When Tata Motors acquired Jaguar Land Rover, it was pilloried for poor judgement. Now, JLR is a roaring success.
Alongside his warning last week that Tata Group expansion plans would have to be tempered by the troubled global environment, Mr Ratan Tata noted that in its drive to take heed of risks, it shouldn't lose out on good opportunities.
Four years ago, the “good” opportunity that the company didn't pass up provoked much tut-tutting. When Tata Motors first took Jaguar Land Rover off Ford's hands for $2.3 billion in 2008, many asked: how could a company known for commercial vehicles and cheap cars, and for whom there were no obvious synergies in the acquisition, do any better than a gargantuan of the global auto world, which had pumped billions into the iconic brand?
Those that didn't tut then, certainly did a few months later, when the financial crisis struck and sales at JLR plunged. Even worse, Tata Motors had taken out a $3-billion bridge loan to finance the acquisition, and struggled to refinance its debts, which remained firmly high. Attempts to secure financial support from the British government failed, forcing the Tata Group to pump its own funds into the company.
In March 2009, Tata Motors posted a Rs 25.1 billion loss for the year. “Troublesome trophy” declared the Financial Times, adding that it “raised questions about the wisdom of fast-growing companies from emerging markets acquiring their developed-world counterparts in struggling sectors.”
Those “questions” have now been turned on their head: far from being a trophy, JLR survived the crisis to become the biggest earnings contributor to Tata Motors, something that has continued — and is expected to continue — through this second round of the crisis.
For the year ending March, Umesh Karne at BRICS Securities expects JLR to make a net profit of Rs 71 billion, against a group profit of Rs 79.5 billion, with sales up 14 per cent, and a further rise of 8 per cent the following year.
JLR seems to be preparing itself for such an upbeat scenario. The threatened closure of one of its British plants never happened; the company has since announced plans to expand the workforce at its Solihull plant, and build an engine factory near the city of Wolverhampton, a move that will gradually reduce its dependence on Ford engines. It's in talks over a joint venture in China.
It's easy to look for one reason for this remarkable turnaround, but there are a number of answers. Firstly, Tata Motors wasn't afraid to seek external assistance, bringing in KPMG and Roland Berger Strategy Consultants to design a turnaround for the immediate, medium and short term. In 2009, the company unveiled a business plan, which involved aggressive cost cutting (reducing employee numbers, more efficient IT systems and marketing spend), changes to cash flow management, and a multi-year plan for product launches.
Luckily, there was lots of room for improvement. Ian Fletcher, an automotive analyst at IHS Global Insight, who worked for JLR under Ford, argues that the American firm had a “feast and famine” approach, lavishing cash on JLR at points, while starving it of investment at others. Cash was often directed in unhelpful ways, such as a Jaguar F1 programme.
“If you want to make a profit don't put millions into racing it round a car track,” Mr Fletcher says. “You need to build a car that people want and charge what you can get away with.”
Building a coveted car also proved challenging in the Ford years: its launch of the X-Type — which was known to some in the industry as a “Ford Mondeo with a pretty frock” — was just one example, while others such as the “S” type were seen as overly retro, and unappealing to audiences below the age of 50. (By contrast BMW and Mercedes were able to attract mid to late 30s buyers too).
Under Tata, the XF and XJ updates did much to restore the company's “cool” reputation while the launch of the Discovery in 2009 proved timely for the recovery. Tata Motors' pledge to pump 1.5 billion pounds a year up until 2014, into a total of 40 new product actions — including new vehicles, and updates — has added to that credibility and created a buzz (rumours that it was considering expanding its Halewood plant had observers asking whether it could mean a new compact Jaguar was on the cards).
Part of the problem in the past was too much interference from Ford: something that Tata Motors has reversed. Tata brought in (and retained from Ford days) senior engineers and management, with many years of experience, particularly in the German industry, pretty much leaving them to their own devices, but with the assurance of having the sizable resources and support of the Tata Group behind them.
The CX-16 concept car that wowed audiences at the Frankfurt auto show last year was a case in point. “10 years ago, something with such cutting-edge technology would have been left on the drawing board,” says Mr Fletcher.
The trouble with Ford's approach was that it understood and applied volume manufacturing, but not the global niche marketing and product that JLR needed to be successful, and which Tata Motors embraced through its hands-off approach, says Professor Peter Cooke, Professor of Automotive Management at Buckingham University.
“Fundamentally, Jaguar and Land Rover have to be global niche products,” he says. Now each product is targeted at specific niche audiences, such as the high-spending city dweller in the case of the Range Rover Evoque, the petit SUV, 15,000 of which have been sold since its launch in September.
As a result, Tata seems to be pushing demand in all the right directions: China is now JLR's third largest and fastest growing market, accounting for around 16 per cent of sales, while demand in Russia, Brazil and India continues to grow.
Overall, with the investment from Tata Motors, JLR was able to position itself in the right space, just in time for the upswing that came in 2009. It is not the only luxury branded car to be doing well: Bentley saw sales rise 37 per cent in 2011, again driven by China, and is preparing for further growth with plans to expand its range.
There are, of course, challenges: currency movements, which have in the past worked well for JLR's profitability, have hurt it in recent months, with the appreciation of the pound against the dollar. As a result, JLR profits for the quarter ending in September fell 2.1 per cent. Moreover, the financial climate will make the quality and timing of its 40 product actions all the more important.
The success of JLR doesn't make or break the case for acquisitions of distressed foreign companies (There is only so much a company can do in the face of unremittingly weakened demand, as has been the case with Tata Steel's European operations). But it does go to show, bad timing is often overrated. After all, had it waited a few months more, Tata Motors would never have secured the financing to acquire the company that has turned out to be its golden goose.