The Hindu Business Line : `Daewoo acquisition, a function of reforms'

Mr Ratan Tata, Chairman, Tata Motors, has a lot to be pleased about the way things are going for the company. Backed by rising cash flows from a booming domestic market and a smooth acquisition of Daewoo Commercial Vehicle Company, Tata Motors is now creating a fund exclusively to finance takeover opportunities that may arise in future.

In an informal conversation with a group of Indian correspondents at Seoul recently, Mr Tata dwelt on a host of issues ranging from the value of the Daewoo acquisition to the next generation car to succeed the Indica.

Excerpts from the interview:

On the possibilities that the Daewoo acquisition opens up for Tata Motors:

If you go back in time, Telco, as it was then known, was one of the first and largest exporters of commercial vehicles to other markets in such places as Africa where it competed with Mercedes Benz. It had the entire bus business in Kuwait until Saddam Hussien commandeered the buses. So it had a position in several geographical locations.

But in later years we found that we did not have products that were required in those markets namely in high power, heavy-duty vehicles.

We did not have highway quality vehicles that could travel at 60-70 miles per hour for prolonged periods of time. We did not have high speed, state-of-the-art buses that many of these countries looked for. We couldn't develop those products in the absence of a market in India as we did not have scale economies. So we had a dilemma in a manner of speaking. Daewoo now provides a ready-made opportunity to address these markets with products that we did not have before. In so doing, we will strengthen Daewoo because its penetration has been less than what we believe it could be in some of the markets. Therefore, for us, it will be a very strategically important acquisition; it will not in any way conflict with Tata Motors but complement us terrifically.

On the Daewoo side, several workers told me that their dream is to manufacture medium trucks which they do not have the finances to develop. We believe that we have the products that we could give to this company that could add to its strength in Korea. So, in an overall manner, we have a win-win situation. We have a product line that we did not have; an association with a work and productivity culture that we have often looked at from India and which we will now gain from and we now have a foothold in the Asian region in terms of a manufacturing source.

Our challenge is to ensure that we do not Indianise the company just because we own it. The company has some strengths, the country has some strengths and we should allow that autonomy to remain. Our ownership should be constructive, positive and contributory rather than taking it away.

On the funding of the acquisition and the proposal to raise $500 million:

The requirements of Daewoo will be met by raising debt on its own balance-sheet. We have taken over a debt-free company. The $500 million will be used basically for various projects that Tata Motors has and other acquisition options that may come up from time to time. If Tata Motors were to avail of the various options when they happen, it needs a war-chest that it can draw on rather than structure a financing deal should an opportunity arise.

Five or six years ago, I do not think we could have undertaken this deal for the simple reason that the regulatory system in place at that time would not have permitted us to structure a financial deal as fast and as freely as we were able to do on this occasion. To a great extent it goes towards recognising the reforms of the present government of Mr Vajpayee. It is now easy and somewhat painless to look at a bona fide acquisition or at a bona fide remittance of a large amount for a given purpose almost the same way as someone might in another country. The Reserve Bank of India and all the other approvals came extremely fast. To a great extent, our ability to do this has been a function of the reforms in the country and we ought to recognise this fact.

On whether the war-chest being built up now will be used for acquisition of passenger vehicle companies too:

Yes, maybe. We do not have an option before us but in the event that we are either offered a facility, find a facility or a going company that has a product or even sub-assemblies of interest, we would look very carefully at that. What I am trying to say is that in the past what we would have done is to put in a second line or to replicate a mirror image of our existing plant. We won't do that kind of thing today.

On the next model to replace the Indica:

It is in the final form of design now. Normally, it takes about three years for the exercise, which means by 2007 approximately. While we have the in-house design capability, we are involving IDEA because we would like to have a product that is not totally different from the Indica which has been quite successful styling-wise. We, therefore, thought that it is important that the same designer also work on the new model so that there is a family resemblance although the car is going to look different and it is different — it is bigger than what the Indica is today. The wheelbase is bigger, the seating will be more spacious and the three-box of that product will have more changes in it than the Indigo has with the Indica.

On the reasons for missed opportunities for overseas acquisitions in the past and plans for future acquisitions in the group:

Putting together foreign exchange finances to make acquisition previously was quite difficult. Or you had to turn to foreign partners to bring in the foreign exchange. The present reforms and opening of the country has greatly eased the above. Today, if an Indian Hotels were to try and make an acquisition like they may have tried three-four years ago, the chances are that they will put together the financing more easily and in a painless way like ours (Daewoo) was.

In terms of where the next acquisition may be I am really not in a position to answer that, not because I am holding anything back but because the Tata group today is still not in a position where it is making its own scouting for opportunities. I am afraid we are still not active or activated adequately like some multinationals are who are scouting various geographies for what you can acquire and making proposals. Our proposals are still by and large coming from investment bankers. I think given time Indian companies will also be more in a position for scouting opportunities on their own.

On whether the improving relations with Pakistan opens up a potential market for Tata Motors:

The opening up of relations with Pakistan is a very important and exciting thing for Indian industry, not just Tata Motors alone. I think Tata Motors alone has a tremendous opportunity in Pakistan both in commercial vehicles and passenger cars subject to our dealing with our capacity problem. Today, that is an issue; it is a nice issue to have rather than worrying about how to avail of capacity. Pakistan provides a tremendous opportunity not just for Tata Motors but for several Tata companies. While we have seemingly not done anything, all of us have been looking at it very seriously and when the market opens up we will be very active in being there.

On the possibility of Korean inputs in the Rs 1 lakh car being developed by Tata Motors:

Not necessarily from Korea, but we are looking at inputs from a variety of places both in the component and in packaging areas. It is a clean sheet of paper exercise. We will look at new materials.

Whether it should be steel or plastic... all those issues are being presently looked at. When this conceptual exercise is completed we can understand better which way we should go. We are simply not at that cost level as yet.

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