labels: M&A, Tata Group, Cars
Tata's magnificent opportunity news
05 January 2008

Tata Motor's likely buy-out of Jaguar and Land Rover may appear ambitious and risky, but offers the company a potentially lucrative - though challenging – opportunity. By Vivek Sharma.

Speculation about Tata Motor's bid for Jaguar and Land Rover (JLR) has been doing the rounds for many months, since Ford announced its intention to sell these brands. But, discussions and analysis of the deal were hijacked by the 'supposedly racist' remarks against the deal from a Jaguar dealer in the US.

While the defenders of our national pride spent hours on television and consumed tonnes of newsprint to attack a remark which should have been simply ignored, the real issue of whether the deal makes sense for Tata Motors was largely forgotten.

Now that Ford has announced Tata Motors as the preferred bidder for JLR, here is a look at what the deal means to Tata Motors.

Why the deal appears stupid
Difference in profile
: When the former Arcelor CEO Guy Dolle said his company made perfume when Mittal made only eau de cologne, it was indeed a bit of an exaggeration. But he was pilloried. If someone uses the same allegory to describe the potential Tata–JLR deal, it would be an understatement.

A more apt comparison would be between a bottle of Bisleri and a bottle of 1995 vintage Krug champagne. Both will serve the same purpose, more or less. The first will quench your thirst in a no-nonsense, but very cost-efficient way, while the second will transform the apparently simple act of drinking bubbly into a sophisticated and memorable process that, if performed in the presence of lesser beings, will make you feel like an emperor.

There is nothing in the Tata Motors product line-up that can be compared against the recently launched Jaguar XF. The best Tata sedan, Indigo XL, is more like one of those simple motor boats in front of the super luxury yacht The Jaguar XF is arguably the best looking luxury sedan available today.

Again, the Safari Dicor 2.2, Tata's best SUV, is more an oxcart when compared to the 2008 Range Rover, repeatedly rated as the best luxury SUV money can ever buy. The product ranges simply do not stand up to comparison!

Jaguar is struggling: Ford doesn't disclose the profitability of individual brands, but has acknowledged that it has not made any money from Jaguar since 2001. The brand's losses for 2007 are estimated at over $1 billion, in the same range as the estimated average losses of $500 million to $1 billion per year for the last six years.

Jaguar

It is a tough market: Outlook for the global auto industry is not all that great. Volume sales are expected to stagnate in mature markets, though emerging markets like China and India will continue to see double digit growth. If there is a recession in the US, which will remain the biggest market for many more years, it will hurt the auto majors even more. And the pain will be felt more by the luxury brands.

Technology expertise: A modern luxury car has to be a marvel, in terms of technology, design and performance. Even large auto companies struggle for a long period to master the art of making luxury products, like Toyota did with its Lexus brand. For regular cars, technology and parts can be shared across platforms and even brands. Not so in the luxury segment, where every shared bit is perceived to dilute the uniqueness and hence the appeal of the vehicle.

Tata's inexperience in premium products: Whenever this issue is brought up, most supporters cite the exemplary performance of the Taj hotel brand. But Taj is in hospitality, a service, and the business is entirely different.

Selling luxury automobiles is not the same as entertaining guests at a luxury hotel. If that was the case, then all Ratan Tata has to do is ask Taj Group CEO Raymond Bickson to take over sales and marketing of Tata Motors! If that sounds stupid, then the Taj argument to bolster Tata group's luxury marketing credentials is cast in a similar mould.

And why it still makes sense
Tata will keep JLR separate
: Ford's biggest blunder at Jaguar was when it re-launched the Jaguar sedan on a Ford Mondeo platform. Now, the Ford Mondeo is an also-ran in a segment dominated by the Honda Accord and the Toyota Camry.

In India, the car was notorious for the biggest drop in value, the moment it left the showroom. It was a bit too cute for Ford to try selling that boat in Jaguar clothing. The Jaguar's brand image was so badly dented and it never quite recovered even though the company has Jaguar made substantial improvements in quality in recent years.

Tata Motors cannot do a Ford and launch the next Jaguar on an Indigo platform! No way, nobody will even think of it. It is also inconceivable that Jaguar designers will raid the Tata Motors parts bin to find things that can be shared to cut costs. Can you imagine a Jaguar with an Indigo headlamp and steering wheel?

