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Ratan Tata: In the driver's seat

Tata Motors has acquired iconic British auto brands Jaguar and Land Rover from Ford Motor Company for $2.3 billion. But does it have a concrete plan to turn them around? BT'sKrishna Gopalan finds out.

Krishna Gopalan        Print Edition: April 20, 2008

A day after Tata Motors announced its takeover of British auto icons Jaguar and Land Rover (JLR) from Ford Motor Company, its Managing Director Ravi Kant was in Bangkok to launch operations in Thailand. Much of the auto world and beyond may have been agog with excitement, but for Kant, it was business as usual. Asked by the media how he was planning to run the acquisition, he replied, without any fuss, that Tata Motors would leave the day-to-day running of JLR to its existing management.

Here comes the Jaguarnaut: Tata Group Chairman Ratan Tata
Ratan Tata
That small sound byte, largely ignored by the mainstream Indian media, answered the question that had consumed analysts and editorial writers worldwide since Ford chose Tata Motors as the “preferred bidder” in January 2008. In retrospect, one wonders what the fuss was all about. This has been the approach of the Tata Group at all its recent big-ticket overseas acquisitions— from Tetley, to Daewoo’s heavy commercial vehicles unit, to Corus. In a press statement, Tata Group Chairman Ratan Tata said: “We have enormous respect for the two brands and will endeavour to preserve and build on their heritage and competitiveness, keeping their British identities intact.”

The obvious benefits

The deal will give Tata Motors a critical footprint in Europe, which accounts for over three-fifth of JLR’s total sales volumes. Then, Jaguar and Land Rover will also expand the company’s product portfolio, which comprises the Indica, Indigo, Sumo, Safari and the soon-to-be marketed Nano.

Then, Ford will continue to provide engineering and backoffice support for an unspecified period. And the US company’s finance arm will also finance JLR’s dealers and customers for one year. These could prove invaluable for Tata during the initial months of its stewardship.

The challenges

 How good a deal is it?

Can Tata Motors succeed where Ford Motor Company and BMW failed? We take a look at the issues involved.
 ForAgainst 
 Deal will give Tata Motors a critical presence in the European market
 The entry comes at a stiff price tag, which will increase the interest burden on Tata Motors’ balance sheet
 It will also give it access to manufacturing plants in the UK Uncertainty with respect to supply of engines and components by Ford once the one-year period ends
 Tata Motors will gain from engineering expertise of Jaguar and Land Rover Challenge will be to have a portfolio that consists of the Nano with a Rs 1-lakh price tag and a niche brand like the Jaguar
 Combined with its presence in markets like Korea and Spain, it will increase Tata Motors’ global footprint The company is acquiring JLR when economic fundamentals in Europe and the US are weak. These two markets account for 88 per cent of JLR’s global sales
But the big question is: can Tata succeed where Ford failed? Despite their iconic brand image, Jaguar and Land Rover face formidable challenges. Jaguar, which sold 130,000 cars in 2002, closed last year with sales of less than half that number. BMW, which targets the same customers, produces 20 times as many cars. Then, over the last three decades, it has been plagued by quality and reliability issues. This, experts say, had a lot to do with Ford’s management mantra. In order to cut costs, it built the Jaguar X-type on the Ford Mondeo platform. This diluted Jaguar’s premium brand image and ensured a lukewarm response from buyers.

But a slew of new launches and platforms—among them the new XF model, and also the XK and XJ— could reverse this trend and take volumes past the 100,000-mark this year. “We will allow the JLR management to strengthen the company’s brand personality. The new Jaguar XK has proved to be a successful model. The new XF sedan has received great reviews at auto shows and 15,000 bookings have already been received. I believe the new product line is very good,” Kant said in a recent interview. The company expects to sell up to 50,000 units of this model this year.

Land Rover’s problems are very different from Jaguar’s. It produced a little more than 225,000 SUVs last year and is profitable. But in a world turning ‘greener’ by the day, Land Rover still produces sturdy gas-guzzlers that are fast going out of fashion. But here, too, the Tatas may be stepping in at the cusp of good times. The new Land Rover LRX concept car, which was unveiled at the Detroit Auto Show in January this year, is fuel-efficient and has carbon dioxide emissions of about 120 g/km, well within EU norms. Like the XF, this smart hybrid, which will be positioned as a small, ubercool SUV for urban consumers, is expected to restore some of Land Rover’s old glory.

