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Will Tata's great car gamble backfire?
Independent, 30 March '08
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Perhaps Ratan Tata can only turn on the showmanship once a year. In January, Tata Group's chairman launched the world's cheapest car, the Tata Nano, by driving it onto a stage in Delhi to the thundering soundtrack of 2001: A Space Odyssey.

But recently, when Tata Motors announced the US$ 2.3 billion (1.2 billion) acquisition of Land Rover and Jaguar, he was nowhere to be seen. The absence of triumphalism may be a sign of the size of the gamble. By the time the Nano starts trundling off the production lines later this year, Land Rover and Jaguar will represent more than 60 per cent of the cars that Tata sells by value.

An auto analyst in Mumbai, says: "If you look at what this company will be after the acquisition, it's a completely different being."

Jaguar has cost its old parent, Ford, nearly US$ 10 billion in losses. So this is a huge risk and Tata is taking it at a time when the global slump has led to a 33 per cent drop in Jaguar's US and European sales, and the credit crunch has hiked the cost of borrowing. The US$ 3 billion 15-month bridging loan arranged by Tata won't have come cheap, nor will its refinancing.

The market is spooked. The stock fell over 7 per cent when the deal was announced, recovering a little and then falling again later. Analysts worry that increased interest on the debt will cut Tata Motors' earnings by as much as 30 to 40 per cent next year.

Another analyst argues that Jaguar Land Rover is a much bigger risk than Tata Steel's US$ 12 billion acquisition of Corus, the erstwhile British Steel. "It's a bigger bet because with Corus at least they have some cost synergies. But this is a new world for Tata; no synergies are visible."

What most perturbs the market is the lack of any clear plan for the companies that Ford wasn't already working on. "Our motivation isn't based on outsourcing and it is not based on taking technologies from these companies," Ratan Tata told reporters at the Geneva Motor Show last month. "What attracted us was that these are two very iconic brands. We believe it is the duty of whoever owns them to nurture the image, to retain their touch and feel, not to tinker with them."

Tata certainly isn't tinkering. It plans to leave the two companies' managements to continue with their existing strategies, without cutting staff, closing plants, moving manufacturing to India, or sourcing cheaper parts from India.

C. Ramakrishnan, Tata Motors' chief financial officer, says Jaguar and Land Rover's business plan to 2011 will remain in place. In the short term, this means the deal is to a large extent a bet on Jaguar's new XF, released this March to the best reviews a new Jag has received for years.

But that does not mean it can revive flagging sales in a downturn. Tata chief executive Ravi Kant has admitted as much. "We may have some pressure," he told reporters in Thailand, adding: "We are not taking this just for the next two or three quarters; we take this for the next 20 to 30 years."

Ratan Tata is not a fool, nor is he a stranger to the challenges faced by British car makers. "I think they know what they've bitten off," says a banker who has worked closely with Ford. "They know what it will take to sort Jaguar out. They know it's a 10-year process."

But why do the deal? For the same reason Tata Steel bought Corus - to give Tata Motors a global presence.

A Mumbai-based expert says: "No matter how hard they tried, they would not have been able to create a global brand in cars. They would have always remained an Indian company with exports to Africa." And Jaguar and Land Rover came cheap. Ford paid a total of US$ 5.3 billion for the brands when it bought them in 1989 and 2000. For US$ 2.3 billion, Tata gets them debt- free, along with a US$ 600 million pension contribution from Ford.

And crucially, Ford has funded a pipeline of new models. Paul Blokland, director at Segment Y Automotive Intelligence, says: "It costs anywhere between US$ 500 million and US$ 1 billion to develop a new car, so to buy seven to eight fairly young platforms for US$ 2.3 billion is not so expensive."

After the XF, the Jaguar XJ is due next year, and Land Rover's Freelander, released in 2006, still has about a decade left. Building up the Lexus brand has taken Toyota 18 years, with only partial success.

The deal leaves Tata with an unusual business model: the world's cheapest car on one side, and some of the world's top luxury brands on the other. "We came to the conclusion it's a pretty neat strategic fit," Mr. Blokland argues. "There is a clear polarising trend in Europe, with sales going to budget brands such as Skoda and Fiat for small cars and to luxury brands such as BMW, Audi and Mercedes at the upper end. There would be no point in Tata developing a Mondeo; that's where companies like Renault are struggling."

The lack of fanfare and Ratan Tata's clenched lips may have frustrated the markets, but a do-nothing approach may turn out to be what Jaguar needs. "Frankly, Ford never had a clue how to manage Jaguar," says the banker who worked with the US giant. "Every time they take a decision, they retake it every five minutes. Tata will be significantly better than Ford."

But it may end up costing a lot more than US$ 2.3 billion.