The moves come as Tata Motors faces increasing criticism over its $2.3bn takeover of the two luxury marques, which analysts say do not fit with its stable of lower-cost trucks, commercial vehicles and cars.The acquisition is also looking ill-timed.
Tata Motors is struggling to refinance a $3bn bridge loan used for the takeover, leading to successive downgrades by credit ratings agencies.Analysts say the collapse in Tata Motors’ domestic market is also a concern. Truck and car sales have fallen by up to 50 per cent in recent months, forcing Tata and its rivals to suspend production at various plants.Mr Kant said Jaguar and Land Rover managements remained autonomous but he felt they should pursue the India opportunity quickly to help make up the deficit in western markets.
Jaguar, which has recently released popular new models, has been selling relatively well in spite of the crisis but Land Rover sales have been hit badly.Mr Kant suggested Tata Motors also facilitate other opportunities for its new subsidiary, particularly Land Rover, in areas such as defence. Tata Motors is already a significant supplier to India’s defence industry.However, he said that while Tata Motors faced cyclical pressures similar to other producers, it was on track to bounce back. The group was spending $4bn-$5bn to revamp its product range, a move he said was essential to revive sales.The group had built a new factory for its light commercial vehicle, the Ace, in northern Uttarakhand state with capacity of 250,000 units a year. It is building a factory for the world’s cheapest passenger car, the Nano, in Gujarat state, also with capacity of 250,000.
A bus plant and a joint venture plant with Fiat to produce 100,000 cars and 200,000 powertrains were also under construction.In the last 10-15 years, India has propelled itself by strengthening its economy after the implementation of economic reform in 1991. These reforms privatized most of the market which has allowed foreign and local firms like Tata to practice business. An increase in entrepreneurship has allowed a lot of wealth to circulate in society not only for these entrepreneurs but also for workers and professionals who constitute the core of the “middle class” in India. Due to the booming economy, the upper and middle classes in India have enjoyed the benefits of a strengthening economy, rising profits lead to an increase in wages. As a result, there has been an increase in demand for luxury goods. Luxury good is a commodity for which demand increases as income rises.Income Elasticity of demand is the responsiveness of quantity demanded of a good through a change in income of the people demanding the good.
These luxury cars are income elastic, and due to the fact that wages are rising in India thanks to the booming economy, demand for these luxury cars has increased. Therefore, this justifies its move to introduce its new luxury subsidiaries to the Indian market because good sales of these highly priced cars could make up for the sales slump seen for its low cost cars as these luxury cars could sell better.Most developed countries such as the United States and Western Europe have seen little economic growth and are going through an economic recession. From common knowledge, we know that thousands and millions of jobs are being cut or wages have been sliced because firms aren’t able to generate enough revenue.Therefore, luxury goods, in this case, sales of cars such as Jaguars and Land Rovers have been very limited as stated previously due to the High Income Elasticity (YED) of these products.
Tata Motors will benefit from the fact that India’s economy is booming, and also because of the sheer size of the middle class whose demands for luxury goods have increased over the year. Introducing these Luxury Brands will give them exposure to a huge number of people who are potential buyers of these cars, therefore, covering up for the deficit made by Jaguar and especially Land Rover in the west.Negative eternality of consumption of a good or service creates external costs that are damaging to third parties. A rise in the demand for luxury cars in India means more vehicles on the road, emitting carbonates. Thus, these carbonates create a negative externality from the increase in demand of cars because of the increased pollution which causes respiratory diseases which are not limited to people owning the cars.
Thus, the marginal social benefits are less than the marginal private benefits. Owners of these luxury cars will ignore the negative externality that they are creating. This means that there will be an over consumption of cars by buying Q1 cars at a price of P1. Since Marginal Social Cost is greater than Marginal Social Benefit for these units, there is a welfare loss to society and a market failure. Therefore, these luxury car brands not only aggravate India’s pollution problems but also create a large burden for the health sector.
India has yet to see the consequences of economic recession in the west in its core economic system. Therefore, Tata Motors has correctly shifted the attention of its Luxury Marques to India where there is still an opportunity to create revenue from Jaguar and Land Rover. This might be supported by the fact that the majority of the Indian population is from the middle class who have seen an increase in standard of living and an increase in wages due to the economic boom, therefore increasing investments in luxury brands. However, the impact of a global recession will almost certainly be seen in India as well where job cuts have been seen as firms have been losing revenue.
Therefore, Tata Motors has to be cautious about its sales strategies as Land Rover and Jaguar may not be long term successes in India and might face a similar fate as they did in the West even though they may make a respectable amount of revenue before the markets react extremely to the global economic meltdown. Adding to this, though the introduction of luxury marques in India is a positive indication of an increase in income and economic growth, at the same time, this creates a negative externality for the community through diseases and creates a burden on other sectors, especially the healthcare system.