A leap of faith
Business Standard — March 27, 2008

Now that Tata Motors has Jaguar and Land Rover in the bag, all eyes will be on the firm and the group to spell out the strategy which has guided the acquisition. The deal, which has been months in the making, could have come at a better time. The turmoil in the international credit markets will undoubtedly impact the cost of the substantial borrowing that Tata Motors may have to undertake to fund the deal. When Ford first announced that Tata were front runners for the two luxury brands, the rating agencies Standard & Poor’s and Moody’s placed Tata Motors on negative watch as it is a large deal which could have a negative impact if heavily funded by debt. The global financial environment has only got worse since then, but the plus side for Tata is that it is paying much less than what previous buyers had paid for the two marquees. So even if debt costs have climbed, the capital cost loaded on to each vehicle that rolls out may be quite small.

The puzzling issue is the absence of strategic fit; Tata clearly thinks it can make a go of its new acquisitions through better management alone — something that no Indian automobile company would have had the confidence to assert even five years ago. In this scheme of things, it may not matter that much if Jaguar and Land Rover are seen as global premium brands while Tata Motors is a value-for-money manufacturer of robust cars and trucks. At a stretch, there can be some synergies between Land Rover and the current offerings of Tata Motors, but none with Jaguar. By way of contrast, synergies can and do exist between Tata Motors and Fiat, and the two have wide-ranging agreements covering manufacturing and selling, whereas no such synergies seem to be part of the Tata plan for its latest acquisitions. The other issue is that the environment for luxury cars and SUVs in Europe, a key market, is hardly favourable as popular opinion and stricter emission norms go against such cars. Tata Motors is also unlikely to be able to cut costs by reducing staff at the former Ford facilities manufacturing the two brands, as it has in all likelihood been chosen over private equity firms because the latter would have cut jobs. That would have been unacceptable to the unions. Tata has therefore a task on its hand, to prove the sceptics wrong. In other words, it is not hard to understand why Tata Motors’ share price dropped on the news of the acquisition.

Still, most analysts also agree that the two brands look good value. Jaguar has been restructured and its line-up of models has been well received. Land Rover has a strong product portfolio in terms of its own past. There is also the feeling that if any Indian group can make the acquisition work, it is Tata. The group did a good job of acquiring and assimilating Daewoo’s commercial vehicles business, Tetley and most recently Corus. In acquiring the two brands, Tata may have its eyes on getting close to international manufacturing best practices, and the top end in design and market positioning. In recent years the firm has taken significant steps to align its product development effort with international benchmarks, including starting a development centre at Warwick in the UK. A company that has long prided itself in doing everything on its own, has taken to getting and assimilating the best that is globally available. Perhaps Ratan Tata will prove the sceptics wrong in the same way that he did with the Nano.