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Business Economics

Session 8 : Tata-Daewoo “The Road to Gunsan”

Faculty: Prof. Sunitha Raju

Session Date: 21.09.2019


EPGDIB 2019-20

Cost Analysis for Optimal Scale


Business Economics

Tata Motors: The Road to Gunsan

1. Why did Tata Motors acquire Daewoo’s plant at


Gunsan?

(a) Market/Demand Condition


(b) Production/cost Characteristics
(c) Indian Market Conditions
EPGDIB 2019-20

Business Economics
(a) Market/Demand Condition

• Tata Motor’s commercial vehicles (CV) focussed on


domestic market. Plans to expand global business from
5% to 20% by 2005-06. Also, plan to enter into big
markets with full product range.
• China is the world’s fastest growing market for CV
(heavy load). Therefore, advantages with respect to
location and entry conditions.
• Other growing markets are South Korea, Italy and Spain
for heavy load. For lighter CVs, the emerging markets
are: S. Korea, S. Africa, Middle East, Turkey and India.
EPGDIB 2019-20

Business Economics

(b) Production/cost Characteristics

• Daewoo’s (Gunsan) plant was operating at 25% capacity


and yet commanded a 22% market share. (This implies
by increasing the production and successful market
expansion will result in cost competitiveness).

• Gunsan plant had the technological capability to develop


new versions of heavy CVs.

• With the work on designs in the Technical centre at


Gunsan plant, Daewoo product-line complements the Tata
product-line.
EPGDIB 2019-20

Business Economics

(c) Indian Market Conditions

• The domestic market conditions for CV are also


changing. First, Euro III emission norms to be
enforced for truck. Second, truck overloading to
be banned. Together, new development in truck
design and engines necessary.
EPGDIB 2019-20
Long Run Average Cost Curve
(Planning Curve)
Business Economics
AC

Minimum Efficient
Scale (MES)
.

Q
• Scale economies: As scale of operation increases, average costs fall
Scale diseconomies : As scale of operation rises, average costs rise
MES : Optimum scale of operation where full economies are exploited
LRAC : Envelope of SRAC curves
EPGDIB 2019-20

SRAC and LRAC Curves .


Business Economics
AC

A .
.
F

B
.

. .
E
C .
D

Q* Q
 When economies of scale exist (A,B,C) and market demand is expanding, in the short
run, it is better for firms to have bigger plants and operate under excess capacity
conditions.

 When diseconomies of scale exist and market demand is expanding, in the short run, it
is better for firms to have smaller plants and operate in the rising part of SRAC curve.
EPGDIB 2019-20

Sources of Economics of Scale


Business Economics

Tata Motors: The Road to Gunsan


• In Manufacturing, Tata is upgrading to Euro III norms and
Daewoo is already complaint Tata trucks can integrate this
engine.
• In sourcing, Tata can get good prices from renders because of
bulk buying.
• In Marketing, Tata’s marketing and distribution network in South
Africa, Middle East have already sold Daewoo’s trucks.
• In design, Tatas make trucks of 1-tonne in India. With a bit of
atomization this product can find its may in S. Korean market,
currently the largest segment in Korean CV market.

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