Wednesday, October 21, 2009

The Japanese Business Mindset: Enigmatic but Efficient and Effective

The prolonged recession of over a decade cast a deep shadow on the Japanese economy.  The emergence of nimble corporations from countries such as Korea and Taiwan has posed new threats to Japan.  Yet, Japan continues to lead the world in industrial innovation and business leadership.  Despite the four-fold adverse movement in Yen-Dollar parity over three decades, Japan continues to retain a global market share for its products.  Despite not following the Western management concepts, Japan continues to be effective in global competition.  Japan amazingly defies the aging characteristics of a mature economy and continues to be youthful and vigorous in terms of technological and business leadership.

Japan’s unprecedented industrial success is often traced to the culture, homogeneity, discipline and hard working nature of the Japanese society. The inscrutability of the typical Japanese businessmen and the invisibility of the Japanese industrial system are often cited as barriers to competitors trying to replicate the Japanese success. 

The Japanese enigma, however, cannot be explained by a simple cultural or behavior paradigm.  The Japanese performance model is a national phenomenon that transcends industrial or business classification. It has its roots in a thoughtfully seeded and carefully nurtured mindset that seeks perfection and practicality in all the activities.  This paper distills the over three decade experience of the author with reputed Japanese corporations and distinguished Japanese professionals to analyse the Japanese mind-set in terms of five essentials of (i) design mindset, (ii) manufacturing mindset, (iii) marketing mindset, (iv) collaboration mindset and (v) individual mindset.  All of these reflect a simple but exacting, and uniquely Japanese, philosophy of fusing quality with elegance in whatever is done under the brand of Japan.

(i)  Design mindset

Product design is the key driver for the success of any industrial operation.  The Japanese design philosophy can be viewed in terms of five key facets which reinforce each other mutually and result in a product that is differentiated for performance, quality, reliability, usability and elegance, providing a total product life cycle experience for the users.  These five aspects are reviewed below. 

Incremental innovation-pioneering inventiveness

Japan has been a leader in Kaizen that embodies the concept of continuous improvement.  The Japanese believe that a product platform has to be basically robust but intrinsically adaptable for continuous enhancement.  The Japanese design philosophy emphasizes incremental improvements as a cost-effective yet value building route to enhance product life cycle.  The Japanese also believe that quality can be enhanced and costs reduced simultaneously.  Typically, a product design is characterized by several basic performance characteristics which when individually leveraged provide successive phrases of product enhancement.

Alongside incremental innovation, Japan has been a pioneer in breakthrough design concepts which help create whole new markets.   From the time Japan pioneered the design of robots to replace manual operations (for example, robots for welding) to the more recent development of the world’s first commercially viable humanoid robot(for example, Honda’s Asimo robot) or Toyota’s hybrid car (Prius), the country has demonstrated an uncanny capability to leapfrog ahead of the technology development curve.  If the rest of the world is focused on integrating cameras with cellular phones, Japan would be ahead integrating camcorders with cellular phones.  If the world is focusing on moving from LCD technology to LED technology, Japan is focusing on moving imaging from 2D to 3D. Except for one or two slips (for example, flat panel technology a few years ago), the Japanese industry has been a step ahead of the rest of the countries in terms of breakthrough inventions that could be commercialized.

The ability to simultaneously follow the twin strategies of incremental innovation and pioneering inventions helps the Japanese companies expand and diversify the market segments on one hand and create totally new markets on the other.  It also helps the Japanese industry to straddle multiple price points and value points with effective product-market segmentation.

Lighter in weight but higher in strength

The success of the Japanese design philosophy is rooted in its reversal of historic engineering principles.  Even as the Western designers tried to equate higher weight with higher strength, Japanese designers consciously strove to explore light weight designs as a means of saving materials and costs while enhancing performance.  A study of various automobile designs of the world would reveal that for comparable specifications and performance, the Japanese products are at least 10% to 20% lighter.  The feature of lower tare weight directly translates into the benefits of lower manufacturing costs, higher operational productivity and better life cycle economics.

Clearly, use of newer material and component technologies and a perceptive understanding of the likely usage conditions drives the low weight-high strength philosophy.  Customization of designs to different countries and user conditions also helps the Japanese designers optimize their product characteristics with relevant design parameters. The cost impact of product weight is well appreciated by the Japanese companies.  When hit by recession, all Japanese automobile makers targeted to take off a certain percentage in the weight of the automobiles to enable meaningful cost savings.  That such weight and cost savings could be achieved with concomitant increases in strength is a reflection of the Japanese design ingenuity.

Smaller in size but greater in functionality

The Japanese design philosophy emphasizes miniaturization far more extensively than is attempted anywhere else.  Miniaturization is both an art and science.  The constraints of space that govern life in Japan could have, over generations, established a mindset which aims at space optimization.  Yet, transfer of such space-efficient approach into an organized industrial design mindset requires fusion of engineering and art.

The Japanese highway system is the most visible icon of the Japanese designers’ skill in optimizing space.  All the elevated highways are of single centre pillar design and enable free and full flow of traffic both on the ground and elevated tracks.  Industrial products with multi-functionality convergence represent a contemporary and amazing wave of new product innovations that combine smaller form factor with more ubiquitous functional performance.

Co-design with suppliers

The Japanese design philosophy is a comprehensive, end-to-end system that integrates material and component design with the end-product design.  Typically, each new product creation or new product upgrade commences with the end-product designers unveiling the total design concept to the suppliers and vendors and encouraging them to come up with their suggestions.  This collaborative process creates new products with seamless integration of multiple technologies.

In several cases, new product developments are led by the suppliers and vendors.  Globally, we have a few examples like chip manufacturers (such as Intel) constantly driving up the processing capability of devices.  This capability, however, is so diversified and deep rooted in Japan that usually every supplier or vendor has the capability to take its material or component technologies to newer levels and thus initiate fundamental changes in the end-product itself.

Product elegance for user delight

Japanese society is known for its harmony with nature.  A green, flowery ambience permeates the general landscape.  The innate sense of aesthetics prompts Japanese designers to combine product elegance with user friendliness.  Whether it is a simple product such as an instant tea sachet or a complex product such as a camera, the ability to reach higher levels of product elegance and user delight is a characteristically Japanese feature.

The Japanese design philosophy combining aesthetics with ease is an affirmation that in contemporary design style has, in fact, technological substance (see the author’s blog “Style is Substance: Management of Product Design and Manufacture” in  For example, a sachet which tears off in the right manner with the right effort requires a wrapper of special quality and crimping with exacting tolerance.  The approach of using technology for elegance extends to a range of products that cover industrial and domestic applications.

(ii)  Manufacturing Mindset

While innovative product design is the driver of the unique Japanese mindset, manufacturing creativity is a core facet of the Japanese industrial ingenuity.  Japan’s unique manufacturing mindset is revealed in several distinctive approaches as below.

Simplification with standardization

Manufacturing philosophy in Japan emphasizes modular manufacture with simple, standard equipment.  Japan has been a pioneer in development of flexible manufacturing systems and transfer presses.  Japan has also been a leader in quick die change systems.  Complete balancing of a production line from start to finish with careful definition of tact time is an essential feature of work flow design in Japan covering the main assembly lines, as well as the supportive sub-assembly and machining lines.  The concept of quick die and tool change is based on perfect matching of multiple sets of tools and dies to basic equipment beds.  Together such concepts ensure that a vast shop floor operates in perfect synchronization.

Unitized manufacture is yet another hallmark of the Japanese manufacturing system.  Amazing flexibility is achieved by understanding the essential core of any seemingly complex manufacturing operation and then designing operations (whether machining, casting, forming or assembling) around the core unitized operations.  For example, in the manufacture of an automobile engine, capability to handle the machining of one cylinder bore is all that is required to develop a flexible, unitized machining system that can handle a wide variety of automobile engines, from single bore to multiple bore configurations. Uniquely Japanese innovations in tool and die design and the mounting arrangements can make it possible for standard machines to undertake non-standard, variable operations, Competencies in manufacturing tools and dies of different designs is yet another capability that adds flexibility to the manufacturing system.  The quality of a manufactured product is  related to the accuracy and the detail that is ingrained in a typical tool or die.

Digitized upgrade

It is one of the enigmas of the Japanese manufacturing mindset that some of the most gleaming and tight-tolerance products are produced out of even old and seemingly obsolete machinery.  While modern Japanese plants have mirror finishes and complete automation, aged plants are also well utilized to produce contemporaneously acceptable products.

Digitization of the older equipment is extensively used by the Japanese to enhance process integrity and achieve tight manufacturing tolerances that are comparable to the ones that can be achieved by newer machinery.  Mechatronics and robotics represent the powerful face of digitization in Japan.  Even transportation and storage are highly automated using digital technologies.  Japan being the home to the electronics industry it is not surprising that digital upgrade is extensively used in the Japanese manufacturing system.

Predictive variability

Japanese understand that controlling the variability is the key to manufacturing perfection.  Control of variability is achieved in two ways.  The first is by total transparency and connectivity of information across the entire manufacturing value chain.  Japanese resort to visual communication of process flows, material flows, product machining and assembly characteristics to ensure that all participants in the manufacturing system are harmonized with a clear understanding of the requirements.

The second way of achieving predictive variability is through a resort to real time, continuous statistical process control (SPC) systems and periodic process capability studies, supported by a systematic maintenance approach.  The SPC charts not only enable strict control of quality but also provide early warning signs of any creeping process variability, enabling proactive corrective actions.  Japanese have indeed been pioneers in the use of statistics in the fields of quality control and quality assurance.

Just-in-time inventory system

The famed Kanban, Just-in-time (JIT) inventory system of the Japanese needs no introduction.  JIT is integrated from the very foundations of building a manufacturing system by eliminating spaces for inventory.  The geographical limitation of space in the country which acts as a constraint and the collaborative expansion of supply chain that includes component and material suppliers are harmoniously used by the Japanese to eliminate idle inventories.  The Japanese are clear that inventories lead to inefficiency in the manufacturing system.  If a breakdown or slippage occurs in any part of the manufacturing line, the line as a whole is stopped instead of allowing stage-wise inventories to be built up.

Adoption of pull-type manufacturing planning helps the Japanese plan production to match demand.  The pull-type system enables synchronizing of the material system and manufacturing system to the sales system through a fine-tuned logistics system.  Just-in-time inventory system synergizes with the pull-type manufacturing system as the whole system operates in a perspective of demand certainty.  The Japanese philosophy of pursuing profitability rather than chasing market share also harmonizes with the pull-type manufacturing and Just-in-time inventory systems.  Together, the continuous flow and the pull-type planning ensure that the Japanese manufacturing system operates with the lowest inventories and highest efficiencies.

5Ss, 3Ms and PY/RC approaches

The Japanese manufacturing philosophy is rooted in designing efficiency and effectiveness into the workplace.  Lean manufacturing is a way of life in Japan.  It is exemplified by the 5S and 3M concepts.  The system of 5S helps in efficient workplace organization for high productivity.  Seiri (sorting), Seiton (set in order), Seiso (cleanliness), Seiketsu (standardization) and Shitsuke (sustaining) go far beyond housekeeping to ensure workplace efficiency and safety.

The 3M concept is focused on eliminating waste in the manufacturing place.  Toyota Motor Corporation, as part of its famous Toyota Production System, defined three broad types of waste:  Muda (non-value adding work), Muri (unreasonable work) and Mura (fluctuating work). By eliminating these three broad categories of waste, the Japanese manufacturing system benefits from enhanced productivity.  These concepts are strengthened by the poka-yoke principles of fool-proofing facility design.  In the unlikely event of errors occurring, the Japanese adopt root cause analysis (with fishbone diagrams, why charts and FMEA analysis) to identify the fundamental causes of errors rather than stop at correcting the symptoms.  This process is also carried out straight at the source of the problem (Genchi Genbutsu) rather than in offices.

(iii)  Marketing mindset

Japanese marketing mindset is quite differentiated from that of other countries.  While the Japanese companies utilize the essential elements of sales and marketing as any other company, be it in terms of market research, customer segmentation, brand promotion, point of sale service and after-sales service, the Japanese marketing mindset is notable for five differentiated characteristics.

Quality as price builder

Japanese corporations aim at what they perceive as an optimal mix of market share and profitability.  The marketing mindset emphasizes the Japanese brand of functionality and quality as an enabler for seeking price premium.  Whether due to the intrinsic cost premium of superior design and superior build, the external impact of adverse Yen-exchange rate (Yen 90 to a dollar in 2009, compared to Yen 360 to a dollar in 1974!) or the deliberate premium sought for the Japanese brand, Japanese corporations price themselves at least 10 to 20% higher than comparable Korean or Taiwanese brands.  The Japanese believe that pursuit of excessive market share has an adverse profitability impact.

The fundamental premise of Japanese marketing is that higher quality provides better product feel and longer usage besides ensuring lower after sales costs.  In addition, the strong association of Japanese brand image with robust quality helps to position the users in the society as a class appreciative of a superior brand.  Whether Japanese would have achieved market dominance in each and every product segment had they pursued a strategy of price parity (if not price competitiveness) vis-à-vis their competitors is a debatable point.  As an overall system, however, long term stability and profitability of the system are perhaps better balanced with the Japanese conservative price and market policies.

Brand segmentation for market segmentation

Products with multiple functionalities are the new driving force of market segmentation.  The Japanese industrial system focuses on creativity of product design as a driver of market segmentation. In respect of a cellular phone, for example, combinations of mega pixels, optical zoom, picture capture capability, connectivity options, multi-media flexibility, battery life, display screen size are creatively combined to develop multiple product-market segments leveraging contemporaneous technologies. Gaming console companies have created new brand statements based on innovative functionalities of real time activities.

Japanese, in addition, have perfected the art of using brand segmentation as a tool for market segmentation.  Sony Ericsson’s Walkman and Cybershot branding of music and camera oriented mobile phones, respectively, is an example.  Similarly, development of concepts such as an urban off-road utility vehicle  or small family small car has been uniquely Japanese. Creation of unique brands such as Lexus and Infinity s has helped the Japanese automobile giants Toyota and Nissan make green-field positioning statements against established luxury marquees such as Mercedes and BMW.

Packaging as differentiator

Japanese retail stores have a knack of using packaging for providing customers with enhanced shopping experience.  From the smallest piece of purchase to the priciest piece of acquisition, packaging gets an integral and elegant treatment from the Japanese retail stores.  As a result product functionality, whether the product is a perishable item or long term usage item, gets preserved till the time of commissioning, and is further protected in subsequent phases of transportation.

Japanese provide an emphasis on packaging that is equal to that laid on design and manufacture.  Packaging itself has three layers; the first being the primary packaging that occurs with product delivery at the manufacturer’s end.  This ensures a perfect fit of the product and all its accessories in a creative packaging unit.  The second is the secondary package that distributes the product to different parts of the globe without any untoward mishandling or breakage.  The third, and most important, is the way the product is unpacked and repacked at retail end while providing factory-fresh delivery to the customer.  In the Japanese system, the packaging value chain is total, robust, elegant and user- friendly.  Packaging design is a fundamental part of product design in Japanese hands.

Global customization

The global success of the Japanese brands is due to a marketing mindset that is adaptive to different user requirements and usage conditions in different parts of the globe.  The phenomenal success of the Japanese automobiles across the globe is linked to the companies’ ability to identify the core characteristics of consumer demand in each country.  In the case of an automobile, for example, these are fuel efficiency, ground clearance and turning circle as far as India is concerned.  Automobile design for USA, on the other hand, emphasizes power, robustness and interior trim.  Design for Europe is focused on styling, external trim and internal trim.

Japanese companies believe that products have to be developed, manufactured and positioned in the host country markets in alignment with core country characteristics.  As a result, portability of brands across the regions is relatively limited, compared to that on offer by the Korean, US or European competitors.  Japanese cellular phone markers for example, have developed designs with user feel essentially aimed at the Japanese users as a result of which some great phone designs are yet to move beyond the Japanese shores.  This certainly is a disappointing result of the Japanese marketing conservatism.

That said, global production has been taken up aggressively by the Japanese companies in select fields to integrate their design, manufacturing and marketing philosophies with local needs.  The ability of Japan to withstand the volatility of global current markets and economic conditions is related to development of multiple manufacturing bases across the world.  Japan has thus been proactive in letting technology and operations lead the way on the marketing path.

‘Hared’ tortoise

Japanese marketing mindset is highly deliberative and rarely opportunistic.  With increased competition from other developed nations, especially the Asian Tigers such as Korea, Taiwan and China, the Japanese marketing philosophy of hastening slowly has perhaps inhibited the Japanese companies from achieving a market penetration that is proportionate to their technological superiority.  For example, though the Japanese have been first off the block in terms of light emitting diode technologies, it is the Koreans that have introduced the first products into the markets.  The hesitation of the Japanese to translate the technologies pioneered in the laboratories and shop floors as first mover products into the market place is surprising on the face of it.

The Japanese marketing philosophy may remind one of hare and tortoise.  The Japanese corporations deliberately play the tortoise in the marketplace despite developing superior or comparable technologies ahead of competitors.  Presumably they use the time to read the customer needs in a more thorough manner and also let the faster, first mover competitors open up the markets for the superior but costlier Japanese products.  It is instructive that despite the history of continuous follow-on introductions, the Japanese remain market leaders in terms of customer appreciation and brand recall.  Their brand resilience and technological virtuosity perhaps would make the Japanese proverbial tortoise in the global marketing race.

(iv)  Collaborative mindset

In today’s globalised conditions, collaborations and alliances are the essential components of globalization.  Japanese companies are a major focal point of the wave of alliances and collaborations.  This is only natural, given the needs of other countries for the Japanese technological resources on one hand and the Japanese need for global markets and cost-effective material and component supplies on the other.  Yet, the Japanese mindset on collaborations and alliances is quite unique and hesitant.  The collaborative mindset of the Japanese is expressed in five key different ways.

Cautious consideration

The typical Japanese approach to collaboration is marked by cautious consideration.  Unlike the Western counterparts, the Japanese are neither hurried nor opportunistic in trying to sew up collaborations despite the existence of market or partner opportunities.  Perhaps a perception of being adequate as a nation in revenues and profits leads to a rather smug Japanese view towards collaborations.  More importantly, the Japanese commitment to the long term and the preference to make only the winning moves influences the typical Japanese corporation to consider a host of factors prior to even deciding to start the process.

Also, the Japanese mindset is typically concerned about governmental and environmental factors that could promote or inhibit a free play. The Japanese appear reluctant to manage a restrictive bureaucratic regimen.  The flexibility and cost-competitiveness of the country as a sourcing base of the market rather than the scale of the market seem to dictate the Japanese decision to take up any market for evaluation.

Diligent evaluation

Even after the Japanese decide that a particular host country’s industrial and economic environment is aligned to their interests rarely does a Japanese corporation move into a market without extensive due diligence.  Whether the move is in the form of an investment in advanced countries such as US and Europe or a collaboration in emerging markets such as India or China, complete feasibility studies are an essential part of the exploratory process.  Typically,  the Japanese prefer to conduct their due diligence processes in alliance with local partners. Such studies, however, provide no assurance that the Japanese company would eventually tie up with the diligence partner.

The system of Japanese diligence is so rigid and unique that new facts discovered in the process of diligence hardly motivate the Japanese to make course corrections.  The Japanese tend to stick to sequential phases of diligence even if early diligence points out the need to advance certain entry steps or re-jig product and manufacturing plans.  The Japanese also are typically unwilling to share their inner perspectives with the partners, thus losing the benefit of their local insight.  While the Japanese lay solid and robust foundations for their business moves with their detailed diligence, very often they pass up major market opportunities due to the inbuilt rigidities in the diligence processes.

Planning for perfect execution

Inevitably, planning by the Japanese corporations tends to be extremely detailed aiming for perfect execution.  Several departments are simultaneously roped in with shared vision, strategy and programs of collaboration. Detailed program management plans are drawn up with all micro level issues fully considered, prior to commencement of physical activities.

