University of Arkansas System
Type of paper: Thesis/Dissertation Chapter
Tata Motors Acquisition of Daewoo
This report will look into the case of Tata motors and Daewoo Commercial Vehicle to understand the various factors in a cross border acquisition. The report would also look into the reasons for this acquisition, the integration processes and the synergies achieved after the acquisition process.
The story of Tata group started back in the year 1868 with the establishment of a Textile Mill at Nagpur by Jamsetji Tata. Starting from there, the company has emerged as one of the leading business group in India with more than 90 business operations in seven different business sectors. Tata group has its operations in over 80 countries in some six continents. Moreover, the companies export their products and services in around 85 countries, which have enabled the group to earn revenue of $67.4 billion in the financial year of 2009-10. Around 57 % of this revenue was earned from the operation outside India. The group has employed more than 395,000 people across its businesses, worldwide (Tata Sons Ltd, 2011).
Tata Motors is the leading automobile manufacturer in India and is among the leading commercial vehicle companies across the globe with revenue of $20 million in the last financial year. The company has also emerged as the one among the top four truck manufacturers as well as top two bus manufacturer across the globe. Established back in the year 1945, the company now employs more than 24000 employees with a vision to be the best in its operation and to be in compliance to its value systems and ethics. Tata Motors has also got the pride to be the first in the Indian engineering sector to be listed on the New York Stock Exchange; that happened back in September, 2004. Through its subsidiaries and some associate companies, this leading automobile firm has its operation spread in Thailand, UK, Spain and Thailand (Tata Motors, 2011). The company is still chasing the opportunities to expand its business further to other location across the globe.
Similar to Tata group, this group also started off in 1967 with a textile business by Kim Woo Choong (Koontz & Weihrich, 2006, p.206). In the 70’d and 80’s, the group has experienced a considerable growth with its diversification into several business. Later on in the early period of 1990s, the Group has expanded overseas and emerged as the largest conglomerate across the globe with around 24 companies under its shield. Back in the year 1978, the group has entered into the automobile industry by the acquisition of 50 % stake in the Sachan motor company while the rest was owned by another automobile giant, General Motors. The venture was later renamed as Daewoo Motor Company. In 1992, the Daewoo group acquired remaining 50 % of the stake with the withdrawal of partnership by GM. Later on after the bankruptcy of Daewoo, GM and some other companies have shown their interest to acquire its assets. Daewoo Commercial Vehicle, previously a vertical of Daewoo, did not come under the bid and established itself as a separate company in the year 2002.
Strategic and Economic Aspects behind the Acquisition
Tata Motors had been one of the oldest players in the automobile industry of India. After expanding its dominance all over the economy, the company aimed at expanding its business all over the globe which made it adopt tie-up strategies with automobile companies in some of the major emerging markets of the world. The automobile industry is generally characterised by a large number of units and the commercial vehicles vertical in it occupies a small fragment of the entire industry. Globally, the commercial vehicles arena is dominated by players like Volvo, Scania, DaimlerChrysler and a few other giants who occupy nearly 60 percent of the total market share. In order to distinguish its might amidst them, the Tata Group needs to have considerable strategic as well as economic edge.
Tata Motors entered into a tie-up pact with the Korean second-largest truck manufacturer Daewoo Commercial Vehicles in 2004 and eventually formed the Tata Daewoo Commercial Vehicles (TDCV). It was especially in view of catering to the emerging markets of South Asia. This measure was adopted particularly to share the stress of spreading out to unexplored markets such as throughout Asia and Australia. Although these constitute of a fraction of the number of markets that the company wants to expand to, it has already commenced its steps ahead towards growth and development. This is evident from the latest export statistics of the company which says that TDCV accounts for being the biggest exporter of various sized trucks (65 percent of total exports of heavy commercial vehicles) from Korea. Out of this large volume, over 40 percent flows out to Africa and emerging markets of Asia (Onkvisit & Shaw, 2004, p. 649).
One of the fundamental reasons which compelled Tata Motors to move out was a recessionary crash between 2004 and 2006 owing to investors’ expectations. In a scenario of global recession, the investors certainly need some form of an assurance about the robust functioning of a firm without which they feel sceptic about the latter’s potentials. When a developing economy has gained an economic growth of approximately 8 percent per annum, the investors often anticipate the companies to grow at a rate of 10 to 15 percent annually. However, even though emerging markets are characterised by potentials to do so, it might not be possible even during periods of recession, which leads to capital flight in such instances. Collective effect of such an outlook resulted to Tata Motors experiencing a slump during 2004-06 when it declared a massive loss worth of US$ 0.1 billion. This had been a turning point in the life of Tata Motors since its foundation in the Indian market in 1945 (Sauvant, 2008, p. 25).
