INDIA BUSINESS WORLD - JULY 2006
THE MONTH THAT WAS...

TATA MOTORS, FIAT INK MOU FOR PASSENGER VEHICLE JV

IN A long-awaited move, Tata Motors chairman Ratan Tata and Fiat SpA chairman Sergio Marchionne finally decided to shift gears and strengthen a relationship which had begun with a low-key distribution tie-up last year.

On Tuesday evening, the two companies announced they had signed a new MoU, which commits them to a 50:50 joint venture in India .

Tata Motors and Fiat plan to now use Fiat's facility in Ranjangaon, near Pune, to manufacture passenger cars from both stables as well as engines and transmissions.

The deal will also enable India 's biggest auto maker to gain an entry into Latin America for its utility vehicles and pickups.

Under MoU, Fiat will manufacture its two future launches — B segment Grande Punto and a new C segment premium sedan — at Ranjangaon. It will also make its small multijet diesel engine there, which will be fitted into a yet-to-be disclosed Tata Motors product. It is not clear what products Tata Motors will be manufacturing in that facility, though sources said the facility would give them “more flexibility”.

Fiat and Tata have also signed a 60-day study aimed at exploring the opportunity of using Fiat's production facility in Cordoba , Argentina to manufacture and sell Tata Motors' utility vehicles and pickups in Latin America .

Tata Motors and Fiat had signed a distribution agreement in January, by which they established a chain of joint dealerships. Fiat had begun hawking its hatchback Palio and sedan Petra through co-branded dealerships. The distribution tie-up, which may have helped Fiat regain some amount of consumer confidence, was seen as a run-up to a more comprehensive arrangement between the two players.

The joint venture agreement is expected to be signed shortly and the new JV company will begin operations in late-2007 or early-2008. Both Tata Motors and Fiat group will be pumping money into the new venture.

Though he declined to divulge the exact size of investments that would go into the joint venture, Fiat India MD Filippis Giovanni said, “ There will more clarity once the JV is signed. The investment will be made in phases, as we ramp up capacity. The plant will hit optimum capacity, 1 lakh cars and 2.5 lakh engines and transmission per annum, in 2010 and it will start generating money then.” On Tuesday, the Italian major provided some early evidence that its overall global strategy of entering into strategic alliances with other global auto companies such as Ford, Suzuki and Peugeot was working. Backed by strong sales of its hatchback Punto, Fiat reported a 56% jump in its second-quarter profits, clearly signalling that it could be finally emerging out of the woods.

This current deal is likely to preserve the win-win nature of the alliance. According to industry experts, tying up with the Tatas will help Fiat reduce the risk of operating in emerging market, where it does not have sufficient understanding. At the same time, it also reduces the level of capital it needs to commit to a new project. On the other hand, Tata Motors gains access to Fiat's world-class technology along with an opportunity to open up new markets in Latin America by leveraging Fiat's manufacturing and distribution networks.

The product portfolio has been also chosen to ensure that the extent of cannabilisation is reduced. Thus, the Punto, a bigger B segment car is unlikely to erode Indica's market share, while Fiat's yet-to-be-launched premium C segment car will be at a price point higher than the Indigo's. “Its only logical, we will co-ordinate launches in such a way that there is no cannibalisation,” said Giovanni.

Giovanni said that the new venture will not impact Fiat India 's operations in anyway as its a joint venture between Fiat Group and Tata Motors. Fiat India will continue to manufacture the Palio and Petra out its Kurla facility till the product cycle for the two models is over, said Giovanni. He conceded operations in the Kurla were unviable and Fiat is considering various options on what they can do with the facility. But industry watchers say that Fiat may find it difficult to sell-out because of the labour issues in the Kurla plant.