1 CBABuilderSimpleWorksheet 3: InternationalizationofTataMotorsinEurope

CasewrittenbySurenderMunjal,CentreforInternationalBusiness,UniversityofLeeds You are employed as international advisor for TataMotors. Tata Motors, an upcoming emerging multinational fromIndiaslargestconglomerateTata,isplanningtolaunchitsnewproductTataNanoinEurope.TataNanois theworldscheapestcarwiththemarketpriceofjust 1,277inIndia,butitwillnotbethatcheap inEurope.The estimatedpriceinEuropewillbeapproximately3,500,whichisalmosthalfoftheaveragecostofsmallfamily cars availableintheEuropeanmarket.Hence,TataMotors isveryoptimisticwithitsplanstolaunchthecarin the Europeanmarket. ThefinancialcrisiswhichhashitmostinEuropeseemstobeanopportunitytoTatainservicingthismarket.Tata hasalreadybuiltupitsbrandnamebyacquiringLandRoverandJaguarin2008.AfterthisacquisitionTatahasa wideproductportfoliorangingfromtheworldscheapestcarstopremiumcars.Tatahasestimatedamarketof 40,000smallcarsacrossEuropeperyearinthecomingtimeandanticipatecapturingamarketshareof3%infirst yeartobeincreasedby1%everyyear,overthe next5years. Thisisequivalenttothesaleof1,200carsinyear1. Tata is contemplating two options: (1) export the car from India, or; (2) set up a manufacturing car plant in Portugal. The financial crisis has also brought down the industry average wage costs and has made available skilledlabour. Theaverage cost estimatesfor production, aswell asmarketing,inEuropeare giveninTable 1. However,ifthecarisproducedandexportedfromIndiathenthecostofproductioninIndiaisestimatedtobe 1,200,withaddedcostsintheform of CIFinEurope estimatedat 1,780 percar (marketingcostsalsoapply). Table 1:CostandSalesEstimates (Option2)
Numberofcars(sales) 1200 1600 2000 2400 2800 3200 Costofproduction() 3375.00 3131.25 2925.00 2687.50 2725.00 3108.83 Marketingcost() 54.54 50.91 48.73 47.27 46.23 45.48 Salesprice() 3498 3498 3499 3499 3499 3499

Thisisahypotheticalcaseforclassroomuse.Casestudyinpartorinfullcanbeusedwithproperacknowledgement.
1

S.MunjalandDrD.Wheatley,CBABuilder,2010.

Questions 1. Usingthedataoncostsandsales/revenue(benefitsoftheseprojects),calculatetheoverallNetPresent Value(NPV) andBenefit Cost Ratio(BCR) associatedwith eachofthetwooptions,(1)exportthecarfrom India,or;(2)setupamanufacturingcarplantinPortugalwithatotalCBAperiodoffiveyears. 2. Whatifyouconsideraperiodofsixyears?Doesthischangetheoveralloutcome? 3. It is also important to consider the relative NPV each year, to ascertain at which time it would be financiallyviabletomoveproductionfromIndiatoPortugal. Completethetablebelowbycalculatingthe NPVandBCRforeachyearforeachoption(i.e.NPVforoption1inyearone,andNPVforoption2inyear 1,andsoon).Usingthefiguresinthecompletedtable,whendoesitbecomefinanciallyviabletomove productionfromIndiatoPortugal?

Option1:ImportfromIndia Year 1 2 3 4 5 Costs Benefits NPV (Profit)

Option2:ManufactureinPortugal Costs Benefits NPV (Profit) Decision

4. UsingyourknowledgeaboutTNC, andtheoutcomesoftheprojectappraisalsyouhaveperformed, what willyourecommendtoTataMotors?Shouldtheyinternalizeproductionornot? 5. Ifyouareinfavourofinternalization,whatownershipandlocationadvantagesdoyouidentifywhichyou cansuggesttoTataMotorstoengageintoFDIinEurope?

S.MunjalandDrD.Wheatley,CBABuilder,2010.