A possible area in which any company originating in India is likely to enjoy an upper-hand is the cost efficient factors. For instance, being an Indian company Tata Motors enjoys low cost of production, which is treated almost like economies of scale. The company plans to merge this benefit with that of an improvement in its resource quality which could be ensured only through research and development. Apparently, an improvement in R & D cannot be accommodated in a scenario encompassing an emerging economy like India (Sauvant, 2008, p. 30). Research and Development is often found to be more advanced in developed nations. To be precise, it is necessary to set up an R & D centre at a spot which is characterised by developed features. Previously, Tata Motors aimed primarily the developing markets which actually provide a very narrow market given their limited capacity to purchase. However, the acquisition of Daewoo Motors paved its entry into the developed market as well (Philip, 2010).
Tata Motors earned a massive gain of US$ 5.4 million in the financial year 2003-04 following its tie-up with Daewoo, owing to the former enjoying a 25 percent market share in the commercial vehicle domain of South Korea. This gain had particularly been due to the fact that Tata Motors stepped into the domain of heavy manufactures of which Daewoo had been an old player. While initially Tata Motors had been producing trucks with engine powers below 210 hp, its deal with Daewoo revised its expanse to those of heavy vehicles with an engine power of more than 230 hp. Hence, the deal actually enhanced Tata’s hold over the market of commercial vehicles not only around the world but in its domestic market as well (Jeannet & Hennessey, 2005, p. 587). Following their investment tie-up, TDCV launched Novus – a Euro III heavy truck which gained immense popularity across developed markets throughout the globe. In the South Korean market itself, the vehicle launch resulted to betterment in TDCV’s position through an increase of market share by 5 percent. Furthermore, the incorporation or acquisition drive resulted to Tata Motors’ inclusion within the New York Stock Exchange (NYSE).
Strengths of Daewoo Motors
Tata chose Daewoo Motors over other companies for a variety of reasons. Though a pivotal reason had been that the latter had been experiencing troubled waters at the point of acquisition and Tata Motors had simply taken an advantage of the situation. One of the prime reasons based on which the acquisition move was finalised had been Daewoo’s operation in the segment of heavy motors. This factor helped Tata Motors to diversify its portfolio of manufactured commercial vehicles. Prior to its link-up, Tata Motors had been engaged in the production of small and medium sized trucks which narrowed down its market of commercial vehicles. However, now it could actually produce heavy trucks as well which could actually help the company to capture larger market share (Khanna & Palepu, 2010, p. 194).
In addition, the company also belonged to a developed nation environment which counts as a very important factor to enter into the developed market. Daewoo Motors operated in a developed environment and catered to the needs of consumers belonging to developed economies of the world. Given Daewoo’s inception in a developed economy like South Korea, Tata Motors enjoyed an automatic entrance to the developed market environment which helped it to pave its way to a more advanced market environment (Banerjee, 2010, p. 175). Daewoo have had posed a very good marketing strategy at the time that it had launched its business back in 1994.
This very fact operated as a pivotal factor in the marketing strategy of TDCV later on given Daewoo Commercial Vehicle’s investment in resource development in the earlier phase of its commencement in the South Korean market (Bilham-Boult, 2001, p. 155). South Korea had historically been the fifth largest beneficiary of India in terms of foreign direct investment, which shows its better side. This fact actually proved to be one of the strengths of Daewoo given the company’s origin embedded in such a robust financial environment. Furthermore, the tie-up received full government support which actually proved to be very essential for Tata Motor’s assurance (Kesavapany, Mani & Ramaswamy, 2008, p. 118).
Tata Motors had every advantage that an established firm enjoys; but the only pestering factor had been a lack of resource which the company suffered from. Daewoo had an opening to a rich resource endowment owing to an improved Research and Development environment (Raju & Xardel, 2009, p. 327). Tata Motors did not have an access to green technology prior to its tie up deal with Daewoo Motors. But the new technology which actually could not be incorporated had it not been for the deal with Daewoo, played wonders for the company’s entrance in advanced market economies (Banerjee, 2010, p. 175).
After the acquisition of Daewoo Commercial Vehicle Business Units, the Executive Director, Commercial Vehicle Business Unit, Tata Motors became the chairman of Tata Daewoo Commercial Vehicle Co. Ltd (TDCVC). The acquiring company was bit apprehensive regarding the cooperation co-operation from the Korean managers while carrying out the integration activities. The Korean part was comprised of Kwang-Ok Chae, who had led significant business activities for the Daewoo group. He had been working for some two years in a manufacturing plant of small car engine, which was not been completed due to the collapse of Daewoo Group. Even the other managers also had experience and familiarity in UK and Austria. Tata has recognised the significance of human resource in the success of any business operation and that is why almost all the workforce of Daewoo was trained at Isuzu plant, Japan to make them accustomed to the operation of Tata Motors.
Moreover, the challenges cannot be said just to be managerial, rather the company may have to face cultural issues with the cultural difference between the two countries. In the cross cultural mergers and acquisitions, it is better to take involve the locals to make the consolidation process a success. IT was pretty same in the case of Tata’s acquisition of Daewoo. Tat Motors has realised the fact that to fetch the success one significant strategy would be to get the locals to carry out major work proposition.
