Press Comment : Tata Motors’ troublesome trophy

Joe Leahy and John Reed, Financial Times, 31st July, 2009

Ratan Tata, Phil Popham...Tata Group Chairman Ratan Tata, left, and and Land Rover Managing Director, Phil Popham, pose during the India launch of Jaguar, left, and Land Rover, right in Mumbai, India, Sunday, June 28, 2009. India's Tata Motors said Friday that it suffered a loss of 25.05 billion rupees ($521.8 million) after taxes in the past fiscal year as the global meltdown exacted a toll on the auto industry worldwide.  Tata had acquired  Jaguar Land Rover in June 2008.(AP Photo/Rajanish Kakade)

In the Mumbai office of Ravi Kant, Vice-Chairman of India’s Tata Motors, a sleek newcomer has appeared among the collection of toy cars and models on his shelves. Occupying pride of place over the miniature Hummer, the shiny steel tank and other trinkets is a “Leaper”, the nose ornament of Britain’s Jaguar marque.

Mr Kant and his Chairman, Ratan Tata, displayed all of the boldness symbolised by the forward-thrusting Leaper cat when they bought Jaguar and its sister brand, Land Rover, from Ford for $2.5bn in June last year.

But last month, as Mr Tata, an amateur pilot and car enthusiast, celebrated his launch of the brands in India with ceremonies and media appearances, his expressions of confidence in the acquisition sounded hollow. Mr Tata’s description of the deal as “a terrific decision” came only a few days after Tata Motors revealed it had pumped more than £1bn ($1.6bn, €1.2bn) into the marques to keep them running.

Largely as a result of the purchase, the group reported a Rs25.1bn ($520m, £315m, €369m) loss for the year to March. “Who had thought that the whole world economy would collapse? Nobody had predicted that. It was not definitely factored into it,” Mr Kant says of the takeover in an interview with the Financial Times.

The plight of Tata Motors and JLR has become the biggest leadership test for the 71-year-old Mr Tata since he took the helm of India’s largest industrial group in 1991. The acquisition has hammered Tata Motors’ share price, its credit rating has been downgraded and the group has locked horns with the UK Government in long-running talks over loan guarantees needed to prop up JLR.

The plight of Tata Motors and JLR has become the biggest leadership test for the 71-year-old Mr Tata since he took the helm of India’s largest industrial group in 1991. The acquisition has hammered Tata Motors’ share price, its credit rating has been downgraded and the group has locked horns with the UK Government in long-running talks over loan guarantees needed to prop up JLR.

The troubles have raised questions about the wisdom of fast-growing companies from emerging markets acquiring their developed-world counterparts in struggling sectors, such as the automotive industry. Tata Motors, whose domestic market is one of the world’s most promising, would have weathered the global economic crisis relatively smoothly had it not got involved with JLR.

JLR’s difficulties meanwhile highlight the debate over whether niche players can survive in an automotive world that is increasingly looking for scale. Its woes are also testing British policymakers, who have spent billions of pounds on bailing out the financial industry and, in a challenge for UK industrial policy, are being asked why they should not do the same for manufacturers such as JLR.

Tata Motors, a group that used to pride itself on treading softly when conducting acquisitions, has slashed more than 2,200 jobs at JLR and there were questions over whether it can afford to keep its three UK factories open. The survival of the marques is on the line, as is Tata Motors’ long-term profitability. “If they carry on operating JLR as it is, it’s toast,” says one banker who knows the company.

This is not the way it was meant to be. When Tata Motors’s interest in Jaguar and Land Rover was first revealed in 2007, things were looking up for both marques.

Jaguar was a costly investment for its previous owner, Ford Motor, which ploughed more than $10bn into the brand to fund investments and cover losses over nearly two decades of ownership but failed in its effort to make it a high-volume luxury brand fit to rival BMW. (Ford bought Land Rover from BMW in 2000.)

By the time of the sale, however, the two brands together were profitable. Both had addressed long-standing problems with reliability and were producing well-reviewed new vehicles such as Jaguar’s XF sports sedan that premiered last year. A new version of its highly profitable XJ luxury saloon, unveiled in London this month, was described by Britain’s Autocar magazine as Jaguar’s “most daring saloon in 40 years”. In Mumbai, Mr Kant points out that JLR made a profit in the 2007 calendar year and the first half of 2008, adding: “If you put it together you’ll see that actually this company has a very good future.”

Tata Motors, a group that used to pride itself on treading softly when conducting acquisitions, has slashed more than 2,200 jobs at JLR and there were questions over whether it can afford to keep its three UK factories open. The survival of the marques is on the line, as is Tata Motors’ long-term profitability. “If they carry on operating JLR as it is, it’s toast,” says one banker who knows the company.

Even so, Tata Motors is an unorthodox home for two of the world’s most exclusive brands. The group derives most of its revenue from trucks and has been producing passenger cars for only about 10 years. Its models for emerging markets include the Nano, the world’s cheapest car, with a starting price of about Rs100,000. By way of comparison, a Jaguar retails for at least Rs6.7m in India.

Tata and Ford sealed their deal just as spiking petrol prices hit sales of large cars. Alan Mulally, Ford’s Chief Executive, has since made it no secret that he was glad to be free of the brands. Demand for luxury vehicles fell further from last September when banking collapses spooked consumers and froze credit markets – prompting Tata the following month to approach Britain’s Government about short-term funding for JLR.

