One Auto Play That Hasn't Stalled

By Kristin Graham | August 13, 2009 AAA

Throughout the last decade, the global economic landscape has dramatically changed. There is a systematic shift occurring that is transferring power the U.S. once held to emerging markets. It's happening across most sectors, but the auto industry may be the most illustrative example.

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The Same Old Story
The story of U.S. auto manufacturers is an old one. It's clear that GM couldn't have survived bankruptcy without being spoon fed capital from taxpayers. Chrysler was sold off with support from the government to foreign competitor Fiat (OTC:FIATY); Ford (NYSE:F) isn't exactly in a healthy state either. The auto industry is facing a worldwide slump in demand, but foreign companies have been able to stand one their own two feet due to their better-structured business models, more innovative product lines and superior efficiency. Lack of vision, innovation and cost control were three key reasons why the U.S. automakers found themselves on the brink of failure. Interestingly, it's the possession of those three same elements that have survived the global recession.

Toyota Motors (NYSE:TM), for example, is famous for its lean production methods. And Honda Motor Company (NYSE:HMC) and Nissan (OTC:NSANY) appropriately evolved with the changing times by shifting to smaller and more fuel-efficient models. But the foreign automaker that stands out in mind among all others to me is Tata Motors (NYSE:TTM). The company emerged into the global spotlight over the last several years as the company took on the famous Jaguar and Land Rover brands in a $2.3 billion acquisition and Tata Group Chairman Ratan Tata delivered his promised one lakh (or $2,500) car to the world.

Hitting Speed Bumps
Investors initially found themselves giddy over marketing an affordable car to India's massive 1.2 billion people. Yet, as the details were digested, the stock began to plunge as analysts questioned what kind of margins Tata's Nano would produce. Things got worse as worries began to materialize from the massive amount of debt Tata swallowed to purchase Land Rover and Jaguar. And then the stock completely collapsed along with the Indian market. By the end of 2008, Tata's stock had fallen below the $4 mark. Just a year earlier it sold for over $20 per share.

Revving Back Up for Growth
Despite Tata's ups and downs over the past several years, the company is still standing as a solid entity today. It secured a $561 billion bank loan this week, increased sales 18% last year and reported an 11.4% surge in operating profit last quarter, all signs that things are beginning to pick up again for Tata. Investors have already started to regain faith in the company - the stock has risen over 150% this year. Typically, I'm not in favor of investing in stocks that are experiencing rapid gains, as it usually indicates excessive exuberance. However, in the case of Tata, I think the stock's upward swing is much more than momentum. The company was severely oversold last year and the stock's recovery is warranted. As an established and dominant brand among India's rapidly growing middle class, Tata Motors will have explosive growth opportunities at its fingertips when the global economy recovers. Analysts peg the company to post 35% annual growth throughout the next five years.

Still, the company has a lot of work ahead of itself. It needs to turn the Nano into the success story it built it up to be. And restructuring Land Rover and Jaguar won't be easy. But Tata's strong management team has proved in the past that the company has what it takes to be a major competitor in the global auto market.

Listen Up GM and Ford
Unlike the U.S. automakers, Tata actually listened to what its customers wanted and delivered what its customers will buy. It took a lot of effort and massive amounts of innovation, research and development to slash costs in order to produce the Nano. Many industry followers had doubts it could be done. It's this visionary mentality and dedication to serving its consumer that will allow Tata to flourish years down the road when GM and Ford are both names of the past. (For more, read Analyzing Auto Stocks.)

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