Intensifying Competition: The global automotive industry is highly competitive and competition is intense in view of the continuing globalization and consolidation in the worldwide automotive industry. Competition is especially likely to increase in the premium automotive categories as each market participant intensifies its efforts to retain its position in established markets while also developing a presence in emerging markets, such as China, India, Russia, Brazil and parts of Asia. The factors affecting competition include product quality and features, innovation and time to introduce new product, ability to control costs, pricing, reliability, safety, fuel economy, environmental impact and perception thereof, customer service and financing terms.
The Company faces strong competition in the Indian market from domestic as well as foreign automobile manufacturers. Improving infrastructure and robust growth prospects compared to other mature markets, have attracted a number of international companies to India either through joint ventures with local partners or through independently owned operations in India. International competitors bring with them decades of international experience, global scale, advanced technology and significant financial resources. Consequently, domestic competition is likely to further intensify in the future.
Exchange and interest rate fluctuations: The Company's operations are subject to risk arising from fluctuations in exchange rates with reference to countries in which it operates.
The Company imports capital equipment, raw materials and components from, manufactures vehicles in, and sells vehicles into, various countries, and therefore its revenues and cost have significant exposure to the relative movements of the GBP, the US dollar, the Euro, the Chinese Renminbi, the Russian Ruble, the Japanese Yen and the Indian Rupee.
In particular the Indian Rupee decline significantly relative to the US dollar during FY 2013-14. Moreover, the Company has outstanding foreign currency denominated debt and is sensitive to fluctuations in foreign currency exchange rates. The Company has experienced and expects to continue to experience foreign exchange losses and gains on obligations denominated in foreign currencies in respect of its borrowings and foreign currency assets and liabilities due to currency fluctuations. JLR has outstanding USD denominated debt and is sensitive to fluctuations in foreign currency exchange rates.
The Company also has interest-bearing assets (including cash balances) and interest bearing liabilities, which bear interest at variable rates. The Company is therefore exposed to changes in interest rates in the various markets in which it borrows.
Although the Tata Motors group engage in managing our interest and foreign exchange exposure through use of financial hedging instruments such as forward contracts, swap agreements and option contracts, adverse interest rates and a weakening of the Indian rupee against major foreign currencies may have an adverse effect on cost of borrowing, which could have a significant adverse impact on the Company's results of operations.
New products, emissions and technology: The competitors can gain significant advantages if they are able to offer products satisfying customer needs earlier than the Company is able to and this could adversely impact the Company's sales and results of operations. Unanticipated delays or cost overruns in implementing new product launches, expansion plans or capacity enhancements could adversely impact the Company's results of operations.
Customer preferences especially in many of the developed markets seem to be moving in favour of more fuel efficient and environmentally friendly vehicles. Further, in many countries there has been significant pressure on the automotive industry to reduce carbon dioxide emissions. In many markets these preferences are driven by increased Government regulation and rising fuel prices and customers environmental considerations. The Company's operations may be significantly impacted if the Company experience delays in developing fuel efficient products that reflect changing customer preferences, especially in the premium automotive category. Further a deterioration in the quality of the Company's vehicle could force it to incur substantial cost and damage its reputation.
Underperformance of distribution channels and supply chains: The Company products are sold and serviced through a network of authorized dealers and service centers across the domestic market, and a network of distributors and local dealers in international markets. The Company monitors the performance of its dealers and distributors and provides them with support to enable them to perform to the expectations. Any under-performance by the dealers or distributors could adversely affect the Company's sales and results of operations.
The Company relies on third parties to supply raw materials, parts and components used in the manufacture of products. Furthermore, for some of these parts and components, the Company is dependent on a single source. The Company's ability to procure supplies in a cost effective and timely manner is subject to various factors, some of which are not within its control. While the Company manages its supply chain as part of the vendor management process, any significant problems with supply chain in the future could affect the results of operations. Natural disasters and man-made accidents, adverse economic conditions, decline in automobile demand, lack of access to sufficient financing arrangements among others could have a negative financial impact on the Company's suppliers and distributors, in turn impairing timely availability of components, or increases in costs of components Similarly, impairments to the financial condition of our distributors may adversely impact our performance in some markets. In addition, if one or more of the other global automotive manufacturers were to become insolvent, this would have an adverse effect on the supply chains and may further affect the Company's results of operations in an adverse manner.
With respect to JLR operations, as part of a separation agreement from Ford, the Company has entered into supply agreements with Ford and certain other third parties for critical components. Any disruption of such transitional services could have a material adverse impact on the operations and financial condition.
Changes in tax, tariff or fiscal policies and regulations: Imposition of any additional taxes and levies designed to limit the use of automobiles could adversely affect the demand for the Company's vehicles and the results of operations. Changes in corporate and other taxation policies as well as changes in export and other incentives given by the various Governments could also adversely affect the results of operations. For example, the Company benefits from excise duty exemptions for manufacturing facilities in the State of Uttarakhand and other incentives in certain states of India either through subsidies or loans from such states where it has manufacturing operations. The Government of India had proposed a comprehensive national goods and services tax, or GST, regime that will combine taxes and levies by the central and state Governments into one unified rate structure. While both the Government of India and other state Governments of India have publicly announced that all committed incentives will be protected following the implementation of the GST, given the limited availability of information in the public domain concerning the GST the Company is unable to provide any assurance as to this and any of the aspect of tax regime following implementation of the GST. The implementation of this rationalized tax structure might be affected by any disagreement between certain state Governments, which could create uncertainty. The timelines of the proposed transition is uncertain at this point of time.