Nine months later, the two sides are near an agreement, expected in the coming weeks, in which the Government would guarantee £175m worth of commercial bank loans, according to people in both camps. A UK parliamentary committee, criticising the Government for failing to disburse anything from a £2.5bn automotive industry aid package, this month said members were “astounded” the JLR talks were taking so long.

Mr Kant and David Smith, JLR’s Chief Executive, have led the carmaker’s team in the talks. Lord Mandelson and members of his Department for Business have led the Government’s side. The amount now under consideration is significantly smaller than Tata’s original request for a Government guarantee for a £340m European Investment Bank loan for lower-emission technology approved for JLR in April, plus guarantees for up to £500m of commercial bank loans. Tata insists it is not seeking a bail-out, saying it only wants the Government to guarantee loans from banks the state now largely owns.

Recently the talks turned acrimonious after public remarks by Lord Mandelson urging Tata to respond to his offer, which angered some at the Indian group who saw them as a breach of confidentiality. “These are big sums for the taxpayer,” says a departmental official. Although the discussions have been constructive, “we must be sure that we understand the financing of the business and plans for the business”.

Describing the talks, a person close to them says: “In India, if they [at Tata] have a problem, they ring up the Prime Minister and say, ‘sort this out’. They are used to being treated like royalty. It has taken time to meet expectations on both sides.”

Describing the talks, a person close to them says: “In India, if they [at Tata] have a problem, they ring up the Prime Minister and say, ‘sort this out’. They are used to being treated like royalty. It has taken time to meet expectations on both sides.”

What is therefore the outlook for JLR, which employs about 14,500 people and says it accounts for more than one-third of all UK automotive research and development activity in an industry dominated by US and Japanese manufacturers?

JLR and Tata say they need Government support for the marques’ further investment in the low-emission technology that will ensure their future, including the development of a compact Land Rover model that would do much to lower the brand’s carbon footprint, extend its market and improve its gas-guzzling image.

With or without Government aid, the two brands’ current sales of about 250,000 units a year raise questions about their long-term viability at a time of global consolidation in the industry. Jaguar sold just 26,417 vehicles in the first half, 26 per cent fewer than a year earlier, and Land Rover sold 67,721, a 38 per cent drop.

Mike O’Driscoll, Jaguar’s Managing Director, has mentioned Porsche, which before the credit crunch sold about 100,000 cars a year, as a model. But Jaguar has much work to do if it wants to emulate the German company’s efficiency – never mind that the sports carmaker is, as of this week, to be absorbed by Volkswagen.

Analysts say JLR needs to cut costs by building more models on fewer platforms – which could mean plant closures. “You can’t really run three plants making that many cars – one of them has to go,” says Chas Hallett, Autocar’s Editor. “They’ve definitely got a future, but they have to make some painful decisions first.”

Mr Kant says the company, which this week retained KPMG and Roland Berger Strategy Consultants to advise on cost-cutting, is working on a three- to five-year time-frame for making JLR’s finances more shockproof. Meeting that goal will be important to the group for another reason. Mr Tata is due to retire in less than four years, when he turns 75. The last thing he will want as his legacy is a Tata Motors still bleeding from its ill-timed acquisition.

Of the two brands, Land Rover – which was achieving record sales before the crisis – is seen by analysts as having the better chance of expanding its franchise. Its compact sports utility vehicles sell at about one-third of the volumes of competing BMW and Lexus models in the US, although its larger Range Rovers do well in their segment. JLR’s combined sales currently claim barely 0.3 percentage points of the world’s largest car market, compared with about 2 per cent each for BMW, Lexus and Daimler. In Asia and Africa, most of the brands’ vehicles also underperform sales of rivals.

While Tata Motors this week reported improved quarterly earnings, JLR’s business remains dire. The two brands together lost £673m last year in their core UK operation – or nearly £1.2bn if losses relating to their pension schemes are included.

Still, probably the best thing that happened to JLR was its acquisition by the Tata Group. The Indian conglomerate, while it is struggling now to digest its overseas acquisitions, is known for taking a long, 10-year view of its businesses. As a group, it has deep pockets and it boasts some of India’s best corporate management teams. The crisis has also provided it with the excuse it needs to get tough on cost-cutting at JLR. This would have been difficult to do in more prosperous times.

Mr Kant says the company, which this week retained KPMG and Roland Berger Strategy Consultants to advise on cost-cutting, is working on a three- to five-year time-frame for making JLR’s finances more shockproof.

Meeting that goal will be important to the group for another reason. Mr Tata is due to retire in less than four years, when he turns 75. The last thing he will want as his legacy is a Tata Motors still bleeding from its ill-timed acquisition.

Luxury cars

[Source: Financial Times]

Clive Goldthorp

About the Author:

Clive claims that his interest in the BMC>MG story dates back to his childhood in the 1960s when the family’s garage premises were leased to a tenant with an Austin agency. However, back in the 1920s and 1930s, his grandmother was one of the country’s first female Garage Proprietors so cars probably run in his genes! Admits to affairs with Alfa Romeos, but has more recently owned an 06/06 MG TF 135 and then a 15/64 MG3 Style… Clive, who was AROnline’s News Editor for nearly four years, stood down from that role in order to devote more time to various Motor Racing projects but still contributes articles on as regular basis as his other commitments permit.

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