Reference no: EM132242061

In March 2017, Volkswagen Group (VW) and Tata Motors Limited (Tata Motors) announced an alliance to produce an economy car for emerging markets, including India. The two companies agreed to use Tata Motors’ Advanced Modular Platform (AMP) as a common platform for the alliance. VW believed the platform offered an important cost advantage over its own Modularer Querbaukasten (MQB-A) platform. However, the negotiation talks hit a roadblock, with the two companies having differences on the use of a platform and the practicality of the business model. VW began to feel that it could develop the vehicle, at the same cost, through its own MQB-A platform. Calling off the partnership would hurt Tata Group Chairman Natarajan Chandrasekaran’s attempt to re-energize Tata Motors’ passenger vehicle business. It would also affect VW’s plans in India’s economy car segment.2 Could the potential partners find a way to resolve their differences, or was going their independent ways a better strategic choice for them? Would they be able to create more value independently as opposed to being in an alliance? GLOBAL AUTOMOBILE INDUSTRY TRENDS Total automobile sales worldwide reached 88 million units in 2016, an increase of 4.8 per cent from a year earlier.3 The annual growth rate in global car sales was expected to drop from 3.6 per cent between 2011 to 2015 to around 2 per cent in 2030. With growth slowing in the established markets, the industry would continue to rely on emerging economies.4 The worldwide domination of large automobile manufacturers was declining, and the drift in sales was toward more “region-centric” products. International players were being forced to review their relationships with dealers and their strategies of pricing products. Strategic partnerships, mergers, and acquisitions were becoming frequent. The profit margins of automakers were at a 10-year high. However, when looked at through the lens of total shareholder returns and return on invested capital, the industry appeared to be in trouble. The total shareholder returns of an average automaker were only 5.5 per cent, and in 2016 the return on invested capital of the top 10 players was only 4 per cent. The industry was also challenged by the increasing concern for safety and environmental regulations. Like other industries, digitization, growing automation, and new business models were affecting the industry. Four disruptive technology-driven trends—shared mobility, independent driving, electrification, and connectivity—were becoming evident in the automotive sector. In the United States, the importance of private car ownership had declined, with the percentage of youth (aged 16 to 24 years) who held a driver’s licence dropping from 76 per cent in 2000 to 71 per cent in 2013. Moreover, in North America and Germany in the previous five years, the number of people sharing cars had increased by 30 per cent

Volkswagen & Tata Motors 1. Discuss the trends in the global and Indian automobile industry. Despite being present in India for the past 10 years, VW’s cars failed to become popular and accepted by customers. Was the Group justified in continuing to give importance to the Indian market? 2. VW and Tata Motors made the decision to work with each other as alliance partners. Comment on the fit between the two partners. 3. What are the individual and joint values that can be created by the firms in the alliance? 4. What probable risks do VW, Škoda, and Tata Motors face in terms of their alliance? What can they do to safeguard against those risks? 5. In the event of the companies sorting out their differences, what do you recommend with respect to the structure of the alliance, and the terms and conditions of the alliance agreement that should be clearly laid down by the partners? 6. What should the companies do—call off the alliance or sort out their differences? 7. Discuss whether a(n) merger/acquisition strategy would work better than an alliance strategy for Volkswagen and Tata Motors. 8. In the event of a(n) merger/acquisition, what would be the result when you think about the level of diversification.