Do Tata Motors' Woes Bode Ill for Ford and GM?

It was a tough quarter for India's Tata Motors (NYSE: TTM  ) , the maker of the world's cheapest car, as profits declined 16% from the year-ago period to $372.8 million, missing analyst estimates by a wide margin.

While Tata's bottom line was hit by rising commodity costs and losses related to shifting currency exchange rates, slowing auto sales in India were the key factor in the decline. Tata's shares fell by more than 2% in Mumbai on Monday, and its U.S.-traded shares were off more than 3% at midday here.

Do slowing sales mean that Tata's in trouble? And what does the slowdown in India mean for the global auto giants that have been seeking growth in emerging markets like India's?

Challenging trends squeezing profits
Tata's troubles aren't life-threatening -- the company is, after all, still solidly profitable -- but those profits were squeezed by several different factors that will affect rivals as well.

Tata, like other automakers around the world, has had to deal with rising global prices of key commodities like steel and rubber. But India's auto market is very price-sensitive, meaning that passing those costs on to consumers -- as automakers have been doing to some extent in developed markets -- is a challenge.

It's especially a challenge when one of your corporate claims to fame is the world's cheapest car, the Tata Nano. But despite its low cost, Nano sales were off 67% in the quarter, one of the most dramatic drops during a first half (April through September) when Tata's overall car and SUV sales in India were down 16%, not counting its Jaguar and Land Rover brands. Tata is doing better with trucks and buses, where sales were up 15% in the half, and with its Jaguar Land Rover division, where profits were up 9% in the quarter on strong sales in China, but clearly Indian consumers are under pressure.

That pressure is increasing -- car sales in India fell 24% in September, the largest monthly drop in more than 10 years. That could be a problem for other automakers -- including the giants that have been looking to India for growth.

Growth is slowing, in India and elsewhere
Indian consumers are being challenged by rising interest rates, higher fuel prices, and a slowing overall rate of economic growth, and that has hit car sales hard across the industry. But growth hasn't gone away entirely for everyone: Ford (NYSE: F  ) has seen a 31% increase in its sales in India through October and has already sold more than 100,000 vehicles there this year. Though it's only about half of Tata's car sales, that total still represents a significant success -- but it's a far cry from the triple-digit growth Ford was enjoying in India a year ago.

Ford, General Motors (NYSE: GM  ) , and Toyota (NYSE: TM  ) have all turned to India in search of growth as sales have lagged in the U.S. and Europe. Toyota's Etios and Ford's Figo, inexpensive small cars designed for the Indian market, have both sold well, and GM's Indian operation -- a joint venture with its Chinese partner SAIC -- has become India's fifth largest automaker.

But as India's growth has slowed, those ventures' prospects for strong growth have dimmed along with Tata's. Tata trails both Hyundai (OTC: HYMTF.PK) and the Maruti Suzuki joint venture in terms of sales in its home country, but it was expected to see gains as labor troubles have hit market leader Maruti Suzuki hard.

Those gains may still come. And the strength of Tata's luxury offerings, Jaguar and Land Rover, in China should continue to help Tata's bottom line. But clearly Tata's white-hot growth rate is a thing of the past, at least for the moment.

Ford's dividend may be on its way back, but you don't have to wait to put the power of reinvested dividends to work in your portfolio. In a special new report, Motley Fool analysts identify "11 Rock-Solid Dividend Stocks," all great additions to a long-term investor's portfolio. This new report is completely free for Fool readers -- get instant access.

Fool contributor John Rosevear owns shares of Ford and General Motors, but he holds no other position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of Ford. Motley Fool newsletter services have recommended buying shares of General Motors and Ford. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1589345, ~/Articles/ArticleHandler.aspx, 12/18/2014 10:20:20 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement