Decision-Making Framework for Tata in the US
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 #2) Import Finished Cars from India or Build an Auto Manufacturing Plant
Many large foreign auto companies import thousands, sometimes millions, of cars into the US each year. Toyota, for example, imports so many vehicles that it operates its own logistical branch, Toyota Logistics Services (TLS), which operates container ships and organizes import activities for many of Toyota’s imports. Accordingly, economies of scale benefit these companies and make importing each vehicle relatively inexpensive when compared to the cost of setting up an auto manufacturing plant for those same cars here in the US or in Mexico. Further, the private nature of these types of logistics subsidiaries makes it difficult to determine the exact cost of importing a vehicle. While a breakdown of the complete import supply chain follows in a later section, estimating the cost to push a vehicle through Tata’s supply chain is contained in Exhibit 6. This simple financial analysis compares the roughly $600 estimated cost of importing each Nano to the US to the prospective capital outlay that building a Nano factory would require, around $225 million on the low-end. While these figures are not directly comparable, they do play a role in determining whether importing or building in North America is the better route.
The prospect of spending $225 million to build a North American factory is supported by the very low transportation cost that Tata would pay in delivering completed cars from the factory to its dealerships in the US. This is where the benefits end, however, as lengthy list of cons presents itself. First, spending this much capital is an unlikely option for Tata as intra-Asia and European expansion are the company’s main concerns right now. The establishment of a dealer network involves many millions of dollars, however its operational and long-term strategic benefits are immediately clear. Second, the standardization of parts in Tata vehicles makes the current Nano plant’s location in India ideal, as many of the same parts Tata uses in other vehicles are included in the Nano. Third, the Tata CEO has said that the Nano plant in India has been designed for customizing Nanos for sale in the European and US markets. The current Nano factory is located in Sanand, Gujarat State, India, along the country’s Western coast. It has capacity to produce 250,000 vehicles annually. Demand for the Nano in India is currently far below this figure, and an efficient supply chain delivery Nano parts to the factory is already in place. These facts reveal that building another Nano plant in North America would be largely redundant.
Another issue to consider is Tata’s current supply chain which brings parts from across Asia to the Nano plant in Sanand. Were a new factory in North America to be setup, this supply chain would need to be expanded to bring all the same parts to the new factory, located on the opposite side of the world. With hardly any North American parts suppliers at present, setting up a factory in the US or Mexico would require establishing an expensive new supply chain to ship nearly all the separate Nano parts overseas. When further considering that labor costs in North America are far higher than those in India, it appears that myriad new costs would result from this additional supply chain. Exhibit 7 details the difference in pay rates among skilled auto workers in various countries. The bottom-line impact, should Tata move production to a US location, would be an additional $49 million in labor costs. This is an outrageous figure which would boost the retail price of the Nano more than $500 higher.
The wage rates for auto workers in Mexico and India are actually nearly the same. Mexican production facilities would only incur an additional half-million dollars in labor cost, an amount that would be more than accounted for by savings in finished-car shipping costs and NAFTA tariff reductions. Conversely, the added inefficiencies of establishing a redundant supply chain (one leading to the plant in India and one leading to a plant in Mexico) would result in costs that far outweigh the potential savings from localized finished-car shipping. For this reason, it is clear that importing finished Nano cars from India is the best fiscal choice for Tata. Only later, once the company has an established foothold in the US market and is ready to introduce new products to it, should Tata consider constructing an auto manufacturing plant somewhere in North America. The risk of US consumers rejecting the Nano is relatively low, though its presence makes the notion of building a plant in North America premature at this time.
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
http://articles.timesofindia.indiatimes.com/2010-06-02/india-business/28297591_1_nano-plant-623cc-engine-gujarat-s-sanand
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