40 Years Ago... And now: Tata Motors - The car dream that turned sour

At the annual shareholders' meeting of Tata Motors (then Tata Engineering and Locomotive Company, or Telco) in August 2001, Ratan Tata offered to resign from the company's chairmanship if shareholders so wished. Though Tata's offer remained just that - merely an offer - quite a few shareholders and analysts criticised the management strategy of transforming Telco into a full-fledged passenger car maker.

The trigger for the collective angst was the company's results for 1999-2000, which were announced just three months prior to the shareholders' meeting. Telco had reported its biggest yearly loss of Rs 500 crore, partly due to the fact that it had invested nearly Rs 1,700 crore, which was a quarter of its revenue in the mid-1990s, to develop an indigenous passenger car from scratch. But the Indica, which was commercially launched in 1998, proved to be a cash guzzler. It was only after the launch of the V2 that the Indica tasted success and became India's second largest selling hatchback by the middle of 2004. But the success proved to be short-lived as sales took a hard knock after competition closed in. Volumes began to lag from 2005-06.

The story is almost the same for other Tata models. Before the Indica, Telco had launched the Tata Sierra in 1991. The model was a cross between a utility vehicle and a passenger car, but could not retain its appeal for long. Since then, the Tatas have launched over a dozen different models of cars and utility vehicles, but success has been elusive despite the initial excitement.

When the Sumo hit the road in 1994, customers who were used to the vagaries of soft-top utility vehicles, saw it as a refreshing change and lapped it up. Within two years, Telco came close to becoming the top utility maker, till its thunder was stolen by Toyota's Qualis and Mahindra's Bolero. Telco didn't upgrade the Sumo in time, allowing the competition to catch up.

Tata Safari, India's first indigenous sports utility vehicle, met a similar fate. When first launched in 1998, it was ahead of its time, but the product was not upgraded for over a decade, turning it into - as an analyst describes it - an old daddy in its segment.

The biggest setback for Tata Motors was, of course, failure of the Nano. Touted as a the world's cheapest car and the centre piece of Tata's strategy to tap the opportunity at the 'bottom of the pyramid', the car failed to excite buyers after the initial hype. Its positioning and brand narrative became too downmarket for India's middle class, for whom buying a car is a statement of financial and professional success.

The net result of all this is evident. During the year ended March 2014, Tata Motors sold as many passenger cars in India as it did in 2003-04. Many say Tata Motors has perhaps paid the price for being too ambitious. Just think of it - its portfolio includes the country's cheapest car (Nano) as well as the expensive sports utility vehicle (Aria). Even Maruti Suzuki, which sells nearly 10 times more cars than Tata Motors, doesn't straddle so many segments. The story might have been different if Tata Motors had tried to win one segment at a time just like it built its commercial vehicle business.

Financial ups and downs Tata Motors is no stranger to financial volatility. The company was set up at the dawn of India's independence to manufacture locomotives (for trains) and construction equipment. Within a few years, it diversified into commercial vehicles and became the market leader by the early 1970s with two out of every three trucks on Indian roads carrying a Tata badge. While the success made Telco an automotive behemoth and the second most important company in Bombay House after Tata Steel (then Tisco), it was faced with a peculiar problem.

Commercial vehicles are a painfully cyclical business, and every boom is followed by a deep and painful downturn that could set the company and its shareholders back by years. Being the market leader with a large installed capacity, a downturn was more painful to Telco's shareholders. This is clear from a cursory look at the company's financial ratios over the years.

The company offered stable and predictable returns on equity (RoE) to shareholders till the mid-1970s.

There was a spike in profitability in the next few years, but the good run was ruptured by the economic slowdown in the late 1980s. In the year ending March 1987, Telco's RoE declined to 1.4 per cent, a ratio previously seen in the early 1950s when the company was still in its infancy.