Tata Motors’ passenger cars swerve back into the race, but need someone to ride shotgun

The company’s passenger vehicle business seems to be on an impressive rebound in H1FY21. Now, it needs a reliable partner 

It was December 2019. Mayank Pareek, head of Tata Motors' passenger car business, was in the driver’s seat with CEO Guenter Butschek as his co-passenger. In a promotional video, they waxed eloquent about their newest offering Altroz, a premium hatchback.

Three months on, Pareek was no longer at the wheel. His exit followed Tata Motors’ decision to spin off the passenger car division as a separate entity even as the company ended FY20 with 38% drop in passenger vehicle (PV) sales to 1.38 million and 34% drop in commercial vehicle (CV) sales.

The slide at Tata Motors mirrored industry sales hitting a five-year low in FY20, as PV sales fell below the three million mark for the first time since FY17.

Since FY17, a confluence of factors had taken the wind off the domestic auto industry. The NBFC crisis, the uncertainty over the validity of BS-IV vehicles amid the switch to BS-VI emission norms from April 1, 2020, the government’s push for electric vehicles and then came the killer blow with the pandemic. But, Tata Motors’ problems in the domestic car market had been festering even when the industry was going through a purple patch.

At its peak in FY07, Tata Motors’ share of the PV segment stood at 16.5%. Ever since, it kept ceding and FY13 was the last fiscal when its market share stood in double digits at 11.8%. Tata Motors was the country’s third-largest passenger vehicle company by sales, but in September 2012, Mahindra & Mahindra pushed it down to the fourth slot. At the company’s 67th AGM in August 2012, which was Ratan Tata's last AGM as the chairman of Tata Motors, he candidly said: “I also have a certain degree of sadness and shame that we have let that happen…Tata Motors will have to understand customers better and will have to pay attention to the product offerings as well as customer support... failure to do so will see us slipping.”

The words were indeed prophetic. Over the ensuing years, even as the Nano project failed and the Indica legacy was put to rest, Tata Motors tried to resurrect its fortunes by getting in a new management, including Mayank Pareek from Maruti Suzuki, and Guenter Butschek in 2016, but it still couldn’t claw back to the third position, ending with its lowest market share in history at 4.98% in March 2020. “Coming from Maruti, Pareek had his task cut out. He had to ensure brand acceptance for Tata cars as higher brand acceptance translates into, initially, higher volume and then into higher value creation. Neither happened,” says an industry observer.

On a standalone (domestic business) basis, Tata Motors slipped into a loss (before other income) of Rs.31.99 billion in FY20 against profit (before other income) of Rs.26.78 billion in the year ago period, even as revenue declined to Rs.439 billion from Rs.692 billion in FY19. An industry veteran believes that the writing on the wall was evident for Tata Motors. Though, as of FY20, the commercial vehicle business accounts for a majority of the standalone business at 74% (Rs.329 billion) and the PV business at 26% (Rs.110 billion), in terms of loss, the PV business accounted for a large chunk at Rs.27.28 billion against Rs.2.07 billion in the CV business.

Not surprising that the current Tata Sons chairman mentioned that Tata Motors was losing money on every car it sold. “Ultimately what is marketing success, it is not sales volume. Marketing success should show up in the bottomline,” points out another industry veteran.

Incidentally, when Tata Motors entered the small car space with Indica, so did Korean rival Hyundai with Santro. But, Hyundai emerged as a strong No.2 after Maruti. “Hyundai made a billion dollars in profit in the first 10 years, and in the same period, Tata passenger cars probably made a loss of Rs.10 billion,” says the industry veteran. What’s more, Hyundai’s sister concern Kia Motors, which entered the market in 2019, has captured 6.37% market share within a short span, with Seltos and the recently launched Sonet.

While FY20 seemed the worst for Tata Motors, the pandemic-stricken FY21 is turning out to be surprisingly good for Tata Motors.

Comeback trail?

In the current fiscal, even as passenger vehicle sales contracted by 34% to 879,966 units in April-September 2020 from 1,333,304 units over the same period last year, Tata Motors toppled M&M to reclaim the third slot. The company’s sales grew 2.63%, pipping Mahindra, which sold 51,475 units, by over 20,000 units. In fact, sales in September 2020 has been the best-ever month recorded by the company in eight years, as it sold 21,200 cars, a 162% jump over 8,097 units in September 2019. In doing so, Tata Motors, has gained around 8% market share, a drastic change in fortunes from a year back. With 69% market share in Q2FY21, the company is also leading in the EV segment. The performance continued into October as well with PV sales surging 79% to 23,617 units. Putting the turnaround in context, Butschek says: “Orders for domestic passenger cars are at an all-time high with demand exceeding production owing to some pent-up demand pre-COVID. We are also seeing an increase in market share as the supply chain issues start sorting out.”

Even as the domestic PV business clocked Rs.52.96 billion in revenue in H1FY21, marginally higher against Rs.52.82 billion seen in H1FY20, loss (before other income) shrank to Rs.10.66 billion against Rs.11.57 billion over the comparable period.

