Tata Motors (NYSE:TTM) is an Indian car manufacturer who recently came out with Nano Car that cost less than $2500. A lot has been written about its design innovation, supply chain, and execution.
One of the keys here is that Tata Motors created a whole new market for itself. Until now, the cheapest car available to the Indian population was at $5000. While Detroit was busy with making incremental changes and coming up with innovative financial schemes, Tata Motors was busy listening to its customer base. It listened and executed to come out with a car that its customers will buy.
Many in the Western world have critiqued the no frills, bare bones Nano car saying that it could have been designed in west, but would be difficult to sell in developed economies. But the point being missed here is listening to its customer base and designing accordingly. With its huge distribution network, design powerhouse, and existing infrastructure, the Detroit Big Three missed the bus not only in the US, but also in other emerging markets as well. Detroit missed riding the wave of small fuel efficient cars. I believe the Nano Car is an example of innovation driven by what customers want. It does not necessarily provide any technological breakthroughs, but it provides innovative ways in which companies address what its customers want. For example, GM gets approximately 250+ patents every year for its innovations, while Tata Motors has only 34 patents filed for the Nano Car. Tata Motors leveraged its existing patent portfolio and remixed them effectively to ensure they designed to meet customer requirements and price points. Tata Motors has positioned itself as the only one who can supply such cheap cars. It remains to be seen how Tata Motors' management converts this design success into a profitable one.
Another aspect that is being widely discussed is about Tata Motors' debt level. This debt level is due to buying of luxury brands Jaguar and Land Rover in the UK. I believe this is another example of the herd mentality. Because western auto companies are buried under debt, analysts are continuing to raise flags on any company with debt. Two aspects are being missed in this herd mentality.
- Tata Motors' existing business continues to be profitable even during the recessionary period.
- Tata Motors has excellent market positioning vis-à-vis products and Indian markets.
Yes, Tata Motors has debt, but it is something that I believe is at a manageable level.
Tata Motors' Nano Car is another example of innovation in business strategy and product positioning. Does this strike any similarity with Apple(NASDAQ:AAPL) (iPhone), Nokia (NYSE:NOK) (phones for emerging markets), and P&G (NYSE:PG) (with design initiative)? All these companies are listening to their customers and adapting accordingly.
Where does TATA Motors fit in an investment portfolio?
Tata Motors stock trades as TTM (ADR) on the NYSE. The stock’s current yield is 1.5%, it pays dividends only once a year, and it has paid growing dividends since 2005. It is not a choice for dividend growth or any other dividend strategy. I view TTM as a potential value stock for long term investing in emerging market because of management's visionary goals and their execution to satisfy their customer base.
Full Disclosure: No position at the time of this writing.