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Tata Motors touched a new 52 week low on Tuesday, closing the day at Rs 385.75, down 4.10 per cent from its previous low. The stock has fallen from its high of Rs 605.5 in mid-January to the present level, losing more than a third of its value in six months. The stock is trading at Rs 390 levels on Wednesday after a sentiment change in markets across Asia due to better than expected economic growth numbers in China.
But the sharp fall witnessed on Tuesday has been on account of multiple reasons. The stock was hit because of a profit warning from Brilliance China Automotive Holdings citing slower sales in China. Brilliance China Automotive makes mini vans for China market and is the assembling unit of BMW. Analysts normally compare the growth of Jaguar Land Rover (JLR) with that of BMW, Audi and Mercedes to understand the growth in the Chinese market.
Bloomberg later reported that Tata Motors is also cutting down the sales target of JLR in China amid slower demand. China used to be the biggest as well as the fastest growing market for Tata Motors. The company said that it is adjusting supply to its dealers to ease inventory pressure, after deliveries there slumped 23 per cent this year till May, much weaker than that of BMW, Audi and Mercedes according to an Ambit Capital report.
Adding to this set of news was Credit Suisse’s decision to remove Tata Motors from its Asian portfolio.
The recent meltdown in Chinese equity market is expected to impact the overall growth in China, which has resulted in a fresh bout of selling in Tata Motors. But Tata Motors has been slowing down much earlier than the recent developments in China.
In fact, sales have started to fall since the commissioning of Tata Motors’ China plant to produce Evoque at the start of the year. In a report on Tata Motors, Ambit Capital has pointed out that JLR stopped importing UK produced Evoque models from February 2015 given the launch of locally produced Evoque. However, local Evoque has not been able to match the sales level of imported Evoque and is currently selling only around 1,000 units per month as against 3,000 units run rate of imported Evoque.
Ambit feels that this was on account low price differential between the local version of Evoque and the imported version. Dealers were giving a discount of 7-8 per cent on imported Evoque to clear their inventory. But when the local Evoque was launched, it was priced at an average 15 per cent cheaper rate that the imported one. However this was only a 7-8 per cent cheaper pricing to the ‘discounted’ price of the imported Evoque. This price gap was perceived as too low by the customers for shifting from an imported model to a locally made model. Customers were also unsure about the quality of a ‘local Evoque’. Evoque volume which dropped by around 60 per cent in the last six months now accounts for only 12 per cent of the total volume.
The company has already announced a price correction on July 1, 2015 of an average of 6 per cent to increase the pricing gap to 14-15 per cent to the discounted price of imported Evoque.
But for Tata Motors, a bigger problem lies ahead. Tata Motors in China has been unable to prevent a look alike model from selling in the same market. LandWind X7 is considered to be a copycat version of JLR’s Range Rover Evoque. JLR’s CEO Ralf Speth conceded that “We can’t do anything. I hope the Chinese customer at the end of the day sees the difference and selects the real product and not a copied one. We hope they generate a self-regulation process so that they can get rid of this kind of copy-paste way of working”.
Before the discounts, the Evoque was available at 40,000 pounds while the LandWind X7 will only be available at 14,000 pounds.
Looks like, this is just the beginning of Tata Motors' woes in China.