The Direct Tax Code Bill 2010, or DTC, proposes to replace the existing Income Tax Act, 1961 and other direct tax laws, with a view to simplify and rationalize the tax provisions into one unified code. The various proposals included in DTC bill are subject to review by Indian parliament and as such impact if any, is not quantifiable at this stage.
Political instability, wars, terrorism, multinational conflicts, natural disasters, fuel shortages / prices, epidemics, labour strikes: The Company's products are exported to a number of geographical markets and the Company plans to expand international operations further in the future. Consequently, the Company is subject to various risks associated with conducting the business outside the domestic market and the operations may be subject to political instability in those markets, wars, terrorism, regional and / or multinational conflicts, natural disasters, fuel shortages, epidemics and labour strikes. In addition, conducting business internationally, especially in emerging markets, exposes the Company to additional risks, including adverse changes in economic and Government policies, unpredictable shifts in regulation, inconsistent application of existing laws and regulations, unclear regulatory and taxation systems and divergent commercial and employment practices and procedures. Any significant or prolonged delay in the Company's operations related to these risks could impact its results of operations.
Product liability, warranty and recall: The Company is subject to risks and costs associated with product liability, warranties and recalls, should the Company supply defective products, parts, or related after-sales services, including by generating negative publicity, which may adversely affect the Company's business, results of operations and financial conditions. Such events also require the Company, to expend considerable resources in correcting these problems and could adversely affect the demand for the products. The Company may also be subject to class actions or other large scale product liability or other lawsuits in various jurisdictions where it has a significant presence.
Jaguar Land Rover Pension obligations: The Company provides post-retirement and pension benefits to its employees, some of which are defined benefit plans. The pension liabilities are generally funded and the pension plan assets are particularly significant in respect the JLR Pension plan. All new employees in the operations from April 19, 2010, have joined a new defined contribution pension plan.
Lower return on pension fund assets, changes in market conditions, changes in interest rates, changes in inflation rates and adverse changes in other critical actuarial assumptions, may impact its pension liabilities and consequently increase funding requirements, which will adversely affect the Company's financial condition and results of operations.
Automobile financing business and selling arrangements: In India the Company is subject to risks associated with its automobile financing business carried out by its subsidiary Tata Motor Finance Ltd. In order to support the sale of its vehicle. Any defaults by the customers or inability to repay installments as due, could adversely affect the Company's business, results of operations and cash flows. In addition, any downgrades in the Company's credit ratings may increase the borrowing costs and restrict the access to the debt markets. Over time, and particularly in the event of any credit rating downgrades, market volatility, market disruption, regulatory changes or otherwise, the Company may need to reduce the amount of financing receivables it originates, which could adversely affect the ability to support the sale of vehicles.
Jaguar Land Rover has consumer finance arrangements in place with local providers in a number of key markets. Any reduction in the supply of available consumer financing for purchase of new vehicles could create additional pressures to increase marketing incentives in order to maintain demand for its vehicles, which could materially and adversely affect the Company's sales and results of operations. Further, Jaguar Land Rover also offers residual value guarantees on the leases of certain vehicles in some markets. Any adverse movement in used car valuation could impact our result of operations.
Labour unrest: The Company's permanent employees, other than officers and managers, in India and most of the permanent employees in South Korea and the United Kingdom, including certain officers and managers, in relation to automotive business, are members of labour unions and are covered by wage agreements, where applicable with those labour unions.
In general, the Company considers labour relations with all of employees to be good. However, in the future the Company may be subject to labour unrest, which may delay or disrupt the operations in the affected regions, including the acquisition of raw materials and parts, the manufacture, sales and distribution of products and the provision of services. If work stoppages or lock-outs at the Company's facilities or at the facilities of the major vendors occur or continue for a long period of time, the business, financial condition and results of operations may be adversely affected.
JLR operations in key mature market: JLR, which contributes large portion of the Company's consolidated revenues, generate a significant portion of its sales in the United Kingdom, North American, continental European markets where the automotive industry was severely impacted during the global economic downturn in FY 2008-09. Even though sales of passenger cars in certain of these markets were aided by Government-sponsored car-scrap incentives, these incentives primarily benefited the compact and micro-compact car segments and had virtually no slowing effect on the sales declines in the premium car or allterrain vehicle segments, in which JLR operates. Although demand in these markets has recovered strongly, any decline in demand for the Company's vehicles in these major markets may in the future significantly impair the Company's business, financial position and results of operations. In addition the Company's strategy, which includes new product launches and further expansion into growing markets, such as China, India, Russia and Brazil, may not be sufficient to mitigate a decrease in demand for the Company's products in mature markets in the future which could have a significant effect on the Company's financial performances.