The success of the several Japanese ventures in rather divergently aligned business environments of different countries (China to India, or Europe to USA) could be traced to the detail and rigor they bring to the execution plans.  The success of the Japanese automobile ventures in India is certainly attributable to such diligent planning for effective execution.

Collaboration with commitment

A typical Japanese corporation is reluctant to enter into expansive or open-sky collaborations, which could provide unlimited access to their technologies or which could demand major commitments on the part of the Japanese partners to the markets.  Collaborations usually are highly product specific and focused on a few deliverables.  This approach is prompted by a desire to understand the potential for partnership success in phases and also take up only a scope that could be successful. That said, expansion of collaboration is a challenge, but not insurmountable as demonstrated by several case studies of Japanese collaborations in India

Once a collaboration is taken up, the Japanese partner could be expected to provide the needed inputs to make a success of the collaboration.  In execution, commitment remains focused on the collaboration rather than the broader company issues.  Japanese companies stay committed to their collaborations and alliances even if they encounter unanticipated surprises, as evidenced by Daiichi Sankyo-Ranbaxy alliance.  The same characteristic may not be held true of Western collaborations.  The Western companies could be opportunistic in entry into as well as exit from collaborations.

Respect for partner

An industrial enterprise needs continuous induction of resources for long term play.  Even if a local partnership starts off with a majority or 50:50 equity share eventually the local partner would need to dilute its equity to bring in resources which only the cash-rich Japanese collaborator can bring in.  The Western approach seeks to assume 100% ownership and management control at the earliest and nominate its own management structure. Japanese partners on the other hand tend to be extremely respectful for the local partners, regardless of the shareholding level the local partners are reduced to.

The respect for global partner is exemplified by the Japanese in many ways.  India’s Maruti-Suzuki and Kirloskar-Toyota reflect the respectful manner in which the Japanese treat the local sentiments, from retaining the Indian names on the company marquee to continued representation of the partners in key decision making structures regardless of the equity percentage.

(v) Individual mindset

The Japanese society is as much plural as it is singular in its behavior. Anyone walking into a Japanese shopping district or shopping mall will find the sales persons extremely chirpy with pleasant greetings (“simasens” and “arigatos”) all the time. A keenness on the part of the sales people to connect with the customer will be palpable. On the other hand, a Japanese business professional tends to be cautious and careful, virtually reflecting an unwillingness to commit in any manner.

The professional approach of the individual Japanese businessman or corporate professional is marked as much by politeness and friendliness as by reticence and hesitation. As a group, however, the Japanese are amazingly focused, cohesive, analytical and achievement-oriented. The transformation from the individual to the group has a unique alchemy at work. Far from any mystical group catalyst, it is the Japanese individual’s unique underlying mindset that drives the visible group performance.

Superior role of the institution

The fundamental governing principle, either of the Japanese society or the Japanese corporation, is that every individual subordinates himself or herself to the institution he or she represents. Whatever be the inner individual preferences and predilections the individual expresses only those points of view that reflect the institutional position. The individual takes pride as a representative of the institution that has corporate achievements than as a person with personal or professional skills.

The amalgamation of the individual personality with the institutional personality starts from the time a professional joins a Japanese organization as a trainee. The training programs provide a complete exposure to the company’s business, products and processes, inculcating proficiency and generating pride in the individuals (for example, the famous Toyota Way program of Toyota Motor Corporation for its new joiners). This coupled with the system of mentoring the newcomers with identified mentors (sensei) helps the newcomers develop a total identification with the institution and its work groups.
Creativity of standardization

Nothing is more striking in the Japanese corporate system than the strong streak of standardization that pans across all industries and corporations, be they be small, medium or large enterprises. From the way data is captured and tabulated to the way data is analyzed and presented, there is only one unique way for the Japanese that is common across Japan. The Japanese have a time tested way of summarizing tremendous amounts of information in terms of simple bullets, graphs, schematics and tables with high visual impact. The standardization of information management across the nation in Japan is creative, and contrasts sharply with the diversity and plurality of information management which is often encountered even within an organization in other countries.

Even more amazing, however, is the very unique and creative manner in which the Japanese professionals are trained to capture, analyze and deliver solutions using a ubiquitous A3 sheet of paper. The A3 sheet has typically 6 sections comprising background, current conditions, goals and targets, analysis, proposals and the execution plan.  Sequentially, problems are comprehensively analyzed and solutions perceptively found using the A3 sheet.  Readers who are interested to learn more of this are referred to “Toyota’s Secret: The A3 Report” in MIT Sloan Management Review, Summer 2009, Volume 50, No. 4.

Management for technology

The typical Japanese, even as he grows in career, stays with technology rather than opt for general management as is practiced in the West. Management systems in Japan have a strong operational and technological orientation. There is far less importance accorded to perceptions and claims and far greater emphasis laid on facts and figures in the typical Japanese presentations. Individuals absorb and present only the corporate view of the organization. They are trained to understand and articulate operations as a system rather than as individual activities. Even at the CEO level the focus in a typical Japanese corporation is more on technology and less on management. There is thus an ambience of individualized as well as collective technological quest in all Japanese organizations. The overwhelming emphasis on technology and operations at the individual level to the detriment of managerial faculties has its own pluses and minuses perhaps.

Acceptance for job rotation is high at individual level in the Japanese corporations. It is not untypical for R&D engineers to move into marketing and operations. It is also not untypical for legal people to do stints in assembly lines. Cross-movement of engineering talent to commercial domains and commercial professionals to quasi-technical domains is commonplace. Shared understanding of corporate issues develops as job rotation helps individuals enrich their core competencies with feedback loops from the markets and peer functions, and eventually become multi-skilled.

Small groups for big decisions

The Japanese organizational system is unique for the importance accorded to the middle tier (comprising managers, senior managers and general managers) in information analysis and decision making. The nuclear decision making groups are typically small, organized vertically within domains and horizontally across domains, providing ample space and scope for individuals to express, debate and conclude on their viewpoints. These nuclear groups are, however, networked across the organization forming a rather large discussion forum. The compact yet widespread organizational grouping helps in building the consensus system of decision making for which Japanese organizations are famous for.

With Japanese, formal meetings in office settings are a great method to share information and exchange viewpoints. However, formal meetings in Japan rarely serve the objective of generating a decision, contrary to the expectations in the West or other oriental counties. The Japanese believe that each meeting provides additional information which needs to be evaluated internally before any final decisions are communicated. Meetings, visits and interactions therefore end in polite handshakes rather than in collaborative hugs. It often takes several meetings before the decisions are crystallized and relationships solidified.