So, the difference in product profiles of Tata Motors and JLR is actually the best reason why the acquisition may actually work. Future Jaguar and Land Rover models will be purely Jaguar and Land Rover, not with an Indigo tail lamp cluster and a Safari Dicor drive train. Once this message is delivered to potential customers, they will trust the Jaguar and Land Rover brands just as much with the Tata badge on them.

Marketing and Technology: These are going to be the biggest challenges for Tata Motors, but not insurmountable. Both Jaguar and Land Rover have considerable in-house design and technology capabilities. Yes, they will need some external support – especially in engine technology and emission management. But, this aspect is likely to be covered in the final deal with Ford expected to extend engineering support for a few more years.

Marketing will be the big challenge for Tata Motors. But, there is no reason why it cannot pull it off. Nothing needs to be built from scratch as JLR has a wide distribution network. Tata Motors simply needs to work hard to put together a brilliant marketing team to manage the brands, and more importantly, keep that team completely separate from Tata Motors existing brand managers. Of course, marketing will be easier if JLR can get the products right. Land Rover is doing a brilliant job in product development and future Jaguar models need to match or exceed the XF.

Some analysts and UK labour union leaders have commented that Tata Motors can open up emerging markets for JLR, better than Ford. That is a bit too optimistic (See: Ball now in Tata Motors' court to tie up deal: Union). Apart from India, the only reasonably big market where Tata Motors has some clout is South Africa. And there, too, it is perceived as the cheapest brand! Not exactly what a potential Jaguar or Land Rover buyer would want to hear.

Besides, it may not be a wise strategy to expand in emerging markets before regaining lost glory in mature markets. Western luxury brands sell in emerging markets because they carry the luxury aura of mature markets. Rich Chinese or Indian businessmen insisted on buying BMW 7-series or Mercedes S-class because that is what rich businessmen in western countries bought till recently.

It is inconceivable that Lexus or Audi would do well in China and India if they had not successfully challenged BMW and Mercedes in western markets in recent years. Also-ran brands in mature markets are likely to lag in emerging markets as well.

Land Rover

Jaguar's losses are manageable: Jaguar is likely to lose money this year as well, even if it can sell quite a few of the XF. Sustained profitability will be possible only if its other offerings are completely revamped and re-launched.

But, Land Rover is making money and has a strong product line-up. As a combined entity operationally separated from Tata Motors, JLR can survive on its own cash flows without recourse to the parent's financial resources. Yes, there will be some equity dilution at Tata Motors to finance the acquisition and the deal is unlikely to be earnings accretive for a couple of years. But, given the future potential, financial markets are unlikely to view this negatively.

The deal will not be too expensive: The best time to buy an asset is when the seller is desperate to sell it. German auto giant Daimler actually paid private equity firm Cerebrus to take Chysler off its hands, because it was so desperate.

Now Ford is equally desperate to sell its premium brands as it desperately needs the cash to revive its core North American business. Ford spent close to $6 billion to acquire JLR and invested many more billions to keep them going. Tata Motors is unlikely to pay more than $2 billion, which is rather cheap even after considering the potential short-term losses and further investments required to sustain the businesses. 

Luxury is where the money is: Porsche is probably the most profitable auto manufacturer and it does not make sedans and minivans for the middle class. Most luxury auto brands - BMW, Mercedes, Audi and Lexus, all except Jaguar - are more profitable than the mass brands. If a luxury automaker can get the products right, finding buyers and turning in a profit are not much of a deal. Even in the SUV segment, luxury brands like Land Rover are doing well when demand for cheaper brands suffers from rising fuel costs. After all, who would worry about fuel costs after spending $100,000 for a Range Rover?

Yes, there is a big opportunity at the bottom of the pyramid and Tata Motors is probably the best placed to exploit that market. Its 'Rs1-lakh car' has the potential to sell in every emerging market and become the biggest selling car ever. Other Tata products like Indica and Safari, when upgraded and after sorting out the quality issues, have the potential to become the 'best value' offerings in many markets.

So, the JLR deal is a unique opportunity for Tata Motors to step into the upper most segment of the auto market – while keeping its other feet firmly in the lowest segment. And leave the crowded middle segment for the global giants to fight and bruise themselves!

End Note: I am sure there are many like me who have been desperately dreaming about a competitively priced Rs12-lakh Range Rover and a Rs15-lakh Jaguar XF, even if re-branded as Safari and Indigo respectively, to attain motoring nirvana.

If Tata Motors ever tries to please us, it will be an even worse parent for JLR than Ford. If that happens, within a decade from now, you can read my arguments on why Tata Motors should sell JLR.


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Tata's magnificent opportunity