As it turns out, the reason behind the strong performance has been the demand for its new line-up of models. The company has tagged its BS-VI range of PVs as 'New Forever' comprising the Tiago, Tigor, Nexon, Harrier and the Altroz, which primarily competes against Maruti’s Baleno, Hyundai’s Elite i20, Toyota’s Glanza and Honda’s Jazz. The company has also rolled out its first-ever homegrown electric SUV, the Nexon EV. On the cards is a micro crossover-SUV, codenamed the Hornbill, which is smaller than the Nexon and is based on the HBX Concept showcased at the Auto Expo early this year. The company is also gearing up for an all-electric Altroz EV, and a seven-seater model of Harrier, called the Gravitas.

Industry observers believe that multiple factors seem to be working in Tata Motors’ favour. Kaushik Madhavan, vice president-mobility, Frost & Sullivan, a research and consulting firm, believes the company is reaping the benefits of discarding a legacy that has always weighed it down. “Their portfolio has seen a huge makeover – it is modern, has excellent crash-test ratings and comes with greater driving dynamics. Forget more than a decade ago, the new models are completely different even from Tata Motors vehicles from three to five years ago.”

Concurring with Madhavan, Ravi Bhatia, president, JATO Dynamics India, a global automotive analytics and consulting agency, says, “They have leveraged their association with JLR, which is reflected in the design language and tech development. The refinement has improved quite a lot, like the gaps in body panel, rattling noise have been eliminated.”

That the company is refreshing its line-up within a short span is evident in the case of Nexon, which was rolled out in September 2017 and already has 27 variants, including EV. The Altroz has 22 variants (See: Refurbishing with a vengeance). Apart from this, Tata Motors has also been quick in discontinuing products that were not doing well in the market. Tata Hexa, which was launched in January 2017, was discontinued in February 2020.

Spin-off play
Even as Tata Motors looks to sweat its current line-up of models, it has taken the biggest leap of faith in its history by hiving off its passenger car business. Jinesh Gandhi, analyst, Motilal Oswal Securities, feels the spin-off is not about de-emphasising the PV business. “While they are looking at financial capital as well, it’s not that they are looking to sell out. It is about allying with a partner who has a clear view of the PV business over the long haul," he says.

The management seems to be in sync. Shailesh Chandra, president, Tata Motors Passenger Vehicle Business Unit told PTI, “A collaboration can unleash bigger potential in the next decade, which is going to see significant investments in new technologies and regulations.” The collaboration is also aimed at reducing product lifecycles and to enhance new product launch intensity. "All this requires huge investments and agility is also the key. So, this is something which we are actively looking into," Chandra added.

In the past, the company under the helm of Cyrus Mistry was at an advanced stage of negotiations with Volkswagen for an alliance, which was eventually scrapped. “It didn’t have the approval of Ratan Tata amid the growing rift with Mistry,” says the industry veteran quoted earlier.

Though the company denied them, there were reports that Tata Motors was considering selling a majority stake to Chinese companies Geely, Changan or Chery as well as France’s Groupe PSA. Incidentally, while the company has a JV with Chery since 2012 for the production of Jaguar and Land Rover cars in China, the current geopolitical tension could have undone its efforts to get a Chinese partner onboard.

However, Madhavan believes that more than tying up with an automaker, the company needs to explore alliances for alternative business models. “At the moment, there is no pressing need for an alliance with another automaker. They just need to change the way they are positioning the product and change the traditional method of ownership and purchase. If they bring in that flexibility, they will be able to increase their volume,” he explains.

For instance, Madhavan points out how rivals Maruti, Hyundai and Mahindra have been quick to onboard the car subscription model, which is common in western markets, especially Europe. The subscription plan entails lower investment and is seen as a viable option in these uncertain times for a first-time car buyer who is unwilling to take on large financial commitments in view of income uncertainty. The best thing about car subscription in India is that the monthly charge include insurance, maintenance, road tax, servicing and even 24-hour roadside assistance. For instance, Maruti has tied up with ORIX Auto Infrastructure Services to offer subscription plans in NCR and Bengaluru. Besides, Mahindra has a similar tie up with Revv, which offers a minimum period of one month, extending up to 36 months and beyond.

The other advantage that leasing and rental model brings to the table is the impact on volume. “Typically, an owner holds the car for six to eight years, but in leasing and short-term rental market, the replacement cycle is two to three years. You may not have outright volume in the beginning but over time you have quicker replacement and product refreshment cycle,” opines Madhavan.

For now though, Tata Motors is experimenting with subscription for its electric vehicles having tied up with Orix. “The goal is to address consumers who prefer ‘usership’ over ‘ownership’ by giving them the option to subscribe to the Nexon EV, thereby expanding the overall customer base,” explains Chandra, without elaborating on whether the same offering will be extended to its non-EV models.