Velvet hands in iron gloves

The typical Japanese professional often gives the impression of being a very polite but somewhat impersonal partner. In the process of developing a collaborative arrangement as well as implementing it the Japanese operate behind a corporate veil that limits the amount of information that is provided. In fact, for a nation that prides itself for its technological depth and perfection, the information that is made available for partnerships is rather limited in a formal sense.

That said, it is more common in the Japanese scenario for professionals to develop deep and abiding relationships with their counterparts in the partner companies. Once a relation develops, the typical Japanese professional brings out all his experience and expertise to make the collaboration work smoothly and deliver effective results. On this dimension of establishing a lifelong relationship and rapport, Japanese professionals reflect an oriental culture of working from the heart. 

The Japanese business mindset in totality

The Japanese business mindset which has helped the nation achieve technological and industrial dominance globally is complex and unique with multiple facets that reinforce the total value chain. On one hand, a unique alchemy of high-end design, manufacturing and marketing deliver world-class products and services through a global network while on the other hand carefully titrated corporate and individual approaches towards business and professional collaborations somewhat limit the market dominance the Japanese companies could have enjoyed. For proponents of technological and operational virtuosity there is indeed a lot that can be learnt from the Japanese mindset.  It is enigmatic but hugely efficient and effective!

Posted by Dr CB Rao on October 21, 2009  

Monday, October 5, 2009

Global Recession and Indian Response - 5: The Case of Tata Motors Limited

Global recession hit the world economies badly from mid-2008 onwards. The growth prospects of companies were adversely affected. As companies aimed to survive or remain profitable they instituted severe measures to close down or realign businesses and operations and implement severe cost compression measures. Jobs were lost and savings were wiped out while purchasing power crumbled and customer confidence wilted.

Indian economy too faced the adverse impact of the global recession with reduced GDP growth and heightened liquidity crisis. The fiscal year 2008-09 represented one of the most excruciating years for Corporate India. Different companies, of course, were affected by the economic recession differently and also responded to the evolving situation differently. Companies in the core engineering sector and those who made aggressive overseas investments in the previous years were particularly under severe pressure.

The author examines in a series of papers as to how different Indian companies withstood the ravages of recession in a more enduring manner than most overseas firms could.  This enquiry also results in an understanding of relevant business models and strategies as a subject of broader academic interest.

In the fifth paper of the series, the author examines how Tata Motors Limited (Tata Motors), fared in 2008-09. The conclusion that emerges from the study of Tata Motors (as from the earlier studies on Maruti Suzuki, India’s leading car manufacturing company, BHEL, India’s leading power and industrial equipment company, Tata Steel, India’s global steel company, L&T, India’s leading engineering and construction conglomerate – reference the other posts in the author’s blog, “Strategy Musings”) is that Indian companies did acquit themselves rather creditably due to their intrinsic fundamentals and business management skills.  This, in turn, leads us to the interpretation that select Indian companies must set their sights higher and move on to higher trajectories of growth on a global canvas.

Tata Motors – Automotive giant of India

Tata Motors Limited is India’s largest full line automobile manufacturer, with a full range covering passenger cars, commercial vehicles (trucks and buses), utility vehicles and defense vehicles. In each of the segments again it offers a comprehensive range. In the segment of passenger cars, the range covers the world’s smallest and cheapest 4 seater car to the large, luxurious Jaguar cars. In the truck segment, the range extends from the micro truck Ace to multi-axle heavy trucks while in the bus segment, the range covers conventional high floor and newer low floor buses in different seating configurations. The utility vehicle range covers the indigenous Tatamobile, Sumo and Safari as well as the acquired Land Rover and Range Rover. With an ability to manufacture all the key aggregates such as engines, gear boxes, axles, frames, cabs and bus bodies as well as a capability to have its own castings, forgings and component supplies. Tata Motors is one of the most diversified and integrated automobile manufacturers of the world. It also manufactures earth moving equipment and standalone diesel engines for generator sets.

Tata Motors is the only automobile manufacturer outside of the developed world (ie., US, Europe, Japan and Korea) to have the ability to design and manufacture a full range of automobiles on its own. It is also the only automobile manufacturer from an emerging country to have global manufacturing facilities in advanced countries. Listed as a potentially Fortune 500 company with an annual manufacturing capacity in India of over 860,000 automobiles, the company has 6 manufacturing facilities in India and 4 manufacturing facilities in UK and Korea. Tata Motors is the only automobile company from India that has been able to participate consistently in the prestigious Geneva Motor Show and win appreciation for its indigenously designed and manufactured passenger cars. The launch by Tata Motors of its path-breaking micro car, Nano, in India has been one of the most tracked global events.

Tata Motors was initially established in 1945 under the name of Tata Engineering and Locomotive Company Ltd (Telco) as a private sector enterprise to manufacture locomotives. It changed its business in 1954 deciding instead to manufacture trucks and buses in collaboration with Daimler Benz of Germany. Mr J R D Tata, the noted industrialist, was the first Chairman of Telco and was responsible for developing Telco as the largest commercial vehicle manufacturer in the country with significant backward integration into castings, forgings and press metal forming and tool and die manufacture. Soon Telco became the flagship company of the Tata group and a symbol of India’s industrial capability as it decoupled itself in 1969 from the Daimler Benz collaboration rather boldly and started development of its own truck and bus models. The company was rechristened as Tata Motors in 2003.  

Tata Motors has a history of innovative automotive product development especially relevant for Indian conditions. Its products rewrote market segmentation in India from time to time. Tata Semi Forward Cowl vehicle blazed a new trend in medium commercial vehicle (MCV) industry in the 1970s. Tata 407 and Tata 608 trucks ushered in a new light commercial vehicle (LCV) market segmentation in the 1980s. Despite the not so successful efforts to enter the passenger car segment through utility vehicles (Tatamobile, Tata Sierra and Tata Estate), Tata Motors persevered and succeeded with Tata Sumo (1994) and Safari (1998), which were runaway successes and opened up a new sports cum rural utility vehicle segment from the mid-1990s. Tata Indica passenger car was the first indigenously developed passenger car and redefined family transportation once again (post-Maruti) from its very launch in 1998. The recent micro truck Tata Ace revolutionized intra-city transport from 2005. The latest small car offering, Nano, at a price of Rs 100,000 (USD 2100) is a landmark development in the global car industry.
In recent times exciting chapters of globalization were written in Tata Motors’ history. In 2004, Tata Motors acquired Daewoo Commercial Vehicle Company Limited, Korea (now called Tata Daewoo Commercial Vehicles, TDCV). This was followed up in 2007 with the acquisition of a 21% stake in Hispano Carrocera S.A (HC), a well known Spanish bus manufacturing Company, with an option to acquire 100% holding. In June 2008, Tata Motors Ltd. acquired the two iconic British brands - Jaguar and Land Rover (JLR) from the US-based Ford Motors for US$ 2.3 billion. These acquisitions coupled with domestic passenger car developments catapulted Tata Motors into the global automobile canvas. With the acquisition of Jaguar and Land Rover brands in particular, Tata Motors’ capabilities extended to luxury cars and off-road vehicles.
Prior to these acquisitions, Tata Motors was a predominantly India-centric company with all the manufacturing facilities located in India. With the integration of Hispano, Daewoo and JLR & Land Rover brands Tata Motors became a relatively more global player.

The acquisition logic and challenge

Tata Motors’ acquisition driven strategy is certainly not as revenue accretive or market expanding as that of Tata Steel. Yet it is a path- breaking strategy for an industry known for its chronic dependence on imported technologies. That the overseas acquisitions came after a decade of path-breaking indigenous automobile developments should certainly be a matter of satisfaction for Tata Motors. Each of the acquisitions had its own logic.

Tata Motors was predominantly into medium commercial vehicles powered by diesel engines of up to 210 HP. It had competition from Ashok Leyland and Volvo which offered heavy vehicles powered by engines of 200 to 450 HP. Daewoo Commercial Vehicles (DCV), part of the bankrupt Daewoo Group, was Korea's second largest heavy truck maker with a modern plant in Gunsan that has an annual production capacity of 20,000 medium and heavy vehicles, powered by engines up to 450 HP.. It had a market share in excess of 25% in the Korean heavy truck segment. The acquisition of DCV at a price of USD 102 million helped Tata Motors to expand its product range and also accelerate its entry into new markets in China, Western Europe, South Africa and Latin America.

Mr Ratan N Tata, Chairman of Tata Motors  commenting on the DCV acquisitionsaid, "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".

Mr Kwang Ok Chae, President, said on behalf of the employees of DWCV, "It has been a very productive negotiation and all of us are happy to be part of Tata Motors, which is the sixth largest manufacturer of Commercial Vehicles in the world".

Both Tata Motors and DCV believed that the combined strengths in technology, customer orientation and product development would provide a cutting edge for competing in international markets and create a new powerhouse in the commercial vehicles industry.
Most analysts also felt that the DCV acquisition was a perfect fit. According to an analyst at ICICI Securities, "The fit is very good and will incrementally add around four to five percent to turnover and the same amount to profit." Analysts saw the acquisition as one which would enable Tata Motors to increase both its domestic and export earnings.

Indian commercial vehicle makers, Tata Motors included, did not possess world class bus body building technology. Hispano deal gave Tata Motors the license for technology and brand rights from Hispano. The total deal consisting of Equity, Debt & Technology Licensing added up to Euro 12 million (about Rs.70 crores). Hispano enjoyed a market share of 25% in the bus market in Spain, sold its buses in Europe and several other countries outside Europe. It has its own in house product development facility for buses and coaches. Mr Ravi Kant, the then Executive Director - Commercial Vehicle Business Unit, Tata Motors stated, "This strategic alliance with Hispano Carrocera will give us access to its design and technological capabilities to fully tap the growing potential of this segment in India and other export markets, besides providing us with a foothold in developed European markets". 

While Tata Motors did exceedingly well as an Indian company to design and manufacture passenger cars from scratch and even showcase them in prestigious motor shows abroad, presumably the need to integrate certain car design and manufacturing capabilities of the West was still felt by Tata Motors. In June 2008, Tata Motors  acquired the two iconic British brands - Jaguar and Land Rover (JLR) from the US-based Ford Motors for US$ 2.3 billion. Forming a part of the purchase consideration were JLR's manufacturing plants, two advanced design centers in the UK, national sales companies spanning across the world, and also licenses of all necessary intellectual property rights.  Tata Motors was perceived to gain both technologically and market presence-wise from the deal. One, the acquisition would help the company acquire a global footprint and enter the high-end premier segment of the global automobile market. After the acquisition, Tata Motors would own its own Nano, the world's cheapest and smallest car, and luxury marquees like the Jaguar and Land Rover.

Commenting on the acquisition, Mr Ratan Tata, Chairman of Tata Motors, said, "We are very pleased at the prospect of Jaguar and Land Rover being a significant part of our automotive business. We have enormous respect for the two brands and will endeavor to preserve and build on their heritage and competitiveness, keeping their identities intact. We aim to support their growth, while holding true to our principles of allowing the management and employees to bring their experience and expertise to bear on the growth of the business."
Not all were sharing the optimism, however. Morgan Stanley reported that JLR's acquisition appeared negative for Tata Motors, as it had increased the earnings volatility, given the difficult economic conditions in the key markets of JLR including the US and Europe. Moreover, Tata Motors had to incur a huge capital expenditure as it planned to invest another USD 1 billion in JLR. This was in addition to the USD 2.3 billion it had spent on the acquisition. Tata Motors had also incurred huge capital expenditure on the development and launch of the small car Nano and on a joint venture with Fiat to manufacture some of the company's vehicles in India and Thailand. This, coupled with the downturn in the global automobile industry, further exacerbated by deep economic recession in all the developed markets which are the mainstay of the already ailing Jaguar and Rover brands, and the need to raise huge debt and equity to finance the acquisition, cast a deep shadow on Tata Motors’ financial position and prospects.

On the face of it, the multi-pronged strategy adopted by Tata Motors to widen the truck, bus and car product ranges and also simultaneously expand the global market footprint appears well conceived, though the choice of some of the target companies and the timing of the last acquisition could be debatable. Given that the company has already achieved a level of technical expertise in the design and manufacture of all kinds of automobiles, it is a moot point if the USD 2.3 billion price tag paid for JLR could have been better invested in further upgrading its organic design and manufacturing capabilities in India. In addition, the high operating costs of overseas infrastructure, reduced market sizes for luxury brands and the staff issues could be a continuing drag on the performance of Tata Motors for some years to come. The only way the acquisitions could mitigate the risks would be through the supply of cost-effective components from India and integration of the technologically sophisticated JLR design concepts into the indigenous designs.

Notwithstanding the “perfect storm” of costly acquisitions and crashing automobile markets, the performance of the company in 2008-09 indicates the resilience of the company and the ability to deliver on the strategic vision.

Economies of scale and scope

Tata Motors represents a business model which derives growth and sustainability through product diversification and economies of scale and scope.  The company’s domestic orientation, incremental innovation and cost leadership enabled it to continuously lead the Indian automobile industry and withstand the recessionary cycles witnessed from time to time, including the global economic crisis of 2008-09.  With the JLR acquisition and the severe recession in Indian commercial vehicle markets, the company came to be delicately perched in terms of capital deployment and returns. 

