Tata Motors ties up with VW, Skoda to enter economy segment from 2019

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Tata Motors has announced entering a partnership with Volkswagen and Skoda to roll out cars in the economy segment from 2019. The announcement comes at a time when all the three automakers are struggling to arrest falling market share in India.

Tata Motors’ passenger vehicles division posted a 96-percent drop in its third quarter profit, and its market share has dropped from 13 percent in 2013 to under 5 percent in February 2017. The Tata Tiago sells around 3,500-4,000 units monthly, but no other product launched over the past three years has made a mark. Tata Hexa is too nascent to predict success.

After an administrative shakeup at the top, Tata Motors is making bold statements about its sub-brand Tamo and working with Microsoft to roll out products like the Racemo, claimed to be India’s first connected car.

Volkswagen, on the other hand, has a lot to clean up since the emissions cheating scandal first broke in September 2015. More than 11 million vehicles cutting across its brands such as VW, Audi, Skoda and Porsche were caught emitting smoke 40 times more than the permitted levels.

With losses emerging from penalties and compensations after the “dieselgate,” the German automaker needs to find quick and sure success. At the Geneva International Motor Show, Volkswagen has also shown a distinct approach towards developing electric and hybrid concepts, but the cash cow cannot be premium select products but an economical product mix for the emerging markets like India.

Volkswagen’s India portfolio starts from a Rs 5.45 lakh (about $8,957) compact sedan Ameo to a premium luxury mini car Beetle which costs Rs 30 lakh (about $49,300) onwards. However, the German automaker sold just fewer than 4,000 products in February, capturing just 1.6 percent of market share.

Skoda India has recently updated some of its models like the Superb and Octavia and plans to bring its SUV Kodiaq to India. But the Czech automaker also needs a stronger footing in India, given its share in the market is below 0.5 percent.

So who needed the deal more—Tata or Volkswagen?

“Both needed it as much,” said Abdul Majid, partner at PricewaterCoopers. “Volkwagen wants to crack the emerging markets while Tata wants to grow in global markets like the European one, where Volkswagen is really strong.”

Friday’s announcement stated, “Skoda Auto will take the lead on behalf of Volkswagen Group to drive forward work towards development of vehicle concepts in the economy segment.”

“Although the collaboration with TML [Tata Motors] may not have a meaningful effect on earnings for VW and Skoda given their large global operations, an increasing focus on fast-growing emerging markets such as India makes the deal compelling for them. The deal is in line with VW’s long-term strategy to partner with regional players in the small-car segment,” said Kaustubh Chaubal, Vice President-Senior Analyst, Corporate Finance Group, Moody’s Investors Service Singapore Pte Ltd.

“In our view, a successful alliance with TML with its well-entrenched dealer and distribution network will help improve VW’s and Skoda’s market shares in India of around 1.6 percent for VW and 0.4 percent for Skoda for the April 2016-January 2017 period,” the Moody’s official said.

Growing competition

Tata rose to fame from this very segment with the Indica in 1998 and then in 2008 with the “lakh-rupee-car” Tata Nano. But amid growing competition from Hyundai, Toyota, Renault and Nissan-Datsun in the same prices and segments, Tata Motors fell back in the game it excelled.

So will economy segment Skoda products, which the partnership aims to roll out by 2019, cannibalize on the Tata models in the same price brackets in future?

IHS Markit analyst Anil Sharma said the automakers are not desperate for such partnerships, and so they would decide the contours of the deal keeping the nuances in mind.

“The automakers would want to share technologies and bring down the costs. But in the process, Tata will need to work to get that right product and fix the pricing so as to offset those losses coming out of such cannibalization. It is largely a mathematical question,” the analyst said.

Analysts also see more such partnerships, not exactly capital tie-ups, takeovers or mergers, in the next ten years.

“There are more threats than opportunities in the market place today—autonomous vehicles, connected cars and alternative fuel vehicles. And you can’t address all the challenges on your own,” Sharma said.

With the rise of players like Tesla and some Chinese brands, customer preferences have changed. And traditional automakers are working together to meet such challenges instead of competing as rivals, sometimes to also tackle issues like the rise of Donald Trump in America and the exit of Britain from the European Union.

“In such challenging conditions, it is always helpful to share what you’re better at and learn from others what they are good at,” Majid said. “Many developments which have not happened in the past 30 years will happen in the next five. And this time, the alliances will be more solid than the past and they will supplement each other’s strengths more than ever.” TNS

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