The company has heavily used the locals in Daewoo (Aswathappa, 2008, p.200). Few Indians were there who was trained on the Korean language for better integration and communication with the employees, suppliers and the customers. To compensate the cultural difference, Tata motors has decided to operate as one Korean organisation in Korea, led by the Koreans. Although the company has decided to learn from Korean business environment, it made it sure that the company would be working as a global coalition with Indians.
There were certain other issues in the marketing and services arm. Earlier to Tat Motor’s acquisition of DECV, the company vertical did not have any individual marketing and sales unit as the sales of trucks used to be done through the sales unit of Daewoo Motor. As a consequence, after acquisition, it was required to build a marketing and sales team for TDCVC. The bidding company brought in its own employees to establish a small team. At the same time, it also opened up six service centres within Korea; all these six service centres had been authorised by TDCVC. Tata Motors was responsible for the financing of the company.
Earlier this acquisition, Tata concentrated on the home market for its commercial vehicle business. However, this acquisition would demand Tata Motors to adopt a comprehensive mindset towards the global competitive environment. The company would have to face challenges to successfully integrate the operations as well as systems of the acquired company, DWCV. Tata Motors would also have to face issues in the retention of the employees and in the coordination of marketing and sales functions. Tata Motors would be working towards an unbeaten integration with Daewoo’s management and committed workforce. According to Kant, it would be required as the wise product range, global marketing and strengths in the product development are expected to open up new avenues for the consolidated company.
The bidding company would also require enhancing its skill of product development and product designs to match the same to that of DWCV. The productivity of the employees in DWCV was much superior to the Tata Motor workers; the relative productivity ratio was around 6:10. Undoubtedly, the employees of the acquiring company would require enhancing their productivity level to be in compliance with that of their counterparts. Surely, Tata is not going to Indianise the company; rather Tata would try to keep the benefits of the country and the Korean company to further enhance the strengths.
Apart from that, Tat would also have to integrate the cultural views as Koreans are very much hierarchy conscious with the senior managers seldom mingling with his or her subordinates. So, the integration is required to be carried out in every prospect from the product design to the human resource management. An appropriate integration and compliance in the manufacturing, product design, marketing and sourcing can bring in success and create value for the company. A focused approach towards the emerging issues would be able to minimise the problems with ensuring success for Tata Motor’s Daewoo venture.
The major potential synergies from the deal: Realisation of the same
Tata Motors acquired Daewoo to develop and stretch the company’s capabilities. This was particularly important as the acquisition would enable Tata Motors to add heavier trucks in its present portfolio. “It was an immediate step to raise the level of product development and cut the time to produce higher-level products for sale overseas and for introduction in India, according to Ravi Kant” (Khanna, Palepu & Bullock, 2009, p.11).
This cannot be said a general merger and acquisition deal; rather it was an immediate step to overcome the resource gap to produce and export heavy trucks. Undoubtedly, the acquisition of Daewoo gave the company the required access to Korean market as well as a launching base to enter into more markets in that region which also includes China.
A number of analysts have come up with the notion that acquisition of DWCV was perfect fit for Tata Motors as it enhanced its earlier portfolio of automobiles. As per Satish Ramanathan who is an analyst in ICICI Securities, the acquisition would add an incremental growth rate of four percent to the turnover and almost the same amount to the profit amount. Through this acquisition, the company would be able to increase its domestics as well as export earnings.
According to an executive in Tata Motors, the company is expected to increase its utilisation of capacity to around 60 percent within some two or three years. By the year 2007, the export volume was expected to increase to 25 % of its turnover and this is expected to hedge against cyclicality of domestic market. The addition of Daewoo with Tata Motors would provide the company with a convenient opportunity to approach the international market and a new product line.
The synergy was achieved and this was pretty visible from the results. In the year 2006, the company has commenced a fresh line of the medium trucks. This was first significant product launch from the year 2000. In the year 2004 and 2005, the company doubled its exports which has accounted for around 66 % of the export of heavy truck from South Korea. The company also introduced launching of ‘Novus’ within Indian market. After the acquisition, the company has increased its market share within the heavy commercial vehicles from around 25% to about 28 % (Kadle, 2007, p.11). Tata Daewoo Commercial Vehicle Co. Ltd. has also introduced the LPG MCV truck and first Liquefied Natural Gas (LNG) tractor trailer in the respective market in South Korea (Tata Motors, 2010, p.18). Undoubtedly, the acquisition has been successful with enhanced profit and cash flow in the later years.
The case has exemplified the influential components which have led to the success of Tata Motors and Daewoo Commercial Vehicle. However, the company experienced a number of issues in various aspects while moving into cross border acquisition. Despite of this fact, the acquisition was a huge success which was possible through appropriate integration of the processes and resources of the two companies.
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