Tata Motors, Volkswagen’s Skoda Auto call off tie-up even before it could start
Tata Motors and Skoda say they have ceased discussions on a potential alliance but will be open to talks on future collaborations
Mumbai: Tata Motors Ltd and Volkswagen group firm Skoda Auto’s joint innings in India has ended even before it could begin.
On Wednesday, the companies said that they have ceased discussions on a potential alliance but will be open to talks on future collaborations.
The companies added that they have performed a technical feasibility and commercial evaluation of a potential collaboration and, based on intense and constructive discussions, jointly concluded that the envisioned areas of partnership may not yield the desired synergies as originally assessed.
“The strategic benefits for both parties are below the threshold levels,” Guenter Butschek, chief executive and managing director at Tata Motors said in a statement.
Both companies have concluded that at present, neither the technical nor the economic synergies are achievable to the extent desired by both parties, said a spokesperson at Skoda Auto. “As a result, a planned strategic alliance will no longer be pursued for the time being,” the spokesperson added. Butschek said Tata Motors will, however, “remain positive of exploring future opportunities” with the Volkswagen group, given the “relationship of mutual respect that it witnessed during the phase of its cooperation discussions”.
“They realized that there were a lot of product overlaps,” said a person aware of the discussions, on the condition of anonymity.
Tata Motors, Butschek added, will continue to pursue its stand-alone product strategy to bring exciting and world-class products to its customers.
In March this year, the two companies signed a memorandum of understanding at the Geneva Motorshow to explore various options, including a partnership for the development of Tata’s new advanced modular platform (AMP), a joint venture or a contract manufacturing agreement, in a bid to achieve economies of scale that would have helped to cut costs.
Reports of the joint venture hitting a roadblock surfaced two months ago. It was first reported by Autocar India magazine. VW and Skoda had become sceptical about the AMP platform, which was not proving to be as cost-effective as expected, the magazine reported, citing unnamed people.
An alliance with the German carmaker would have given Tata Motors access to advanced technology and could have helped both partners cut development and production costs.
The announcement to call off the proposed agreement comes amid mounting losses at Tata Motors’ India operations and efforts to turnaround the business by Butschek. The India business reported a loss of Rs403 crore in the June quarter.
“Alliances work only if the partners see long-term benefit in terms of cost optimization, market access and technology,” said Abdul Majeed, auto practice head at PwC.
In this case, it did not tick all the boxes. So it only made sense to call it off sooner than later, he added.
An analyst at a consulting firm who declined to be identified said, “The partnership would’ve never worked. You can’t have a partnership between two struggling firms. At least one needs to be on a strong footing.”
Both firms have had a patchy innings in a market that is poised to become the world’s third largest by 2020.
The passenger vehicles business of the Tata group flagship, which once used to be the third largest by volume, has ceded ground to rival carmakers over the last five years. Its market share in the segment has fallen to 5.2% in fiscal 2016-17 from 13.1% in fiscal 2011-12. Recent launches such as the Tiago compact car, Tigor compact sedan and Hexa SUV has helped the firm regain some ground.
Skoda Auto too has had its share of woes in the Indian market. The firm continues to be on the fringes despite a one-and-half-decade-long presence. It sold a total of 13,712 passenger vehicles in fiscal 2016-17 against 15,368 units a year ago, according to Society of Indian Automobile Manufacturers.