Finally, Tata Motors has hit the jackpot by snatching the US$ 2.3 billion Jaguar Land Rover (JLR) deal. The deal has enabled Tata not only to set a benchmark for other business houses, but also to enhance its own brand value in the global market. Moreover, it also helped Tata Motors fulfill its long-cherished dream of entering into the high-end luxury car segment.
With its persistent efforts and skillful negotiations, Tata Motors managed to win the prestigious deal and as a result joined the premier league of global automakers. Tata Motors overtook its Indian counterpart Mahindra & Mahindra and a private equity firm, One Equity led by Jacques Nasser, to secure the coveted deal.
The takeover
Tata Motors, one of India's largest automobile manufacturers, is controlled by Mumbai-based Tata Group. Its product range covers passenger, commercial and utility vehicles. It stayed away from the premium and luxury segments only to sharpen its focus on the Indian market. But of late, Tata Motors was planning to expand itself globally and enter the luxury car segment. So, when Ford decided to divest its British brands, Tata Motors left no stone unturned to acquire them and capitalise on the deal for its expansion.
Ford's JLR has a significant presence in 227 nations. Tata Motors' belief that the acquisition will enable it to set a foothold in all the 227 countries, particularly in the North American and European markets compelled it to snap the deal.
Why Ford hived off JLR?
Ford acquired Jaguar for US$ 2.5 billion in 1989 and Land Rover for US$ 2.7 billion in 2000, and made them part of its Premier Automotive Group. Ford acquired the two iconic brands to scale-up its offerings to the luxury car market, especially in the overseas markets. However, high manufacturing costs in Britain, rising employee healthcare and pension costs, and competitive pressure from foreign carmakers-notably the Japanese- led to the decline and subsequent losses from Jaguar car sales. When Ford posted a whopping US$ 12.6 billion loss in 2006-the heaviest in the 103-year history of Ford- the company decided to hive off the two brands.
Though Land Rover has always been a profitable entity, Ford offered it along with the bleeding Jaguar. This makes business sense since the production and manufacturing of vehicles for both the units are very much intertwined. It also makes sense from engineering point-of-view as both Jaguar and Land Rover share many parts, components and assemblies.
Terms of endearment
Tata Motors agreed to continue vehicle production in all the three British plants located at Solihull, Castle Bromwich and Halewood. It has also committed that JLR production or component sourcing will not be transferred from Britain to low-cost countries. Tata Motors has assured that no job cuts would take place at the production units of both the brands. It has also agreed to buy engines from Ford.
Ford, on the other hand, has agreed not to retain any stake in JLR. It has committed to contribute US$ 600 million towards JLR's pension fund. The company will provide engines, power trains, transmissions and stampings services, platform and environmental technologies, engineering support including research and development, accounting, information technology and other services to the two brands.
Tata's gains
- The deal will raise the status of Tata Motors to the level of global car manufacturer and help it in establishing a global footprint.
- The acquisition will help it to gain a strong foothold in the luxury automobiles market.
- The deal will widen its portfolio from the world's cheapest car to some of the most expensive brands.
- By accessing the ready-made technology and products, Tata Motors can make a huge technological leap.
- It can now have access to the established JLR distribution network across the globe.
Challenges
- Cutting down the costs of the British marques will remain a daunting task for Tata Motors.
- Sustaining the brand value of the iconic brands is a major issue that needs to be dealt with.
- The problem of maintaining the diverse portfolio is the need of the hour.
What next?
"There are challenges . but there are also opportunities," observed an analyst after the deal.
For a few analysts, the deal is an odd turnabout. First, they were surprised at Ford's decision to sell its iconic British auto brands. Secondly, they expressed their doubts regarding Tata Motors' experience in the international market. Many of them could not digest the fact that an Indian carmaker, which is known more for manufacturing cheap cars (e.g. Nano, the world's cheapest car priced at US$ 2,500), clinching a deal to acquire two prestigious British marques. They are of the opinion that what works for small cars may not work with JLR. For instance, Tata Motors low-cost manufacturing skills may not be applicable in the premium segment. Nevertheless, the fact that Tata topped the list of potential bidders says a lot about its calibre.
However, CRISIL (Credit Rating Information Services of India Limited) expects Tata Motors to become self-sufficient in the near future, and not depend on Ford for its components, materials, technologies as well as R&D. Thus, down the line, we can expect Tata Motors to source components from low-cost countries.
Some industry analysts even believe that bringing down the costs of JLR will remain a daunting task for Tata Motors, which will affect profitability of both JLR and Tata Motors. On the contrary, CRISIL advocates that, Tata Motors is going to pocket more than half of its total consolidated revenues from JLR operations. It anticipates that the recently unveiled Jaguar XF and a new version of the XJ Saloon and higher-end versions of the XF and XK-which are yet to be out-will definitely bring in profits for Jaguar. The concept of a small Land Rover, the LRX, with a new design and a hybrid petrol and electric engine, will also reap benefits.
Now that Tata Motors has purchased JLR, how well it does, will go a long way in proving India's mettle in the world car market; dominated by Japan, North America and Europe. In a nutshell, much will depend on how deftly Tata Motors handles the post-acquisition challenges.
As of now, the acquisition reflects the coming of age of Indian automotive players.
Author
Pragyan Paramita Barik, Editorial Associate, Automotives
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