So, despite Tata Motors having no obvious synergies with JLR, and despite having no presence or expertise in its market segment, it may just be getting in at a time when the tide is turning. Says Jagdish Khattar, former MD of Maruti Udyog (now Maruti-Suzuki India): “The challenge will lie in selling cars in competitive markets, which are not growing.” This is where the Tata Group’s unique management philosophy can help it come up trumps. The Telegraph, London, quoted Peter Cooke, KPMG Professor of Automotive Management at the University of Buckingham, one of the world’s foremost authorities on auto companies, as saying: “Tata has perfected the delicate art of arms-length management.” Tata Motors is expected to follow the Corus model at JLR. That means, it will probably form an integration committee comprising senior executives from Tata Motors and JLR, set milestone and long-term goals and, as Kant has said, let the local management run the company. At least, two dealers that BT spoke to in the UK declined to comment on the grounds that they were waiting for more clarity on the deal.

New markets

If there’s one fly in the ointment, it is that Europe and the US, JLR’s main markets, are slowing down. This may delay its recovery. The Tatas are expected to counter this by exploring new markets in Russia, China, India and other parts of Asia. But will it also move production to a low-cost location like India? The UK, after all, has one of the highest wage rates in the world, and one way of cutting costs will be to move at least a part of the manufacturing somewhere cheaper.

 

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Tata Motors has signed an agreement with Unite, JLR’s labour union, to safeguard jobs for three years, ie., till 2011. Roger Maddison, National Officer for the Automobile Industry at Unite, says the deal augurs well for the UK automotive industry and for the people working for JLR. “Unite has secured written guarantees for all the plants on staffing levels, employee terms and conditions, including pensions, and sourcing agreements. The sale ensures the future of our members,” he told BT by e-mail.

Tata Motors did not respond to a question from BT on this sensitive subject, but the Telegraph has said that JLR’s three plants, whichproduce a little over a quarter million cars and SUVs, “may be two plants too many”, and speculated that “Land Rover would be pushing an open door if it closed its Solihull plant, as the land is sought after for housing and an extension to Birmingham airport”. If such speculation does turn to fact, then there is a possibility of the Tatas moving at least some production lines to India after the three-year nolayoffs agreement runs its course.

Investors unhappy

The Indian press greeted the Tata-JLR deal with lots of jingoistic chest thumping, but investors gave it a thumbs down. Since January 3, when Ford announced Tata Motors as the “preferred bidder”, the Tata Motors stock has moved down from Rs 794.25 to Rs 679.4, when the deal was announced. In the two days since then, it has lost a further 4.92 per cent to Rs 645.95.

 
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Whatís all the fuss about? Itís business as usual for Tata's Managing Director Ravi Kant
Ravi Kant
A part of this is undoubtedly due to the overall crash in the stock market, but it is a fact that investors are nervous about the impact of the $3-billion (Rs 12,000-crore)debt that Tata Motors is taking on its balance sheet to finance this deal. Says Tata Motors’ CFO C. Ramakrishnan: “This is a bridge loan facility extended by a syndicate of banks and will be replaced by a combination of a long-term debt and equity at an appropriate time.” A report by global investment bank UBS says: “This (the debt) could increase Tata Motors’ interest costs by Rs 650-700 crore per annum and reduce the earnings per share for 2008-09 by Rs 12-13, or 19-20 per cent.” Investors are particularly worried because this comes at a time when the company is in the midst of a Rs 12,000-crore expansion programme.

In January this year, global rating agency Standard & Poor’s placed Tata Motors under credit watch. “The acquisition price of $3 billion is a significant consideration. The impact on cash flows and Tata Motors’ large domestic plans will put pressure on its ratings,” Anshukanth Taneja, S&P’s Senior Director, (Corporate Ratings), in Singapore, told BT. Tata Motors is also looking at selling a part of its shareholding in some group companies over the next few months to part-finance the transaction.

The road ahead

Autocar India Editor Hormazd Sorabjee says the short term will be all about new models like the XF saloon. “I do not think there is a problem as far as the brand positioning is concerned. These are topend models and there is no overlap with Tata Motors’ existing lineup.” Agrees Harish Bijoor, CEO, Harish Bijoor Consults, a brand consultancy, who thinks it is possible for a company to have a plethora of brands. “Having a car priced at Rs 1 lakh and another at Rs 1 crore is hardly an issue,” he says. This means, effectively, that Tata Motors will be competing at the top-end and the bottom of the market, where competition is the least intense, and not in the cutthroat middle segment where the main global action lies.

So, can the takeover yield dividends for Tata Motors? It won’t be easy, and Tata and his team will have to overcome several hurdles before they can turn JLR around. But as it did with Daewoo Heavy Vehicles, Tetley and, to a lesser extent, Corus, Team Tata may yet surprise the doomsayers.

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