Tata_Daewoo_Merger

The Road to GUNSAN Case Study Presented by Group 11 (Malad Center, Mumbai) Geetanjali Singh, Manohar Suvarna, Sanket Shah, Satishkumar Deshpande, Sridhar Turaga and Ramachandran Iyer Contents Overview SWOT Analysis – TATA MOTORS & DAEWOO CV Acquisition Fitment – Demand/Supply/Policies Long Run Average Cost Increase in Production Effect of Acquisition Leveraging existing resources Win-Win Acquisition 2 Overview Tata Motors •  Strong financial background and looking out for inorganic growth in global arena •  •  6th Largest CV manufacturer in the world Tata Motors had 5% revenue from exports (Soft currencies countries) •  Tata Motors had a turnover of 15,483 Crores (USD 3.09 Billion) •  •  •  Dominant in LCV & pick-up range Future for multi-axle & high powered CVs USP - Cost effective solution for truckers •  •  •  •  •  •  Daewoo CV 22% Market Share in Korea Daewoo went into bankruptcy Daewoo had a turnover USD 231 Million Dominant in 8 Tonne & above Daewoo was not present in 1 Tonne CV segment in Korea USP – Innovative design & power The fit between the two companies seemed perfect fit 3 SWOT Analysis Strength •  Strong domestic player •  Steady revenue growth •  High level of innovation •  Strong labor relations Weakness •  Decline in vehicle sales •  Employee productivity •  Image of low quality makers •  Large domestic market •  Workforce with international exposure TATA MOTORS Threats •  Competition from global players •  Strengthening rupee •  Environmental regulation Opportunities •  International growth •  New product lines 4 SWOT Analysis Strength •  Strong product base •  High employee productivity •  R&D activities •  Workforce with international exposure Weakness •  Weak financial position •  Not present in 1 Tonne segment •  Hierarchical work culture DAEWOO CV Threats •  Company could close down without buyout •  Strong domestic labor union Opportunities Attractive company for buyout 5 Acquisition Fitment TATA-Daewoo Acquisition Demand –  In 2003, Tata’s export turnover was Rs. 400 Crores –  Daewoo’s turnover was Rs. 1200 Crores –  Right product mix for entering identified key markets (China, Latin America, Western Europe & India). Comprehensive product range that includes 1 tonne and LCV range from Tata and 8 tonne + of Daewoo. –  Increasing market reach from soft currency countries to developed countries. Due to introduction of higher tonnage and speed trucks of Daewoo product range. –  Changed the perception from low tech to high tech CV manufacturer thus enhancing Tata Brand Image –  Realizing Tata’s vision of growth in International sales from 5% to 20% –  New market for existing 1 Tonne CV 6 Acquisition Fitment TATA-Daewoo Acquisition Supply •  Daewoo plant was operating at higher productivity –  Technology transfer from Daewoo to Tata –  600 workers trained from the ISUZU plant in Japan •  Reduced cost of new product development –  80 Design engineers working on newer models –  By tweaking existing products and entering into new markets –  Introduction of 350 HP, 140 kmph with 12 Tonne load •  •  Plant utilization would increase from existing 25% Leveraging existing distribution network –  Daewoo for 1 Tonne CV –  Tata for 8 Tonne & above CV •  Sourcing cost will come down due to increased Buying Power 7 Acquisition Fitment TATA-Daewoo Acquisition Policies –  To mitigate risk of cyclical market demand of CV industry –  To meet Indian changing environment •  Emission Norms •  Higher Payload and Speed •  Removal of overloading •  Improved Infrastructure –  Regulation – Euro Emission III Norms 8 Long Run Average Cost TATA-Daewoo Acquisition AC LRAC is likely to move along the downward slope due to –  Tata can sell 8 tonne+ range of trucks in other untapped markets –  By tweaking the existing product range, Q can be further enhanced to meet specific market requirements such as China. –  Similar effect can be observed for 1 tonne truck Q Effect of increase in market reach Q25% 9 Increase in production TATA-Daewoo Acquisition Output per Time period (units) Total Cost Function Total Product Assuming Q25 < Q* –  The increase in Q, will result in large volume discount (Procurement costs lower) Decreasing returns Increasing returns –  Reduction in costs will be higher than the increase in cost for producing higher quantities Q25% Q* Input per time period (units) Q* - Point of deflection Total Cost Function for a Production System Exhibiting Increasing, Then Decreasing, Returns to Scale 10 Effect of Acquisition on Economic Scale TATA-Daewoo Acquisition Sourcing cost will come down due to increased Buying Power –  Even if we consider that Output (q) of each plant will remain the same after acquisition –  The joint venture gives an advantage of adding Indian requirement & Korean requirement together. (e.g. Fasteners and Radiators) Percentage Change in Total Cost (Tc) will be < Percentage Change in Output (q) Percentage Change in Total Cost (Tc) Cost Elasticity = Percentage Change in Output (q) –  ε C Q 1 then only AVC, ATC, will be on declining part and MC will be on increasing part of the curve (decreasing productivity on variable factor) AVC AFC Q 3.  For quantities above Q3 MC curve will be the supply curve Q25% Q 1 Q2 Q3 12 Effect of Acquisition on Fixed Cost TATA-Daewoo Acquisition $ Per Time period Decreasing Productivity of Variable factors Increasing Productivity of Variable factors Total Cost Cost of Greenfield Cost of Acquisition Variable Cost –  The Daewoo plant was bought at approx $102Mn (against the valuation of the plant i.e. $322Mn) –  Hypothetically Green-field project would have costed more than $102Mn –  Acquisition pushed the fixed cost downwards 13 Fixed Cost Total Variable Cost Q1 Q2 Q3 Output per time period (units) Leveraging existing Distribution Network TATA-Daewoo Acquisition Leveraging existing Distribution network & Plant capacity AC AFC for Individual distributor AFC Acquisition for combined distributor Output Per time period By using existing distributor network, there is a strong possibility to push the AFC lower 14 Leveraging existing resources TATA-Daewoo Acquisition The following added skill sets will be impact the learning curve –  Daewoo has higher productivity than the Indian plant. * –  Nearly 600 workers trained at the ISUZU plant in Japan * –  80 Design engineers working on newer models ** –  Innovative effect on Korean Plant ** * (Learning can be applied in Indian plants to improve productivity) ** (Will reduce cost of new product development/modification) AC LRAC - Current LRAC – Current + t without Daewoo LRAC – Current + t with Daewoo acquisition Output Q 15 TATA-Daewoo Acquisition •  •  •  •  TATA Novus introduced in 2004 and also the best selling CV in South Korea Trucks compliant to EURO IV norms Market extension, by forming a JV with Afzal Motors in Pakistan Trucks sells under the brand name “Daewoo” in Pakistan and in South Korea. And sold under brand name of “TATA” in India, Africa and Europe. •  Product extension by introducing its first LPG run MCV in South Korea (Product development was initiated in 2004) •  World Standard range of Trucks introduced in May 2009, for Indian market A Win-Win Acquisition 16 Thank You Case Study Presented by Group 11 (Malad Center, Mumbai) Geetanjali Singh, Manohar Suvarna, Sanket Shah, Satishkumar Deshpande, Sridhar Turaga and Ramachandran Iyer 17