At last the wait is over. After nine months of negotiations—not to mention false dawns (BusinessWeek.com, 12/20/07)—Tata Motors (TTM) has struck a $2.3 billion deal with Ford (F) for its two remaining British marques, Jaguar and Land Rover.
In a statement issued Mar. 26, Tata said that Ford would also contribute approximately $600 million to the pension funds of the two British automakers (BusinessWeek.com, 3/26/08).
The question now is whether Tata can do a better job of managing the two brands, which long weighed on Ford's bottom line, than the Detroit automaker did. Jaguar and Land Rover couldn't be more different from Tata's other grand project, the $2,500 Nano (BusinessWeek.com, 1/10/08), or anything else in its lineup. "I don't think there's anything in there that's a fit with the Tata Group," says Ashvin Chotai, an independent automotive consultant in London.
Tata Has a Lot on Its Plate
As a result, the new money-losing brands from Ford will test management at Tata Motors as never before. And the challenge comes at a time when the Indian company is already stretched. In addition to the Nano, Tata recently launched a new multi-utility vehicle, the Sumo Grande, and will introduce new versions of its Indica hatchback and Indigo subcompact. Jaguar and Land Rover will also have to compete with Tata's other auto businesses for funds and management time, including its commercial vehicle business and a joint venture with Fiat (FIA) inked last year that will produce vehicles in India and Thailand. Throw in the new luxury marques and Tata's management will be busier than ever.
Then there's the challenge of selling Jaguars in India and a line of Indian-owned luxury brands around the world. In India, demand for the luxury marques in the short term is likely to be limited. While growing quickly, India's luxury car segment accounts for only 1% of the total car market. BMW and Mercedes-Benz, for example, sell just 3,500 cars a year in India between them. "The Jaguar could surely sell a couple of hundred cars in India," says Paul Blokland, chief executive of Segment Y, an auto consultancy based in the southern Indian state of Goa.
Whether Indian ownership will affect Jaguar sales is harder to determine. To date, an Indian passenger car has never been an international success. Tata, for example, failed to sell its Indica car, rebranded as the City Rover, in Europe in large numbers after its launch in 2003. And while most analysts and auto industry observers view the Jaguar and Land Rover purchase as good for the brands, some wonder whether Tata, despite running high-end hotels in India, has the marketing experience to handle the challenges of the high-end car business.
Looking for Savings
Another test will be how to bring down costs at Jaguar and Land Rover. While steeped in history, Jaguar and Land Rover weighed on Ford's earnings and cost it, by some estimates, in excess of $10 billion in losses over the years. A constant problem was that production at the British plants, which Tata has no plans to close, is expensive (BusinessWeek.com, 3/26/08).
Analysts say that in much the same way Tata is using its in-house component manufacturers to make the super-cheap Nano a reality, it may be able to tap Indian expertise to find savings at Jaguar and Land Rover. But "the process will be slow and in the luxury segment there are a lot of dangers of embarking on this route," adds Chotai. "Tata will need to tread carefully."
Still, for all that, what is inarguable is Tata Group's winning habit when making daring acquisitions. In the past five years, Tata has embarked on an investment binge that is building the group from a once-stodgy regional player into a global heavyweight. Since 2003, Tata Group has bought the truck unit of South Korea's Daewoo Motors, a stake in one of Indonesia's biggest coal mines, and steel mills in Singapore, Thailand, and Vietnam. It has taken over a slew of tony hotels (BusinessWeek.com, 8/2/07), including New York's Pierre, the Ritz-Carlton in Boston, and San Francisco's Camden Place.
Corus: Benchmark Acquisition
Its crowning deal to date has been Tata Steel's $13 billion takeover in April of Dutch-British steel giant Corus Group (BusinessWeek, 2/14/08). In one swoop, the move greatly expanded Tata Steel's range of finished products, secured access to automakers across the U.S. and Europe, and boosted its capacity fivefold, with mills added in Pennsylvania and Ohio.
That's the kind of track record that makes some analysts believe Tata's purchase of Jaguar and Land Rover will ultimately pay off. "When they bought Corus, a lot of people said they were stupid. Maybe it's the same with Jaguar," says Prabhat Awasthi, an analyst at Lehman Brothers (LEH) in Mumbai. "If anyone has a chance to emerge as a big auto player from India, it's Tata."