While it’s not clear if the company is looking at car subscription services to boost volume, industry observers feel it needs a partner that could leverage Tata’s existing platform and also help it seal product gaps in its portfolio.

Bridging the gap
In recent years, Tata Motors built two new platforms, Omega and Alfa, as the launch pad for its future line-up of models, to recoup market share. “The big thing is to get the platform right as it has to be amortised over multiple model types such as an SUV, crossover, hatchback and a sedan, which, for instance, Maruti does well,” says Bhatia. 

While Omega is based on Land Rover's D8 architecture, Alfa has been designed for various body styles and offers the flexibility to develop alternative power trains, including hybrid and electric. The Harrier, aimed at the UV market, is the first model based on the Omega architecture, while the Altroz is built on the Alfa platform.

According to reports, there is a small gap between the platforms of Alfa (that can build cars in the 3.7m-4.3m length category) and Omega (that can build cars in 4.3m to 4.7m range). The gap is in the mid-size SUV segment, dominated by the likes of Hyundai’s Creta and new entrants Kia and MG. Among the most talked about partners, Chery could offer Tata its Tiggo SUV platform to bridge the product gap between the Nexon and the Harrier, while Chery could benefit from Tata’s Ziptron EV technology as the Chinese automakers are looking at launching EVs in India. Given the expensive nature of the Land Rover-based Omega architecture and the requirement to make substantial changes in Alfa, it is unlikely that Tata Motors would be spending anymore on the platforms. “By creating a subsidiary, it gives Tata Motors the flexibility to rope in a strategic partner,” feels Bhatia.

While the spin-off is expected to be completed over a year, the other critical aspect that the company will have to address is the viability of its dealer network, which has been in question of late, especially after the pandemic.

In April and July this year, some prominent dealers of Tata Motors wrote to Ratan Tata to address their plight. The letter stated that unsold inventory, lower margins and other market conditions were making it difficult for them to make regular payments on their bank loans, and they were being labelled “irregular” accounts. The dealers urged that Tata Motors should announce interest-free loans of Rs.250 million for commercial vehicle dealerships and Rs.100 million for a passenger car dealership, and the company could recover the money over three to five years.

Some dealers have been complaining about the company dumping stock for shoring up market share, which is calculated on wholesale volume. To ease the pressure on the dealer network, Tata Motors has been pushing the industry to calculate market share on retail sales. “The entire OEM, dealer and vendor ecosystem is super stressed in terms of inventory levels, availability of cash, liquidity cycle and the likes. So, we would not like to add to it using a metric which only pumps inventory into the system,” CFO PB Balaji was quoted as saying in a report.

For now, given the demand for its vehicles, discounts on Tata cars have come down. “They have also moved away from wholesale incentivisation to retail incentivisation. Average car realisation is up Rs.6,000 and the average incentive is down by Rs.19,000 over past six months, ensuring that Tata Motors is taking home Rs.25,000 more per car. This incentive reduction clearly shows that stock is not being dumped at dealers,” opines Bhatia (See: Bestseller at work).

At present, Tata Motors, which has around 250 PV dealerships and close to 800-plus touch points, is looking to expand its presence to 920 touch points by the end of this fiscal. Chandra elaborates that the company is also helping dealers generate more and better enquiries to drive conversions. “We have helped them build digital footprint, rationalised vehicle margins and follow a localised marketing approach targeting specific geography for our vehicles,” explains Chandra.

The way ahead
Given the vigour with which it is pushing ahead, analysts and industry observers do not believe the company is looking to exit the PV business. “The company has stated that it is seeking a partner and not a buyer, and partnerships are common in the auto industry,” feels Bhatia. Concurring with the view, Gandhi says: “If the question is will Tata Motors sell out its PV business, I don’t think that will happen.”

Though there is buzz around a possible alliance in the EV business in wake of group company Tata AutoComp’s JV with China-based Prestolite Electric to supply powertrain solutions, the management has ruled out any tie-up. “Tata Motors is currently not pursuing a JV partner in the electric vehicles business,” reveals Chandra.

But, the big question is that beyond Hornbill and Gravitas, Tata Motors is mum on the line up of models ahead. “Tata Motors is back in the game with its market share rising but how long will depend on the product pipeline which they haven’t shared yet,” adds Gandhi.

Chandra declined to elaborate on what lies ahead by stating that “additional details will be shared at an appropriate time.” Currently, it appears that Tata Motors has found its mojo, but two quarters is too short a period to make a long-term assumption. Playing it by the ear, Butschek says, “If the present trend of improvement in demand continues, we are hopeful of an improved recovery by the end of the year.” 

In 2018, addressing employees at an annual townhall, Butschek said that under Turnaround 2.0, Tata Motors' effort would be to enable its PV business to fund itself in the future and also take it beyond the aspiration of being No.3 in the domestic market. "However, the turnaround is not over yet. Not when we still have to meet our own targets and our deserving space in the consumer's mind," Butschek had then said. But with the CEO’s tenure set to end in February 2021, the agenda is still work in progress.