1) Build out a network of dealerships versus utilize existing distribution networks (Mercedes, Volvo, Land Rover, Jaguar, etc.).
2) Import all completed cars from India versus setting up an auto manufacturing plant in the US or Mexico.
Decision #1) Build-out Dealership Network or Use Existing Distribution Channels
The decision about whether Tata should establish a dealership network of its own comes down to a comprehensive financial analysis. Exhibit 3 shows use of Tata’s financial information from Form 20-F to calculate an approximate profit forecast for Nano sales. The issue of how to distribute and sell the vehicles comes down to profit analysis. Exhibit 4 begins the process by approximating the cost of establishing a modest network of Tata auto dealerships. The forecast includes funding for 40 Tata dealerships where the Nano would be sold, with 10 of those dealerships including a body shop for servicing Tata product warranties and repairing vehicles. Gordon Page is a website through which auto dealership owners buy and sell complete car dealerships and auto body shops to others. This site is a valuable resource for estimating the cost of purchasing or building a car dealership. By using an average dealership price from the website, the extrapolation in Exhibit 4 indicates that building out Tata’s modest dealership network would cost the company roughly $67 million. While no small sum, these 40 dealerships would be established in the largest 40 US cities, and therefore go right at the heart of Tata’s target demographic for the Nano car: environmentally-friendly, budget-conscious city-dwellers who seek a small, inexpensive automobile for everyday use.
Spending millions of dollars to develop a dealership network can be an intimidating prospect, however analysis of the alternative reveals the bright side of owning the dealer network. Rather than build dealerships, Tata can distribute cars through an existing dealer network under a different brand name. The cars would still be Tata Nanos, however a company such as Mercedes or Volvo would sell the vehicle through its own dealerships. The issue Tata would face with this route is that of profit sharing. By using another company’s supply chain and distribution network, not to mention the physical dealership space necessary to sell another brand of automobile, Tata would be forced to relinquish a serious portion of the profit it would otherwise capture on sales of the Nano. Industry trends indicate a reasonable and realistic estimate of this profit-sharing percentage to be 50%, which Exhibit 4 reveals would amount to more than $81 million over 3 years for the 92,000 expected Nano sales. Fifty-percent may seem like a high percentage, but given the physical and personnel resources needed to service sales of another line of vehicle, this figure is very close to the level of expense Tata is likely to face by taking this path.
Exhibit 5 reveals the result of plugging the cost figures for building dealerships versus using a selling partner into a pro forma income statement. This set of projected statements combines all the figures from Exhibits 1 through 4 to show a projected net income calculation. The numbers presented capture the fiscal expectations for Tata should it choose to sell the Nano in the US market under alternative distribution and selling methods. The analysis indicates that, while building out a dealership network would require a large initial capital expenditure, even financing the entire cost of the project would result in Tata earning more than $17 million in net income over three years. Alternatively, sharing revenue with a partner by selling cars through an existing dealership network would cost Tata too much money in the near-term, and result in an almost $14 million net loss over three years. Simply put, the demand forecast for the Nano is not generous enough to make profit-sharing with a partner a fiscally worthwhile approach.
The prospect of profit-sharing loses traction under the realization that until a network of dealerships is built, Tata will forever have to share a large portion of its profits with other car companies. Even distributing Nano cars through Tata’s recently acquired partners, Land Rover and Jaguar, faces rejection. As each Land Rover and Jaguar dealership is franchise owned, each dealership’s owner will require profit-sharing if the Nano is to be sold through them. Once a dealership network has been built, on the other hand, Tata can use those facilities for several decades with very little additional capital investment. The financing costs of building out a network of dealerships, combined with the costs of operating those facilities, only amounts to roughly $64 million over three years. This is less than the $81 million profit-sharing would forfeit. At this rate, Tata’s dealerships would pay for themselves in roughly five years, and the company would have the infrastructure to begin selling other Tata car models at the same locations. Building out a dealership network is the best long-term course of action, as seriously competing in the US market is a long-term strategic goal of the company.
Other posts on Tata Motors related to US expansion:
Executive Summary: Tata Motors' Expansion into the US and other Foreign Markets
Tata Motors Recent Financial Performance and Customers
Method and Rationale for Tata Motors' Expansion into the US
Demand Forecast for the Tata Nano in the US
Tata Motors Expansion into the US: Retail Pricing Forecast
Tata Motors Expansion into the US, Build Dealerships vs. Dealer Network
Tata Motors Expansion into the US, Import vs. Auto Mfg Plant
Works Cited for Tata Motors Expansion into US
"Dealerships for Sale." Gordon Page. Gordon Page & Associates, Inc., 1 Apr. 2011. Web. 6 Apr. 2011.
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