The present study aims to measure a proposal concern program to spread out Tata car operations to Mexico and accomplish a lower hazard profile in the administration. The aim of this enlargement program is to present the new Nano auto in United States and Mexican market, cover the existent Land Rover and Jaguar demand in those states and increase the competiveness of the company by cut downing production and logistic costs.
Tata Motors is portion of Tata Group, it was funded in 1945 and now it is the most of import car company in India. The company manufactures commercial vehicles, compact and in-between size rider vehicles, public-service corporation vehicles, trucks and coachs. Tata Motors has spread across the state and its grosss for 2009 was $ 14bn ( Tata Motors, 2009 ) . Nowadays it is the first Indian ‘s technology company listed in the New York and Bombay Stock Exchange ( Tata Group, 2010 ) . It has become an international car company spread outing operations around the universe.
In June 2008 Tata Motors started its engagement in the luxury auto market, purchasing Jaguar and Land Rover from Ford for $ 2.3bn ( BBC, 2010 ) . In 2009 as a contrast Tata launched Nano, the cheapest auto in the universe, its monetary value is around ?1,366 ( BBC, 2009 ) .
Impact of fiscal crisis
The fiscal crisis impacted the car industry, but it has had a stronger impact in the American car manufacturer industry. The top three car companies in United States are confronting jobs to go on operating ; GM is owned by the authorities, Chrysler is now associated with the Italian house Fiat and Ford, who avoided bankruptcy by reconstituting its balance sheet and merchandising Jaguar and Land Rover to Tata Motors company ( Ingrassia, 2009 ) .
The company Tata Motors was chiefly affected by the fiscal crisis when purchasing JLR in June 2008.The British authorities was non able to supply fiscal support to the company ( The Economist, 2009 ) . Then Tata started to analyze different fiscal options, such as European Investment Bank ( EIB ) , but the Indian company found the footings unacceptable. Therefore, the administration proceeded to utilize the hard currency flow to pay the acquisition of Jaguar and Land Rover.
The Economist ( 2009 ) published that Tata had invested ?1.2 billion into JLR in the last 14 months. Therefore, the company felt confident to take this determination due the profitableness of Tata vehicles ‘ gross revenues in India and the recovery of gross revenues orders of Jaguar and Land Rover. However, Deepak Jain ( The Economist, 2009 ) argues that Tata Motors has a support shortage of at least $ 3.4bn due the investing in working capital and the purchase of Jaguar and Land Rover. Therefore, the recognition evaluation of the company turned to a higher degree of hazard.
On the other manus, the company Tata Motors is seeing the fiscal crisis as an chance to present its new merchandise Nano auto into the in-between category market, due the fact that consumers are short of hard currency ; nevertheless, they are still able to purchase inexpensive autos. The fiscal scheme followed by the company is increasing its hard currency flow by inquiring prospective Nano purchasers to put sedimentations that are close to the full monetary value of the vehicle ( The Economist, 2009 ) .
Diversification – Impact in the administration hazard profile
The current Jaguar and Land Rover fabrication works is located in the UK ( Jaguar Land Rover, 2010 ) . Harmonizing to the Jaguar and Land Rover article in the BBC News ( 2010 ) , Tata Motors has announced that in 2014 it will shut one of its workss in the UK, every bit good as seeking to cut down rewards. The scheme that Tata is taking is due to the fact that labor and production costs in the UK are expensive, compared to whether the company manufactures its merchandises in an emerging economic system, such as Mexico.
The program proposed to Tata Motors, in order to diversify its operations and cut down the hazard profile, is to construct a fabrication works in Mexico. The company will bring forth Jaguar and Land Rover with the intent to cover the current demands in the United States and Mexico for the luxury auto market. In add-on to this, it will get down bring forthing the new Nano auto with the purpose of presenting it into the in-between category market in both states.
The state of Mexico has been chosen as the topographic point to set up the fabrication works for the undermentioned grounds:
Mexico is portion of North America Free Trade Agreement that eliminates all barriers to merchandise and investing among the United States, Canada and Mexico ( NAFTA, 2008 ) .This understanding benefits the company, due the fact that it can commercialize its merchandises through those states without paying any import charges.
The strategic geographic location of Mexico contributes to the lessening of distribution cost, due the fact that Mexico is beside the primary automotive market, the United States. In old old ages Jaguar and Land Rover vehicles were manufactured in the UK and shipped to the America market. Therefore, by set uping the fabrication works in Mexico it will cut down the distribution cost.
The depreciation of the Mexican peso against the US dollar and other currencies around the universe makes the state an attractive topographic point for investing ( Aguilar, 2009 ) . The currency exchange of Mexico benefits the venture of the new industry works of Tata Motors, due to the fact that the company will be puting in Mexican pesos and selling its merchandises in US dollars in the United States market.