The financial performance of the company was adversely affected by the sharp de-growth in the Indian automobile sector.  The commercial vehicle market shrunk by 17.4% to 415,652 vehicles and Tata Motors’ sales shrunk by 15.2% to 265,373 vehicles.  Market share of the company in the commercial vehicle sector improved, however, from 62.2% to 63.8%.  The passenger vehicles segment reduced only by 0.5% to 1,525,313 vehicles but the sales of the company reduced more sharply by 4.8% to 207,512 vehicles.  Market share of the company in the passenger car sector dropped from 14.2% to 13.6%.  The overall vehicle market reduced by 4.7% to 1,940,965 vehicles and Tata Motors overall vehicle sales reduced by 10.9% to 472,985 vehicles. The company’s overall market share reduced from 26.1% to 24.4%.

Within the commercial vehicle segment, the light commercial vehicle (LCV) segment grew by 1.2% to 232,090 vehicles in 2008-09, and Tata Motors registered a better than industry growth rate of 3% to reach a sale of 151,676 vehicles.  Its dominant market share in the LCV segment further consolidated from 64.4% to 65.4%.  The medium and heavy commercial vehicle (M & HCV) segments registered the sharpest fall of 33% to 183,562 vehicles and the M&HCV sales of Tata Motors also shrunk by 31.4% to 113,697 vehicles. In the passenger vehicle segment, the small car (mini and compact) segment registered a marginal growth of 0.7% to 936,500 vehicles in 2008-09 but Tata Motors’ sale in the segment dropped sharply by 17.1% to 115,160 cars.  Market share in the small car segment dropped from 14.9% to 12.7%.  The mid-size car segment registered a growth of 9.9% to 245,015 vehicles and Tata Motors registered a whopping growth of 68.8% in this segment to 53,057 vehicles.  Market share in the mid-size car segment jumped from 14.1% to 21.7%.  The utility vehicle / SUV segment registered a decline of 6.5% to 223,238 vehicles and Tata Motors registered a steeper decline of 17.6% to 39,295 vehicles.  Market share in utility vehicle / SUV segment declined from 20% to 17.6%.

The standalone turnover of Tata Motors however reduced by 23.6% to Rs 285,992 million (USD 5.958 billion, USD 1 = Rs 48) reflecting the adverse M&HCV market situation. The consolidated turnover of the company, however, increased by 83.8% to Rs 741, 512 million.  (USD 15.4 billion), reflecting the positive turnover impact o0f JLR brand acquisitions.  Earnings Before Interests, Taxes and Depreciation (EBITDA) of the standalone operation reduced by 21.6% to Rs 26,784 million.  However, the consolidated EBITDA reduced more sharply by 33.7% to Rs 29,964 million.  Standalone Profit before Taxes (PBT) reduced.  55.4% to Rs 10,790 million while consolidated PBT registered a loss of Rs 17,900 million, compared to a profit of Rs 29,256 million in 2007-08 (a massive Rs 47,150 million loss during the year!).  Standalone Profit after Tax (PAT) was down by 50.7% at Rs 10,138 million while the consolidated PAT plummeted to a loss of Rs 24,650 million, compared to a profit of Rs 22,348 million in 2007-08 (a net loss of Rs 47,000 million!).  The consolidated financial performance reflects the impact of eroded profitability of the acquired JLR brands and also the sharp increases in depreciation (20% increase to Rs 25,068 million in 2008-09) interest costs (160% increase to Rs 19,309 million in 2008-09) consequent to the JLR acquisition.

Most automobile purchases are credit driven.  With the recessionary environment affecting purchases as well as operating economies adversely and the liquidity in the financial markets drying up, sundry debtors have increased. The company’ standalone sundry debtors increased by 37.5% to Rs 15,552 million while consolidated sundry debtors increased by 133% to Rs 48,001 million.  Sundry debtors as a percentage of sales increased from 3.42% to 5.44% in 2008-09 on a standalone basis, while the percentage increased by 5.1% to 6.5% in 2008-09 on a consolidated basis.  It would appear that collection policies of the Indian market continued to be more disciplined compared to the overseas ventures.

Manufacture of automobiles is highly asset-intensive, requiring massive investments in tools, dies and manufacturing plants.  The standalone fixed assets of the company increased by 40% to Rs 145,993 million while the consolidated fixed assets swelled by 178% to Rs 347,333 million, again reflecting the impact of the JLR acquisition.  The sales to asset turnover of the standalone company worsened from 3.17 to 1.96 in 2008-09 while that of the consolidated group worsened from 3.14 to 2.08 in 2008-09.

The manpower costs increased marginally by 0.4% during the 2007-08 to Rs 15,514 million while the manpower increased marginally to 23,638.  However, with decline in sales turnover, the revenue per employee (on rupee basis) declined from Rs 21.4 million in 2007-08 to Rs 18.4 million in 2008-09.

That the recession and acquisitions took its toll on cash generation is evident.  Cash generated by operations reduced by 44% to Rs 15,567 million.  Net cash generation of the company, after accounting for working capital and securitization transactions, dropped by 79% to Rs 12,950 million.  Consolidated closing cash and bank balances reduced by 32% to Rs 11,418 million.

The company’s expenditure on R&D continued to be one of the highest in the Indian industry.  In 2008-09, Tata Motors spent a higher amount of Rs 14,766 million on R&D, reaching 5.75% of the turnover, compared to Rs 11,960 million in 2007-08, corresponding to 4.2% of the turnover.  The increase in R&D expenditure reflects the longstanding philosophy of Tata Motors to invest in R&D.

Six strategic drivers

In contrast to Tata Steel, Tata Motors appears to be following a policy of letting the subsidiaries, associates and the newly acquired brands operate as autonomous entities.  Unlike in Tata Steel’s case, it is not evident that  global group leadership and corporate teams have been established in respect of Tata Motors.  Assuring that there are no issues of cultural integration, the need for Tata Motors appears to be in terms of using strategic and operational levers for profitable growth.

The success of Tata Motors acquisition and expansion led growth strategy depends on six primary components: continued market dominance, capital structure stabilization, asset integration, value chain optimization, cost leadership and technological differentiation.  These are also essential to cope with the pressure caused by the acquisitions and global operations in a period of intense global recession.  The leadership of Tata Motors, headed by Mr Ratan Tata, Chairman and Mr Ravi Kant, Vice Chairman acted with alacrity to put in place institutional mechanisms that meet the six strategic criteria.  The new position of Managing Director – India Operations has been created to preserve the robustness of the Indian operations while Mr Ravi Kant, the principal driving force behind the series of acquisitions continued to oversee the overseas operations, besides having the oversight for domestic operations thus facilitating overall asset, operational and value chain integration.

