The Hindu Business Line : Tata Motors' Korean buy to boost China plans

"We have been working the Chinese market for the last few months, so have they. Now, we will do it together," Mr Ravi Kant, Executive Director (Commercial Vehicles Business Unit), Tata Motors, said.

He declined to say more on the subject, save that the conventional view of a Chinese foray costing more due to investment on the ground was not without solution.

Last week, Tata Motors announced signing an investment agreement to buy DWCV for $102 million, bringing to a close developments starting with the advent of query in July 2003 to preferred bidder status by October and binding MoU by November. There were 10 bidders in the fray, from the US, Europe, China, Korea and India.

According to Mr Praveen Kadle, Executive Director (Finance & Corporate Affairs), Tata Motors, 10 per cent of the acquisition cost has been paid, incurred equally at the preferred bidder and investment agreement stages. The balance 90 per cent will be paid shortly; the legal integration of the two companies is slated for March-end.

The $102 million, equally met by Tata Motors and a consortium of banks, will pay off DWCV's existing creditors and shareholders, in the process making it a 100 per cent subsidiary of Tata Motors. The consortium will work as new lenders to DWCV for its operations, details of which are under study. Mr Kadle pointed out in this context that the Korean company is already solvent, profitable, has no immediate working capital needs and importantly, sports good financial indices despite 25 per cent capacity utilisation.

Going ahead, Mr Kadle said, the financial tasks at DWCV would be to make it EVA (economic value added) positive at the earliest through improved revenue and profits. Further, "the investment we made as a shareholder should see value enhancement as quickly as possible."

Both officials said integration between Tata Motors and DWCV is expected in aspects such as IT systems, operations and research, but otherwise intent is to manage DWCV as a "Korean company in Korea." The acquisition included rights to the Daewoo brand in the commercial vehicle space, strategic value read into it. Choice of brand will be a function of each market.

Notwithstanding current weakness in Korean truck sales (it was forecast at 350,000 units for 2003, lowest since 1999) over the next three years, DWCV's capacity utilisation will be raised to 50 per cent. Its domestic market share in heavy trucks will be enhanced, entry into the larger medium-payload segment (Tata Motors' strength is in medium/light trucks) enabled and products taken to overseas markets. In a nutshell, the Tatas' product strategy for DWCV is akin to how it rolled out its EX-Series trucks in India.

"Intangibles" from the deal include better time to market and robust development of medium/heavy offerings from a synergic Tata-DWCV combine.

"Korean labour was described as militant. But we found them to be hard working and if dealt with in a transparent and equitable manner, will listen to reason. DWCV's management is also competent and sincere," Mr Ravi Kant said. The acquired plant and machinery is just seven years old.

Further, the Korean company and its product categories impact in-house benchmarks for Tata Motors' truck unit, making it a more international play (the medium-truck segment will soon have a cross-functional team). Within a year, Indian roads will have trucks from Tata Motors in the 200-400-bhp range — DWCV's forte. Theoretically, a toehold in a more evolved automobile market such as Korea offers scope for improved efficiency on the input side as well. According to Mr Kadle, it is still early days.

A view shared by Dr V. Sumantran, Executive Director (Passenger Car Business Unit), when asked if DWCV could mean future dividends in cars. Amidst a dip in Korea's vehicle sales in 2003, the percentage of diesel engine vehicles was rising fast. Diesel is 40 per cent cheaper than gasoline in Korea.

"Share of diesel cars in total vehicle sales stayed above 50 per cent in the last four months of 2003, while that of gasoline-powered cars remained stagnant in the low 30 per cent range," Yonhap news agency reported recently on Korean auto sales.

"DWCV gives us a footprint. But we are also looking at other Asian markets," Dr Sumantran said.

Mr Ravi Kant, however, is open to selling Tata Motors' pick-up in Korea. Both he and Mr Kadle are comfortable with Korea's import tariff, critical for the product interplay that a cross-border acquisition promises. Traditionally protected, Korea's auto market has opened up of late. Import car sales for January-September 2003 tracked Korea's economic weakness growing by just 14.7 per cent, but it had surged by 108.1 per cent in 2001-2002.

Currently, DWCV's products are distributed by Daewoo Motor Sales Corporation. The Tatas are holding talks to improve market penetration, sales quality, sales performance and customer interface.

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