The labor cost in Mexico offers advantages over UK and United States. The wage in Mexico is ten times lower than the United States ( Aguilar, 2009 ) . This makes Mexico a cheaper topographic point for fabrication. It is relevant to advert the qualified work force and engineering that Mexico owns ( Aguilar, 2009 ) .
The facts described supra will assist the company to cut down industry and distribution costs and cover the market in Mexico and the United States. The company Tata Motors will spread out its trade names and present Nano auto into the new market of Mexico and United States. In add-on, Ford will go on providing engines and constituents for Jaguar, every bit good as supplying entree to its intercrossed and low emanation power train engineering ( The Economist, 2008 ) . The entree to this engineering will let Tata to industry merchandises harmonizing to the market demands ; this means eco-friendly and be effectual merchandises.
Fiscal Resources Deductions
The operational enlargement proposal is to construct a fabrication works in Mexico. It should be made in the signifier of SPV ( Particular Purpose Vehicle ) holding the terminology name of “ TLJ Automobile Inc ” . The intent of set uping this fabrication works as SPV is to make a subordinate company of Tata Motors with assets and liability construction, every bit good as legal position that makes its duty secure, even if Tata Group faces fiscal jobs or bankruptcy. In add-on, Tata Motors is listed in the New York and Bombay stock market already ( Tata Group, 2010 ) . However, the troubles should be considered in make up one’s minding the right monetary value for the initial offer of the new stock.
The budget calculated for edifice and runing the fabrication works is $ 200m. This investing will be financed in the part of $ 100m infused by Tata Group, $ 60m from bank loans and $ 40m from the stock market, utilizing IPOs ( Initial Public Offering ) in order to raise financess. The Economist ( 2009 ) published that after the fiscal crisis, the IPO market is going progressively attractive to the investors.
The investing for the fabrication works in Mexico to bring forth Jaguar, Land Rover and Nano vehicles is projected in five old ages with a price reduction rate of 10 % ; this is shown in the tabular array below.
( 200 )
Discount rate @ 10 %
( 200 )
Net Present Value
Return on invested capital
Table 1. Evaluation of concern proposal expand
The tabular array demonstrates that harmonizing to the investing and the planned gross revenues for the merchandise portfolio ( Jaguar, Land wanderer and Nano ) , in five old ages the concern will be profitable. There is a positive NPV of $ 50.14m at the price reduction rate of 10 % and the IRR is 19 % . This means that the concern is bring forthing adequate net incomes to pay the cost of capital, pay back the stockholders and invest in the concern itself. Therefore, the capital is being used efficaciously harmonizing to the 33 % of ROI.
The present investing has a certain degree of hazard, due the macro and micro environmental factors. There are several chief troubles that can be faced in raising the fiscal demands for the operational enlargement program. First, complications have to be considered in order to run into the gross revenues budget established in the program, due to the competitory market and fiscal crisis. Second, the high involvement rates on debt that can impact the net net incomes of the administration. Third, the political and economical uncertainness of Mexico, such as the rising prices and revenue enhancement rates which can impact the stableness of the company. Finally, the impact of consumer behavior and the car market tendency should be considered.
The concern proposal made to Tata Motors, in order to diversify operation and diminish the hazard profile of the administration, is to spread out operations to Mexico by fulfilling the demand in the United States and the local market. The administration will profit from the competitory advantages and the trade understandings of Mexico. Due to the North American Free Trade Agreement ( NAFTA ) Mexico is non charged for imports to the United States and Canada ( NAFTA, 2008 ) . The company will be able to offer competitory monetary values in the market, due the low labor cost, fabrication and logistic cost in Mexico. In add-on, the administration will get down to implement low emanation engineering to its merchandises harmonizing to the understandings established with Ford ( The Economist, 2008 ) . This will let the company to be competitory and offer what the market demands.
Marsh ( 1982 ) argues that administrations with a high degree of equity are more likely to be belly-up. This is supported by Jung, Kim and Stultz ( 1996 ) who mention that companies with a large per centum of equity have higher degree of hazard and a higher earning volatility. However, Walsh and Ryan ( 1997 ) citation that a negative relationship exists between the volatility of net incomes and the issue of debt. Therefore, in order to diminish the hazard profile of the administration debt and equity will be used to finance the investing of the company.
It has been demonstrated that harmonizing to the rating of the concern proposal expand ( Table 1 ) that the concern is profitable, due the positive value in NPV ; the IRR is 9 % higher than the cost of capital and harmonizing to the 33 % of ROI the capital is used efficaciously in the administration.