products are sitting in a sweet spot of growth in the future and the trend clearly shows that.” In the midand premium categories of hatchbacks, Tata Motors has the Tiago and the Altroz respectively; it offers the Tigor in the compact segment “which forms nearly 70% of the sedan segment demand”, adds Chandra.
Crucially, Tata Motors also has the midsized Harrier in the fast-growing SUV segment of the Indian passenger vehicles market: the category has expanded from 15% in 2015 to over 30% in 2020. Tata Motors, too, is prepared to make the most of this trend. “Our next two products are going to be SUVs—the seven-seater Gravitas and the Hornbill,” says Chandra. “I think this makes our portfolio very rich. And therefore we’re able to effectively compete and gain stronger market position with lesser number of products.”
The company is firm that its design focus hasn’t taken away from its commitment to safety. Tata Nexon became the first Indianmade car to score full five stars in GNCAP tests. “There’s a strong association of Tata products with safety and this helps them build the equity of their brand,” points out Gaurav Vangaal, associate director, automotive LVP forecasting, IHS Markit.
He adds that Tata Motors is also benefitting from a “vocal for local” push. As Butschek points out, Tata Motors is amongst a rare breed of original equipment manufacturers in India to have end-to-end in-house capabilities—from designing, to manufacturing, to testing. “We source less than 1% of supplies by value from China. Further, we had undertaken a strategic vendor [car parts suppliers] consolidation exercise some time back and today almost no tier 1 vendor is dependent on supplies exclusively from China,” he says. Adding to its consolidation efforts, Tata Motors has shifted its entire product offering on to two platforms—Omega, developed by JLR and Alpha, which was made in-house. (A car’s platform is a part of its design architecture that includes engine compartment, underfloor, and basic vehicle frame.) This is more cost-effective and, hence, viable.
Apart from consolidation, the turnaround also meant tough calls, like discontinuing under-performing products. Hexa was dropped within three years of its launch in 2017 while eight old models—Sumo, Safari, Nano, Aria, Zest, Bolt, Indica, and Indigo— have been gradually phased out. Instead, they focussed on cars like Tiago, Altroz, and Nexon, which were known for their value packaging, in the right segment, and helped Tata Motors increase its overall share in the passenger vehicles market to 8% in April-September 2020 from 5.3% in the year-ago period.
from 5.3% in the year-ago period. A significant challenge for Tata Motors is the revival of its loss-making subsidiary, JLR. And here, pulling the plug is not an option. Yet.
Back in 2008, too, JLR needed saving. The global financial crisis was at its peak and the U.K.-based luxury carmaker was looking for suitors. The Tata group saved the day with a $2.3-billion buyout, and JLR performed well after the acquisition. The ₹2,505-crore loss-making business of FY09 generated a profit of ₹13,986 crore in FY15. In 2016, JLR’s global sales crossed half a million units and reported a year-on-year growth of 13%. As a result, between FY09 and FY15, Tata Motors’ consolidated turnover grew 257%.
In the last few years, however, JLR has had a difficult run aggravated by trade tensions between China and the U.S., slowing demand for diesel cars in Europe, and Brexit-related uncertainties. Falling sales have already forced JLR to lower production and reduce the size of its contract staff. In October 2018, Tata Motors had announced a comprehensive turnaround strategy for JLR focussed on cost-cutting measures and improved cash flows. It seems to be paying off. JLR returned to profit (£65 million) with significant positive cash flows (£463 million) in the three months ending September 2020, even though sales in the luxury car segment declined 27% year-on-year. “Jaguar Land Rover was no different than many companies which saw sales and profits impacted by Covid-19 in the first six months of the year,” says P.B. Balaji, CFO, Tata Motors. “We expect the recovery in sales, revenue, and profitability to continue in the second half of the financial year ending March 31, 2021.”
A resurgence is needed, particularly because JLR accounts for 78% of Tata Motors’ revenue, and the Tata group wouldn’t want it to become another expensive mistake like the Nano or its Corus acquisition. It doesn’t help that JLR faces a portfolio problem in an SUV-hungry market, where its sports sedans like the XE, XF, and the big limo, the XJ, haven’t worked. The company is hoping that its J-Pace SUV—expected to come out in 2021—is a big growth driver, especially in the U.S., JLR’s biggest market.
But will it be enough? The problem, experts say, is that JLR is always too late to the party and ends up losing its market share to companies like BMW. Consider that it was a late entrant into diesel and slow into SUVs. Now the fear is that it might have missed the premium luxury electric bus even though JLR has managed to generate buzz with its all-electric I-Pace and the big XJ limo, that is about to go electric.
