Tata needs two-hub strategy in ASEAN

Tata Motors has not had a successful innings in Southeast Asia. Choosing Thailand as its entry point, the automaker entered the region with the Xenon pickup truck in 2008. On face value, it was a logical move: compete in the biggest segment in the region’s biggest market. However, Tata may have underestimated the strong brand loyalty Thai buyers have towards Japan’s automakers even as it recognised it was going up against a very tough (Japanese) contingent.

Japanese hold

The structure of the market illustrates this further. Eight automakers are present in Thailand’s pickup truck market, of which five are from Japan. These are Toyota, Isuzu, Mitsubishi, Mazda and Nissan.

The non-Japan players are Ford, Chevrolet and Tata. Toyota dominates the segment with 39 per cent market share, followed by Isuzu with 35 per cent. The remaining one-fourth of the market is fought for by the others.

Tata also faced a setback when its Indian vendors refused to set up shop in Thailand because of the potentially low volumes. This meant the company had to source components from the suppliers to Japanese OEMs at higher prices, affecting its costing and retail price of the product. And since the price of the Xenon now was not much lower than those from Japan’s automakers, there was little incentive for the buyer to simply shift to this product.

The Xenon has thus struggled to win new buyers against this backdrop ever since it first came to the market. After six years, it accounts for less than one per cent of Thailand’s pickup truck segment. Last year, while more than 500,000 pickup trucks were sold in the country, the volume of the Xenon was less than 2,000 units. Cumulatively, its sales have totalled more than 17,000 units since 2008.

Besides the Xenon, Tata sells the Super Ace mini truck in Thailand imported from India. The company had also toyed with the idea of participating in the government’s Eco Car I scheme. However, it rightly abandoned the plan on concerns of not meeting the criteria of producing 100,000 vehicles on the vehicle platform by the fifth year after the start of assembly.

Strategy shift

We had anticipated Tata would bring more models to market by now, but perhaps its troubles at home and especially the focus to establish the Nano which put a spin on its overseas focus.

Now, it appears that the company has also shifted the focus of its Southeast Asia strategy to Indonesia. The main reason behind this change is the potential for higher growth in Indonesia which we believe will pip Thailand to become Southeast Asia’s biggest light vehicle market this year.

Tata’s approach in Indonesia is also more balanced as opposed to the ‘one product at a time’ plan adopted for Thailand, which would give it more avenues to establish its brand. Again, this is going to be no easy feat because the company faces the same tough challenge from Japan’s automakers, as it would across Southeast Asia.

Surely, Tata needs time to build up volumes before it can begin to consider local assembly in Indonesia. Still, given the price-sensitive nature of the market, having locally-built models would be important to compete better against its rivals. A decision would have to be made quickly.

We believe a two-hub strategy would be necessary for Tata to succeed in Southeast Asia. While Thailand can continue to be the production base for pickup trucks, Indonesia should be developed over the medium- and long-term as its base for passenger cars, MPVs and SUVs.

Obviously, local assembly of its models with 40 per cent minimum local content would allow Tata to benefit from the duty incentives under the ASEAN Free Trade Area agreement and will put it on a more level playing field vis-à-vis competition.

By the end of the day, Tata would need to struggle it out over the long-term in Southeast Asia with the focus squarely on expanding sales (and market share) in Thailand and Indonesia. Local assembly will be critical, and the company can ill afford to delay taking the necessary steps for the region any further.

(The writer is Senior Market Analyst (ASEAN & India), LMC Automotive)