THERE is rightly a sense of national pride that India’s Tata Group has pulled off the purchase of the internationally prestigious Land Rover and Jaguar brands from owner Ford. Commerce and Industry Minister Kamal Nath boasted yesterday: “The world is looking at India.” And so it is. Global business undoubtedly wants to see if this really is the start of an Indian entry into highly competitive international markets such automobiles.
There are considerable challenges ahead for Tata management. On the face of it, the Indians have got a bargain. They have paid $2 billion for assets that made a profit last year of $500 million. Ford has also agreed to pay $600 million into the two companies’ pension funds which should protect Tata from having to meet any shortfall between pension liabilities and invested assets during the current equity market downturn. Against this must be balanced the $3 billion short-term funding Tata is reportedly putting in place to finance the deal and give it some extra working capital. Money is not cheap at the moment and even an early conversion into longer-term debt may come at a high price in the current lending climate.
Nor do the challenges end there. Tata has reportedly committed to maintain the five-year investment plan for both marques that are built in the high-labor cost UK. This may have kept the British automotive unions sweet but it precludes the option of moving the plants and key workers to India in the same way that the Chinese transported the newly acquired Rover factories from the UK to China two years ago. Both the Chinese and Indian economies have grown in part because of a strong wage cost differential with Europe, America and Japan. It is true that Tata has already addressed this issue with its purchase of the European-based Corus Steel but there is a big difference between running a specialist international steelmaker and two high-profile consumer automotive brands.
Besides which, while Land Rover is profitable with a well-defined range, under Ford management, Jaguar has lost money as well as direction. Analysts will be watching closely to see how Tata sets about reviving the brand. There is undoubtedly a growing middle class market in India for Jaguar but it would be a neat trick if Tata could build the cars in the UK and sell them profitably in India as lower cost prestige cars — the market position the marque has occupied for the last four decades. Yet Tata — the maker of the world’s cheapest motorcar, the Nano — clearly has vision and enterprise. It probably also has deep enough pockets to fund the growth of both businesses. The interesting question will be whether Tata “Indianizes” its acquisitions, with an eye on its huge domestic market or uses them as another step in the “internationalization” of Indian business.
Finally at this euphoric moment for India’s entrepreneurs, there is a sobering question: if Ford Motors, which virtually invented the modern automotive market, no longer saw Land Rover and Jaguar as part of a profitable future, what can Tata bring to the party? The answer is almost certainly that India, China and the other emerging economies, have a hunger and drive that is perhaps beginning to dissolve in the comfortable First World.