A part of its turnaround plan is to focus on India—the world’s fourth-largest automobile market—especially because the Covid-19 pandemic has made it even more difficult for JLR to drive demand in its key overseas markets. “Innovations introduced by us have and will continue to strengthen India and its auto sector. India has always been and continues to remain a primary market of interest due to its inherent potential,” Butschek says.
With its new aggressive design strategy, Tata Motors is planning to launch around 12 new models on its Alpha and Omega platforms over the next few years. It is also in the process of spinning off its PV business, including the electric vehicles (EV) unit, into a separate subsidiary through a slump sale. A slump sale will mean that the hived-off entity will not carry any debt of the existing business. This also signals the intention to achieve “mutually beneficial strategic alliances” as market conditions continue to be bitter. This is in keeping with the trend (take the Maruti Suzuki and Toyota, and Ford and Mahindra collaborations). Analysts suggest Volkswagen could be a good option for Tata Motors as its global presence across segments would be an advantage.
“The intention of subsidiarisation is definitely to, at a certain stage, look for a partner,” says Chandra. “Right now the priority remains very clear… that we have to continue on our path of winning sustainably. In October, we grew by 79% as opposed to 18% for the industry. As a long-term choice we will definitely be looking for a partner as we progress.”
Though the worm is turning for its PVs, the challenges in reviving its commercial vehicles (CV) business, which forms the second-largest share (after JLR) of 14% in Tata Motors’s revenue pie, is reflected in its overall numbers. Tata Motors reported a consolidated net loss of `307.30 crore in the quarter ended September, compared to a net loss of `187.70 crore in the year-ago period.
Girish Wagh, the head of the CV business unit, points to the cyclicality of the industry to explain the difficulty the business is facing. “But the good thing is that it has always shown a secular growth trend… [because] the industry is very closely correlated with the economy and GDP growth,” Wagh says. “As an industry, we actually scaled our peak in FY19,” and it can take at least five to eight years to recover.
Medium and heavy CVs and buses have been the worst-hit segments. “A turnaround is a never-ending journey. When we set out on this journey, we were on an upswing. There were certain goals we set. Now that there’s a downturn, we’ve changed our milestones. We believe we’ve scraped the bottom and are very well-poised to leverage the growth ahead of us,” says Wagh, who is cautiously optimistic about the forthcoming months as the economy is showing signs of revival. The CV segment has been seeing month-on-month recovery after witnessing a decline of about 78% in Q1; in Q2, the company’s CV business grew 18% in line with the growth of the segment, and that trend continued in October.
Analysts say that some part of the industry’s growth of late is due to pent-up demand, but robust sales will continue in the medium term. “Whether it’s on the back of the Covid19-induced need to have personal mobility or otherwise, the momentum will sustain. It may not be at the same level of velocity that we’ve seen in this quarter,” says Vinay Raghunath, automotive and mobility sector leader at EY India.
The next big focus for the company is the EV segment. The increased environmental consciousness after Covid-19 has made the folks at Tata Motors particularly bullish about this category. As the gap between the price of EVs and conventional vehicles gradually reduces, and more choices are made available to customers, the company expects to see a growth momentum in the segment once normalcy returns after the pandemic. In this year, the company has already sold 1,500 Nexon EVs.
Keeping up with the innovation of the last few years, their “next set of products… will be absolutely aligned to what the changing consumer preferences are and where the gravity of the demand is shifting,” Chandra says.
Speed will be of the essence, though. While auto experts say that the company has managed to ramp up its PV business, it is still being hampered by the delay in its launches. The Altroz was introduced in 2020 as opposed to the stated 2016, while Tiago was delayed by almost a year. The Gravitas, too, was supposed to be launched soon after the Auto Expo in February but was caught in Covid-19 and supply chain issues. “Every vehicle has a time and moment for its launch,” Vangaal of IHS Markit says.
What can also help Tata Motors sustain growth going forward, Vangaal points out, is creating a new premium brand as a bridge between Tata Motors and JLR—essentially addressing the ₹15 lakh-plus segment. “Jaguar can’t be brought down to ₹15 lakh. All the vehicles that Tata Motors is selling right now hold good volumes, but after five-seven years these people are going to look for an upgrade to the next segment. At that time, you need a brand to hold the customer,” Vangaal says. Sub-brands like Maruti Suzuki’s Nexa and Hyundai’s Genesis solve a similar purpose. All told, Tata Motors’ progress has been “very good”, says Vangaal. “Now they have to sustain it. Turnaround 2.0 worked very well for them because they let go of some products.” In Turnaround 3.0 Tata Motors will need to think about creating a new premium brand.
It is befitting, then, that new beginnings were signalled by a new product line-up— headlined by the concept electric version of the Safari—that the company showcased at the Auto Expo this year, showing it is once again ready to usher in a new era of mobility in India, just like it did in the 1990s.