Tata invested some $440 million in designing the car, moving (following local objections at the original site) and then building the production facilities for the Nano according to this report. How accurate this figure is remains debatable. A significant portion of the R&D cost was pushed onto suppliers but let’s take the number at face value. Nanos have been selling like hot cakes and Tata appears to be facing only two significant challenges. The first is the cars have an unfortunate propensity to burst into flames. Four have gone up in smoke over the last six months with varying displays of pyrotechnics from a gentle smoking to outright bonfire. Fortunately nobody has been injured. The first three Tata say were due to a faulty electrics switch under the steering wheel. The last one appears as if it may be more serious as it started at the rear of the car where the engine is housed – the company is still investigating. The second challenge is the cost of raw materials has risen sharply since the car was launched as a concept in 2003 with the target price of $2,500 equivalent. The dollar equivalence has dropped in recent years as the Rupee has strengthened putting the target under pressure but nevertheless the concept of a drier safer but not much more expensive equivalent to a scooter still holds. Tata’s logic was easy to follow. India is a developing country with a rising and highly aspirational middle class for whom a cheap car is high on the list of must haves. Tata’s purchase of Britain’s Land Rover-Jaguar in 2008 for US$2.3bn according to this BBC report is harder to understand. Tata has made some efforts to market the Land Rover 4×4’s in India but the price tag will prove prohibitive after import taxes. Although 4×4’s should be hugely popular on Indian roads, the reality is the market for gas guzzling western technology is very limited.
Geely’s recent purchase of Volvo however has much more to commend it. Geely is understood to have $2.7bn of funding to invest in Volvo including the sale price of about US$1.8bn according to a Telegraph article. Geely’s chairman Li Shufu said the company would maintain its Swedish heritage with its own management and headquarters in Gothenburg. However, Volvo will develop manufacturing capability in China while maintaining the firm’s manufacturing centers in Sweden and Belgium. China is rapidly developing its engineering skill base through such deals, having bought MG Rover and IBM’s personal computing arm. Airbus is also building planes in China.
Although Europe and the US are currently Volvo’s two main markets, Geely has said it wants to develop the firm’s Chinese business to be of equal size to its non-Chinese business. Geely is the 12th largest automaker in China but the second largest that is not at least part state owned. Buying Volvo gives the firm access to technology and an international footprint that would otherwise takes years to develop. As the Boston Globe puts it this is Geely’s bid to break out of the basement.
Are emerging market manufacturers purchases of established western rivals an act of egotism or good long-term investments? Often it looks like the former. You have to wonder what Tata is really going to do with Jaguar Land Rover or with Corus Steel, but Geely’s purchase of Volvo does have much to commend it. Ford-Volvo’s technology is world class and it was apparently security of that technology that was more of a sticking point in the company sale than the price. Geely is looking to build substantial manufacturing facilities and a supply chain in China to make the Volvo line up for the local market. Quite how Geely is going to improve Volvo’s European operations economics to get them making money though remains uncertain. Expect to see component manufacture move to Geely’s China supply chain over the coming years as the new owners struggle to bring the European operations back into the black.