Ford's Pending Sale of Jaguar and Land Rover to Tata

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March 14, 2008

It is well known that Indian manufacturer Tata Motors Ltd, is the front runner to purchase the historic, yet troubled Jaguar and Land Rover brands from the financially troubled Ford Motor Company. For Ford, the motives are simple. The company needs the cash and they really do not care who the brands are sold to. Ford needs to raise capital to fund their most recent restructuring.

In the past few years, Ford has sold off assets such as Hertz rental car and more recently Aston Martin to increase their cash on hand. There have also been rumors about a possible sale of Volvo. Given Ford's financial crisis at the moment it is understandable why Jaguar and Land Rover are in play.

However, why would Tata want to purchase either Jaguar and/or Land Rover?

Tata is India's largest automobile company with USD 7.2 billion in annual revenue. Tata sold 450,000 vehicles globally in 2006 including passenger and commercial vehicles.



Pictured: Tata Indica

Tata is a small company and ranked 22nd out of 48 in production volume by Automotive News in their 2007 Global Data Book. The company made headlines in early January with their new Nano mini-car. Tata plans to sell the Nano with an estimated price of USD 2,500. Bare in mind, this vehicle is designed for emerging markets such as India and would not be legal to sell in mature markets such as Europe, Japan or North America because of safety and emissions standards.



Pictured: Tata Nano

However, given Tata's intent to purchase Jaguar/Land Rover, I have a number of concerns. The first is, Tata is not planning to purchase the brands with cash but is seeking to raise money. Tata, has mandated State Bank of India to raise USD 3 billion in debt as reported by the Financial Express paper. Given today's problems in the credit markets, is it wise for Tata to take on added debt given they will need to raise capital to fund Jaguar and Land Rover's future product.

Now it comes out that Tata seeks commitments from Ford to continue to supply powertrains to the two brands.

First off, this is standard practice anytime a company is sold as continuing operations is important. When Ford bought Land Rover from BMW, BMW supplied engines until Ford developed their own for the vehicles.

My concern is, Tata's technical ability going forward is suspect. Given the new emissions and fuel economy regulations in Jaguar/Land Rover's key European and US markets, does Tata have either the ability to develop advanced powertrains or resources to purchase what is needed? Also, designing and manufacturing vehicles for emerging markets is very different when compared to Jaguar and Land Rover's target prestige market. Land Rover has a relatively new portfolio of product. Jaguar on the other hand is trying to find a new identity with their new XF midsized sedan and will require significant investment to update the rest of their product line. I also question if Tata understands the two brands well enough and the market conditions to successfully manage them.

Jaguar/Land Rover will double or triple Tata's revenue, however the profitability of both brands are very suspect. Jaguar for the most part has been bleeding money for decades under Ford ownership and Land Rover could be slightly profitable now (Note*) but that is an open question.

I just have caveats with regard to this deal for both the future of Tata, Jaguar and Land Rover. The deal, if it materializes is good for Ford, however without cash or technology I am unsure if Tata can transform Jaguar and Land Rover into viable brands. Something Ford and even BMW had difficulty in achieving.

Unless there is something I am missing, I wonder if the independent Chinese or Indian companies can survive on their own if at all. The global automotive market is ever more competitive and more is being demanded of them by the market and governments. Larger, well established companies such as GM, Ford, Volkswagen and Fiat are having problems in this climate. Tata does have a joint venture with Fiat. Could that be their wild card?


Note *: Jaguar, Land Rover and Volvo profit picture is combined in Ford's financial statements under Premier Automotive Group (PAG) and cannot be separated. PAG generated $33 billion in revenue for a profit of $500 million in 2007. See 2007 Results


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