Continued market dominance

Continued, if not increased, market dominance is the key to the success of Tata Motors.  Despite the runaway success of its sub-one tonner Ace, the company’s market share gains in the LCV segment have been muted.  The company needs to come up with  “aces” in the 2 to 5 tonne payload light intermediate commercial vehicle segment to be in an unassailable position.  In the absence of such a product strategy, as a current dominant player, Tata Motors could face erosion in future with the envisaged LCV competition from Ashok Leyland-Nissan combination.  The company also needs to significantly raise its market share in the small car and utility / sports vehicle categories.  Post-Nano, global automobile manufacturers have decided to make India a hub of small car production.  Tata Motors needs to consider new product options in the small car and utility vehicle range as well.  While in the M&HCV sectors the company seems to have held its ground, the anticipated synergy of DCV acquisition in terms of a significant foray into high end commercial vehicles did not seem to have occurred.  In addition to the above, the delays in the launch of Nano need to be offset by fail-proof launch and accelerated ramp-up of its production.  Similarly the JLR brands which lost 30 to 35% of their market shares in their markets need to claw back their shares and also enter newer markets.  Lack of significant export penetration is yet another cause of concern.  As a global automotive company, Tata Motors must eventually aim to derive at least 50% of its turnover from overseas markets, compared to the current level of less than 10% derived from exports.

Capital structure stabilization

The acquisition of  the JLR brands came at a price tag, which looks expensive, post-economic meltdown.  The company has taken short term bridge loans to finance the acquisition and also issued equity on rights basis to the shareholders to prepay in part the bridge loan.  While the debt-equity ratio remains comfortable at 1.08:1, the high interest costs even at this level of debt and the inability of the operations to service the larger equity base dictate the need for measures to strengthen the capital structure further.  Rather than any fresh equity induction, a strategy of higher revenues and better gross margins needs to be implemented to generate cash that is required to prepay the debt.  Such a strategy would also improve the declining sales-asset ratios, increase asset utilization, reduce unit costing and enhance profitability.  As can be seen, overseas asset base is over 50% of the total asset base and needs to be sweated even more to restore the company to beneficial asset turnover ratios.  In addition, strategies to restructure the zero coupon foreign currency convertible  notes into longer term instruments, without losing the benefit of zero coupon rate are also urgently called for. 

Asset integration

With domestic asset base now constituting only 41% of the total asset base, the ability of the company to meaningfully integrate domestic and overseas asset base could hold the key to company achieving improved asset utilization.  The task is all the more challenging as the overseas assets are established and consolidated for different product blocks and may not be amenable for easy integration.  That said, there could be higher operational synergies between Land Rover manufacturing plants and the advanced design and engineering facilities that were acquired on one hand and the established Indian utility / commercial vehicle manufacturing infrastructure and R&D centers on the other.  Innovations like intelligent start / stop system patented on the Freelander range of Land Rover utility vehicles and the established 4X4 vehicle technology of the Land Rover vehicles could be extended to the company’s domestic vehicle range.  In addition, the Land Rover infrastructure could be used to launch a new breed of off-road military and civilian vehicles for Indian defense and para-military services.  An integrated asset base could enhance the company’s ability to achieving a larger global footprint with customized product offerings and better market segmentation.

Value chain optimization

One of the premises of the global acquisition strategy by Tata Motors is that the acquired companies would be providing high end design and manufacturing capabilities and market specific know-how to Tata Motors (besides providing range expansion) while Tata Motors would be providing low cost, high quality materials, components and aggregates. In addition, Tata Motors could be providing enterprise and group resource planning services through information technology.  Given also that Tata Motors has a number of subsidiaries and associates to manufacture diesel engines (Tata Cummins), bus bodies (Hispana, Tata Marcopolo and ACGL), auto components (INCAT and TACO), construction equipment (TELCON), design houses (TMETC), tooling and equipment (Tata Precisions), co-branded products with Fiat (Fiat India Automobiles) and financial products (Tata Finance) and so on the need to integrate the value chain is acute.  Tata Motors had as of March 31, 2009 as many as 70 subsidiaries and 7 associates globally which together with Tata Motors India and the acquired JLR infrastructure constitutes a formidable value chain.  It would appear that the organization of Tata Motors is directed towards autonomous management of various entities and achievement of operational excellence in such enterprises.  This capability perhaps needs to be reinforced with corporate leadership teams which strengthen the management of the overall group value chain.

Cost leadership

Cost leadership is the fifth essential component required for Tata Motors to become a full-fledged global automobile force.  Nano type of cost position needs to be a rule rather than an exception for Tata Motors to be a dominant player.  This would accrue from optimization of the total supply chain, integrating new concepts of low weight, high performance materials and components, building of greater flexibility and versatility in work station design, absorption of low cost high automation manufacturing technologies from Korea, cross-fertilization of cost leadership ideas from associates and subsidiaries, simplification of product range with varied front-end or superstructure options with common or shared platforms, minimization of carbon footprints and so on.  Continuous improvements in shop floor, logistics and commercial operations and in business processes combined with break-through technologies in products and processes would be required.  Comprehensive plans to reduce tare weights of automobiles which increasing the performance would not only improve the cost position but also enhance value proposition to the customers.

Technological differentiation

The sixth dimension of success would relate to technological differentiation.  Tata Motors is well ahead of its Indian peers in terms of its investments in R&D.  However, Tata Motors may need to subscribe to a policy of more frequent model changes and more aggressive implementation of cross-over designs to develop a constantly modernizing product range.  Given that Tata Motors has now luxury brands as evidenced by the JLR strategy, an ability to master frequent model changes with continuous improvements in looks as well as performance would be called for.  As with Nano, vehicle concepts which capture the imagination of customers need to be developed across the full spectrum.  An Asian truck model could be one concept, before a world truck is developed.  Introduction of electric powered vehicles, hybrid vehicles and vehicles powered by clean fuels could be taken up as a separate design SBU to develop differentiated products.

In order to achieve durable technological edge, Tata Motors may need to collaborate with input manufacturers such as steel makers, foundries and forging makers to explore fundamental ways of modernizing their technologies to meet the needs of new generation of automobiles.

In the overall, Tata Motors has achieved global recognition not only by emerging as the dominant Indian automobile group through indigenous design and manufacturing efforts but also by acquiring overseas brands and infrastructure to diversify product range and sharpen technical skills.  The strength of the domestic market and operational base has helped the company withstand the twin impact of a deep recession in the automobile markets and the enormous pressures of a debt-funded multi-billion dollar overseas acquisition.  A six-pronged strategy of continued market dominance, capital structure stabilization, asset integration, value chain optimization, cost leadership and technological differentiation would position Tata Motors higher in the future. However,  these six strategic components must be managed in complete coordination  to deliver superior results in terms of enduring economies of scale and scope on one hand and design and operational excellence on the other hand that befit Tata Motors as a global automotive giant.

Posted by Dr CB Rao on October 5, 2009