Over the past three to four years, overseas acquisitions by Indian firms have increased in terms of number and average deal size. According to UBS Investment Research Report 2007, they believe this is a consequence of Indian corporate’ strong balance sheets and rising global ambitions. In this essay I am going to use a specific acquisition example based on the article named Tata Motors Acquisition of Daewoo Commercial Vehicles to illustrate the Indian Acquisition problem. Statistically, there are 12 per cent to 14 per cent of Tata Motors revenue is from overseas at current status.
And Tata Motors sets its communicated target at 25 per cent to 30 per cent, which means that the company aims to reach 25%-30% revenue from overseas in three years, eventually wants to build a global automotive brand. (UBS Investment Research, 2007) The article is about the first-ever overseas acquisition by an Indian automobile company. It provides a detailed account of the acquisition of Daewoo Commercial Vehicle Company Limited (DWCV) in South Korea plant by Tata Motors, which was a part of the Tata Group and the worlds sixth largest commercial vehicle manufacturer.
On 29th of March, 2004 Tata Motors Limited, India, announced, today, that it had completed the acquisition of Daewoo Commercial Vehicle Company Limited (DWCV), Korea. The Chairman of Tata Motors, named Ratan Tata pointed out: This is indeed a major step for Tata Motors and a milestone for the group in its quest for globalization. I am confident that both companies will derive considerable benefits from this agreement. I am going to structure my essay by answering the following question: What was the strategic and economic rationale for the acquisition in the case?
What strengths of Daewoo Motors were the most valuable for Tata Motors? What were the major challenges for Tata Motors in this acquisition? What were the major potential synergies from the deal? And were they realized? Strategic and Economic rationale: General speaking, the main motives or main reasons for acquisition are: access to new markets or customers; access to new products or new technologies; access to primarily raw materials; and surely in some cases, also better scale economy.
But however in the Indian case, the major motivations appear to be: access to new markets; augmenting capabilities; expanding product portfolio, and overcoming both domestic and overseas competition. Due to a global expansion of Indian corporate ambitions, several fundamental strategic and economics rationale need to be involved in this acquisition. Market-seeking: Market-seeking means that the acquiring company uses the acquired company as a vehicle for access to new markets.
The article mentioned that the acquisition of DWCV speed up tempo of Tata Motors to entry in to new market in China, Western Europe, South Africa and Latin America. For example, as a result of Daewoos technological potential and the experience of working with a European firm for a sub 1-tonne pickup based on an international design (which is similar to Korean markets need), Tata Motors will be able to sell its 1-tonne pickup in the Korean market. Furthermore, DWCV already had Euro III engines.
This would help Tata Motors to upgrade their vehicles and finally these trucks could be able to sell to developed markets in Western Europe and in China. Product-seeking: Product-seeking means that the products of acquired company complement those of the acquirer. General speaking, the acquired companys products are more value-added than those of the acquirer. And our Tata Motors case is the example of such behavior. The product range of Tata Motors and DWCV was complementary. As Tata Motors made low tonnage trucks, but DWCV made the opposite without experience of making low tonnage trucks.
The joint product of the two companies could be made available worldwide through Tata Motors. Moreover, with respect to its product design, the combined team can add value to the truck of the future project which was designed with an Italian design firm, called Stile Bertone. And DWCV had gain strong customization capabilities as the Korean markets required a high level of customization. As a result of this, Tata Motors can take the advantage of this in order to sell its product to various countries by customizing the existing models.
Efficiency-seeking: Efficiency-seeking means the acquirer is operationally less efficient than the target company. According to Tata Motors, the initial investment in terms of its opportunity cost could be recovered in three to five years, as the Daewoo Technical team was very competent in collaborating on products for the global markets, which is proof of the technical capability of DWCV. But however, UBS pointed out that general speaking this efficient-seeking is not a tradition motive for Indian companies acquisition. Resource-seeking:
Resource-seeking means those natural resources available with the target company are a key motivator for the acquirer. But in our case, it shows a different phenomenon. Tata Motors had the advantage of cheaper procurements from suppliers due to it large-scale orders. And apart from this, DWCV also can take advantage of its online processes. Overall speaking, it is logical to say that a company acquires purely to obtain economy of scale, although apart from this, Tatas acquisition also aims to enhance capacity and consolidating the markets, etc. Strengths of Daewoo Motors which are most valuable for Tata Motors:
Tata Motors is the biggest company of the Tata Group and ranks as the fifth largest commercial vehicle manufacturer in the world. DWCV is an earlier part of Daewoo, and it was the second largest manufacturer of heavy trucks in South Korea. It had a capacity of 20,000 unites over a two-shift operation. Most analysts felt that the DWCV acquisition was a perfect fit. Mr. Tata said, This is a historic occasion for Tata Motors and the Tata Group. I am happy to note that this is the largest acquisition by any Indian company in Korea and I look forward to increasing the Tata Group’s presence in this country.
Korea is a shining example of what can be achieved with diligence and dedication, and I am sure we will learn a lot from operating in South Korea. The acquisition offers the opportunity for both companies to expand the product line, good research and development capabilities and new markets (which including new markets in China, Western Europe, South Africa and Latin America). As regard Tata Motors future, the acquisition also provide Tata Motors the opportunity to de-risk its business by countering domestic cyclicality (the CVs market is cyclical) through foreign expansion.
As I mentioned before, DWCV and Tata Motors are complementary in terms of their product range. DWCV truck ranged between 210 to 450 hp. On the other hand, Tata Motors was focused on the lower end of heavy trucks of up to 210 hp. This complementary advantage could help Tata Motors to check competition from Volvos Indian unit. In the word of Morgan Stanley analyst: DWCV would help Tata Motors product range in its existing markets-including Indian. But it is known that DWCV does little aggregate manufacturing, so Tata Motors could outsource components to the Daewoo plant.
Finally, I am going to talk about DWCVs technology, its technical team was very competent on product for the international markets. From the article, we also know that DWCV had been ISO 14001 certified by SGS-ICS of Switzerland way back in November 1997, which is the first Korean commercial vehicle plant to get this certification. This certification can be a proof of the capability of DWCVs technical team. As a result of the advantages of complementary product range, strength in product development and international marketing, the acquisition brings new opportunities to Tata Motors.
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