Tata Motors and Fiat Auto: Joining Forces
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Case Code: BSTR248 Case Length: 24 Pages Period: 2006 Pub Date: 2007 Teaching Note: Available |
Price: Rs.400 Organization: Tata Motors, andFiat Auto Industry: Auto and Ancillaries Countries: India Themes: Mergers, Acquisitions, Strategic Alliances |
Abstract Case Intro 1 Case Intro 2 Excerpts
"This is the beginning of what promises to be a far-reaching, long-term relationship between Fiat and Tata."
- Ratan Tata, Chairman, Tata Motors, in 2006.
"While Tata Motors will get technology to develop economically priced small cars and entry-level sedans and an entry into untapped markets, Fiat India can continue to have a presence in the Indian market without much investment."
- Kalpesh Parekh, Auto analyst, ASK Raymond James, in 2006.
Introduction
In July 2006, major Italian automaker Fiat Auto S.p.A. (Fiat Auto), and the Indian auto major Tata Motors (TM), signed a Memorandum of Understanding (MoU) to form a joint venture to produce passenger cars, engines, and transmissions in India. These products were intended both for the Indian and the international market. Earlier, in January 2006, the two companies had signed a marketing and distribution agreement under which TM marketed select models of Fiat cars through a few of its dealers. The joint venture was seen as a major development in the Indian automobile industry. Both TM and Fiat Auto had a long history in automobile manufacturing. Until the 1990s, TM was mostly a manufacturer of commercial vehicles.
It entered the passenger car market in the 1990s with the Indica, a 1400 cc small car44 with a diesel engine, which went on to become a success and placed TM among the top three passenger vehicle manufacturers in India. However, in 2002, because of a fall in the demand for commercial vehicles, TM reported a loss. As a part of its turnaround strategy, it improved its internal efficiencies and also decided to focus on overseas markets to reduce the impact of demand fluctuations in the domestic market. In 2003, TM returned to profitability. By 2005, it had a market presence in Thailand, Senegal, South Africa, Turkey, Europe, and West Asia.
However, in spite of its impressive growth, TM was still a small player at the global level. Fiat Auto, which built its first car in 1899, also had an illustrious history in the automobile world. After World War II, it became a major manufacturer of small cars in Italy, and later on in Europe. Until the 1990s, Fiat Auto dominated the small car market in Europe and other parts of the world. In India, Fiat cars were imported even as far back as 1905. In the 1950s, the Fiat Group entered into a license agreement with India-based Premier Automobiles Ltd. (PAL) to manufacture its cars. Fiat Auto formally entered the Indian market in 1997 through a joint venture with PAL. In the early 2000s, Fiat Auto ran into losses as it was slow in adapting to the changed economic environment in Italy in particular and Europe in general.
Its market share in the Italian and European car markets declined. Around the same period, Fiat Auto's share in the Indian automobile market also fell drastically. In 2002, the company adopted a turnaround strategy which included several measures like cutting costs, restructuring debts, launching new models, increasing advertising spend, and focusing on markets where the demand for small cars was high.
India being a major market for small cars, Fiat Auto decided to revive its operations in the Indian market. And the joint venture with TM was a step in that direction. Most analysts were of the opinion that the joint venture would benefit both parties; TM would gain in terms of better accessibility to technology, design, and global markets, while for Fiat Auto, it would mean a larger presence in India, one of the world's fastest growing auto markets, without heavy investments. However, there were others who felt that the joint venture would end in brand dilution and product cannibalization for both parties. Also, with Honda, Toyota, GM, Mitsubishi, M&M/Renault, Nissan, Skoda, etc., chalking out plans to enter the small car segment, especially the premium small car segment, it seemed likely that the TM-Fiat Auto joint venture would face intense competition in the coming years....
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