The Hindu Business Line : The right turn by Tata Motors?

Is the $2.3 billion spent by Tata Motors to seal the JLR deal worth it? Will the acquisition benefit the domestic business of Tata Motors? Read on to find out.

The new Jaguar XF has received rave reviews.

Raghuvir Srinivasan

The Tata Group has encountered several challenges in its journey to becoming India’s pre-eminent business group. It faces its toughest one yet in making a success of Tata Motors’ acquisition of Jaguar Land Rover (JLR). The purchase of the two iconic brands that are a part of the world’s automotive heritage is a bold and courageous move, yet it could backfire on Tata Motors if not handled with care.

Markets not impressed

The company may have acquired the brands at what many consider to be a bargain price ($2.3 billion) but questions are already being raised about what synergies they bring to Tata Motors and whether the company may have bought itself a load of trouble.

Indeed, the stock market has voted with its feet de-rating the Tata Motors stock which has shed considerable value from the time the deal first became public in October last and now, particularly in the last one week after the formal closure. Compared to a 19 per cent fall in the market bellwether, BSE Sensex, between October and now, the Tata Motors stock has lost about 25 per cent value in the same period.

Of course, some of it also has to do with concern over the performance of the company’s bread-and-butter business of commercial vehicles which is in the grip of a cyclical recession, but there is no mistaking the market’s concern over the JLR deal and its impact on Tata Motors. After all, the Rs 9,200 crore that the company has spent on the deal is a third more than its net worth (as of March 31, 2007).

Given the investment, the two obvious questions are: Is JLR worth the money that has been spent on it and how will it add to Tata Motors’ bottomline? Second, will the acquisition benefit the domestic business of Tata Motors?

Let’s answer the second question first. Operating as they do at two different ends of the spectrum, it is difficult to envisage any synergies between JLR and Tata Motors’ products. If Jaguar and Land Rover are luxury marques, the Indica and the just unveiled Tata Nano are mass-market cars. The materials and components that they use are different, JLR’s technology is high-end and the cars are engineered quite differently. So simply put, there are unlikely to be any major benefits flowing into Tata Motors in terms of technology or components from the deal.

It is also difficult to imagine that India will be a big market for the two iconic brands anytime in the near future. Jaguar and Land Rover will remain premium marques selling mainly in Europe and North America.

JLR in focus

Will JLR add to Tata Motors’ bottomline in a big way? What are the prospects for JLR’s business? One of the challenges that Tata Motors would face is to ensure that Jaguar and Land Rover maintain their “luxury” image. In the glamorous, often snobbish world of luxury automobile buyers, image is everything. Ford created a big mess for itself in Jaguar by launching the X-Type, a car designed on its Mondeo platform. Jaguar buyers were not impressed by the brand being taken down-market. In all probability, Tata Motors mayopt to keep the JLR business separate if only to ensure that the “mass-market manufacturer” image does not rub off on the latter.

Mr Ravi Kant, Managing Director, Tata Motors, has said that the company examined the five-year product plan of JLR and bought into it. The recently introduced Jaguar XF has received good reviews and has also attracted bookings in excess of 15,000 units. Jaguar sold a little over 60,000 units in the whole of 2007.

Besides this, there are also said to be a couple of exciting products under development one of which is a new version of the XJ saloon. There are also higher-end versions of the XF and XK that are likely to be out in another year’s time. The turnaround of Jaguar rides on these new models in the pipeline which Tata Motors obviously had a close look at.

The case of Land Rover is different. The brand is doing reasonably well and a concept of a small Land Rover, the LRX, which was displayed at the Detroit Motor Show, already has attracted favourable attention. The LRX is a “junior” Land Rover with a new design and has a hybrid petrol and electric engine and is slated for launch in the next two years. In a world of expensive fuel and tighter emission norms, the hybrid concept could prove handy.

The rapid appreciation in the pound sterling versus the dollar is a major headache for JLR as its biggest market is the US. The adverse currency equation erodes the price competitiveness of JLR in the US market. The only consolation is that its competitors — BMW, Audi and Mercedes Benz — suffer in equal measure as the euro is also strengthening against the dollar.

Emission control challenge

One of the biggest challenges that Tata Motors is up against is to get the JLR models fall in line with the developing stringent emission control regime in Europe.

The European Union has proposed tough new measures to control emission, in terms of which, all cars sold in the EU from 2012 will have to control CO{-2} emission to 120 gm per kilometre. Those unable to comply will face fines that could go up to 95 euros for every gram per kilometre that is over the limit from 2015.

What should worry Tata Motors is that as per the scheme, heavier vehicles will have to cut more. Land Rover vehicles are some of the heaviest on the road and could face a higher norm. To be sure, there is a lot of opposition to the proposals from within the EU from such powerful constituents as Germany, which stands to lose the most given its huge interests through BMW, Volkswagen, Mercedes and Audi. The general trend though is unmistakeably one of clamping down on emission with an iron hand.

Tata Motors must have factored these developments into its calculus but what it means is that the company will have to invest millions of dollars in environmentally clean technology. The deal with Ford includes supply of such technology but what is left unsaid is how long will the US company do that and at what price.

The norms are to be applied on a “fleet-basis” which means that smaller, fuel-efficient vehicles in a company’s portfolio can subsidise their profligate bigger siblings. To exploit this though, Tata Motors will have to seriously consider taking the Nano to the European market, which is not an outlandish possibility.

Continuing investment

It is likely that product development and environmental technologies will together need large investments in JLR on a continuing basis over the next five years at least. If there is a turnaround in Jaguar’s fortunes in the next year and Land Rover continues to do well, chances are that a large part of the investment will be generated there. But again, assuming that either of these or God forbid, both, do not happen, Tata Motors will find itself having to raise funds big time to sustain JLR.

Ford has promised assistance in component supply, technology and R&D but these will obviously come at a price which cannot be estimated now. Tata Motors will already be raising Rs 12,000 crore — three times its outstanding debt as of March 31, 2007 — as a bridge loan to fund the purchase. Some of it could be replaced with equity over the next one year.

Any continued investment in JLR for its operations will be over and above this. Has Tata Motors overreached itself? Will JLR eat into the top management’s time and divert its attention from the main commercial vehicle and domestic passenger car business? These are questions that have the market worried.

The answers are not going to be coming in the near-term or even in the medium-term. It is a leap of faith for Tata Motors, really. One that could take it to the next league of a world-class automobile company; it could also end up as a costly mistake. One thing is clear though: every company comes to a point where it has to take a big leap in its growth curve; having reached that point, Tata Motors has taken the leap. Here’s hoping that it lands in safe terrain.

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