AN ANALYSIS OF OPPORTUNITY Tata Motors Explores FDI into Romania Mark Bagin Tim DuBoff Khurram Hasan Eugene Pangalos Jeff Steckmest STRT 571 May 3, 2010 Section 44

Tata Motors Overview Who is Tata?  Maker of passenger cars, buses, trucks and tractor-trailers  Largest Indian car manufacturer, maker of Tata Nano, which is the cheapest car in the world (priced at approximately $2,500)  Consolidated revenues of Rs.71 thousand crores (USD 14 billion) in  Acquired the Jaguar and Land Rover brands from Ford for about $2.3 billion What are Tata’s key strengths and weaknesses?  Strong position in its core Indian market  Strong R&D capability and industry leader in low-cost car design and production  Saddled with a large debt load from its recent acquisition (high debt-to-equity ratios vs. industry)  Lack of significant manufacturing base in any country outside India Tata’s strategy and reasons for FDI  Two-tiered strategy of competing in the luxury cars segment (acquisition of Jaguar - Land Rover) and the low-cost cars segment  Expansion into global markets beyond the core Indian market.  Tata has already entered into distribution alliances and acquired brands or manufacturing facilities in countries such as UK, Spain and Thailand.  Planned introduction of Nano Europa in Europe in 2012 Current Distribution Network

EU Auto Market and Romania Where should Tata sell and produce?  Demand increasing for small passenger cars in the EU  Production in Romania has many advantages:  Low labor costs $2.23 per hour Romania vs. $2.75 for Tata motors  In EU (geographic advantage)  Immunity from tariffs (10% for firms producing outside of EU) How could Tata take advantage?  Build a new auto plant in Romania  Manufacture cars in Romania and export to the EU Number of Units Sold* (in Millions) *EU 15 and EFTA Cars Sold in Europe

On Euro CurrentPossibilitiesImplications Currency Risk Leu (have not started ERM 2) Adopt euro Increase in aggregate price levels with euro accession; however currency exchange risk eliminated Leu devaluedLow cost of inputs and wages Political Risk Low (relative to non- EU Eastern Europe) Acceptably low – political crises have minimal long-term impact on domestic business environment Euro accession may increase political risk (Greece). Per capita income level of $11,000 and EU membership mitigate this concern LaborMajor cost advantage Labor costs increase w/euro adoption; increased unionization Euro accession decreases labor cost advantage Current Free Capital Flow Pegged Exchange Rate Sovereign Monetary Policy Romania’s Trilemma

The Overall Picture Unfavorable Business Considerations  Investment Scale Exceeds Current Capability:  Inability to purchase any existing auto production plants will force Tata to invest in a brand-new facility costing ~$600 million  Large debt load will makes it unfeasible to undertake such a large FDI at this point  Long Timeframe to Recoup Investment: NPV analysis reveals an unreasonably long-time frame of 12 years to recoup investment  Unproven Demand for Tata: While the overall European demand for low-cost cars is increasing, Tata’s brand is unproven in Europe Recommendation  Although Romania remains a favorable political and macro-economic environment, analysis of business factors reveal a different picture  Recommendation is to NOT pursue FDI in Romania at this point until European demand solidifies and Tata finances improve Recommendation  Although Romania remains a favorable political and macro-economic environment, analysis of business factors reveal a different picture  Recommendation is to NOT pursue FDI in Romania at this point until European demand solidifies and Tata finances improve