Tata: Clawed by Jaguar and Land Rover

Mumbai - To show off the new Jaguar XJ, Tata Motors (TTM) in July rented a gallery in London's fashionable Chelsea district and flew in Jay Leno and other stars. With its muscular new design, the $73,000 car has won rave reviews. Tata, which a year ago paid Ford Motor (F) $2.3 billion for Jaguar Cars and its cousin, Land Rover, seemed to have good reason to be upbeat.

Yet buying Jaguar and Land Rover has so far not worked out well for Ratan N. Tata, chairman of both the sprawling $64 billion Tata Group and Tata Motors. Unit sales of Jaguar and Land Rover are down 52% for the June quarter. The brands lost some $1.1 million a day in the same period, pushing the otherwise profitable Tata Motors to a $67 million loss. Tata still needs to spend $1 billion-plus a year in research and development on new models and making power-hungry Jaguars and Land Rovers meet new European emission standards. Among the options: replacing heavy steel with aluminum and more efficient engines such as hybrids. In Mumbai on Aug. 26, Ratan Tata defended the acquisitions as "very much worthwhile," while Tata Motors Vice-Chairman Ravi Kant said on Aug. 31 that the R&D spending would likely continue for five more years.

Funding all this activity has been a headache. Tata this spring rustled up a $480 million loan from the European Investment Bank to help make its cars greener, and it wanted an extra $290 million to cover operating expenses for Jaguar and Land Rover. But Tata needed loan guarantees from the British government. In exchange, Peter Mandelson, the Business Secretary, wanted a seat on the board and the right to fire David Smith, the chief of Jaguar and Land Rover, according to Tata executives. Tata balked, and in August the company gave up on the government and got guarantees from private banks. The British government maintains it couldn't go forward unless it was assured that taxpayers' money would be protected.

AN EQUITY SALE?Tata was stung by the experience. "We learned our lesson," says a Tata executive who asked not to be named because the company declined to comment for this story. "We are on our own." Tata has lowered inventories, saving $250 million, cut three British factories to single shifts, and eliminated some 2,500 jobs. Unite, a union representing Jaguar and Land Rover workers, agreed to $110 million in cuts such as pay freezes and shorter work hours. "We feel Tata has done exactly the right things to deal with [the crisis]," says Unite leader Dave Osborne.

Jaguar and Land Rover won't likely break even before 2011, estimates brokerage firm Indian Development & Finance Corp.—and that would require a rebound in the global economy and new models that can claw back market share. And with less than $300 million in cash on hand, Tata Motors may need to sell equity to raise more funds.

The biggest expense is apt to be Land Rover, which may require a major rethink as Americans and Europeans shun SUVs. "Land Rover needs to tweak its entire image," says Paul Newton, a London analyst at research firm IHS Global Insight. "The complication is the huge amounts of money that will take."

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