Tata Motors and Fiat Auto: Joining Forces

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Case Details:

Case Code : BSTR248
Case Length : 24 Pages
Period : 2006
Pub Date : 2007
Teaching Note : Available
Organization : Tata Motors and Fiat Auto
Industry : Auto and Ancillaries
Countries : India

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"This is the beginning of what promises to be a far-reaching, long-term relationship between Fiat and Tata."¹

- 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."²

- Kalpesh Parekh, Auto analyst, ASK Raymond James,³ 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.⁵ 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)⁶ 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 environment⁷ in Italy in particular and Europe in general.

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1] "Fiat and Tata announce joint venture in India," www.detnews.com, July 26, 2006.

2] "La dolce deal?" www.economictimes.indiatimes.com, August 04, 2006.

3] ASK Raymond James Securities India Pvt. Ltd. (ASK RJ) is a joint venture between ASK Investment and Financial Consultants Ltd. (India), Raymond James Financial Inc. of the US, and Bharat Shah, an investor. It offers portfolio management services and investment advisory services.

4] A small car, in the Indian context, is a car of length not exceeding 4,000 mm and with an engine capacity not exceeding 1,500 cc for diesel cars and not exceeding 1,200 cc for petrol cars. They are the most fuel- efficient cars available in both diesel and petrol variants, and also the cheapest.

5] In 1968, Fiat surpassed Volkswagen as the largest carmaker outside the U.S., with 157,000 employees producing 1.75 million cars a year. Fiat continued to expand through much of the 1970s and 1980s. (Source: www.time.com)

6] Premier Automobiles Ltd. (PAL) was established by Walchand Hirachand in 1942. In 1946, in association with USA-based Chrysler, the company assembled De Soto and Plymouth cars. As of 2006, the company was making auto components.

7] In the early 2000s, the European Union's new requirements for open competition came into force. This and the dismantling of protectionist measures changed the economic environment for businesses in the EU region.