Riding the Elephant

Ratan Tata, who runs the Tata group, one of India’s two biggest conglomerates, is buying into a history of trouble with his $2.3 billion cash deal, announced today,  to acquire the Jaguar and Land-Rover companies from Ford (F). Transfer of ownership to Tata Motors is due to be completed by the end of June, and the  question is whether Tata can then break a cycle of decline.

It’s been 40 years since the British government, in a bid to rebuild the country’s automobile industry, cobbled together ailing car brands such as Jaguar, Rover, Austin, Morris and Riley into a giant called British Leyland. BL, as it became known, was a failure, mainly because of endemic labor problems, uninspired products and poor quality.

[Added Dec 10 ’08: See http://justbritish.com/2008/12/10/auto-industry-bailout-lesson/ for more details of the history, including  how the British government had committed £11bn at today’s prices by the 1970s to save BL, and Ford spent another $10bn later]

Since 1968, there have been many rescue attempts, but only rare short bursts of success. Several of the once proud names are long forgotten and none is British-owned; the iconic MG brand was bought three years ago by China’s Nanjing Automobile to make sports cars in China and the U.K., and the Morris Mini cult car is with BMW.

So could Tata succeed where others have failed? Market and industry analysts have their doubts, fearing the companies do not fit and that Tata’s optimism about growth could be hit by worsening economic problems in the United States and elsewhere. Tata Motors shares lost 4.4% on the Mumbai stock market today as brokers awaited the announcement.

But there is some reason for optimism. Ratan Tata isn’t expected to treat Jaguar and Land Rover like a traditional takeover: He says he’s not planning to overhaul senior management, close factories in Britain, or cut workers.

He said today: “We have enormous respect for the two brands and will endeavour to preserve and build on their heritage and competitiveness, keeping their identities intact. We aim to support their growth, while holding true to our principles of allowing the management and employees to bring their experience and expertise to bear on the growth of the business.” Ford will continue to supply Jaguar and Land Rover with powertrains and other components, in addition to a variety of  environmental and other technology and support services.

Tata also doesn’t seem all that concerned about instant profits – just as he doesn’t expect instant returns from the tiny Nano car he hopes to launch by year’s end. Instead, he is expected to use the brands and their U.K. plants, executives and labor to help build Tata Motors, which had $7.2 billion sales in fiscal 2007, into a global car company. He’s been on this mission for several years, buying Britain’s Tetley Tea in 2000, a Korea-based Daewoo truck plant in 2004 and steel giant Corus (previously British Steel) last year.

Ratan Tata’s hands-off ownership could win him crucial support as he tries to fold the Jaguar and Land Rover brands into Tata. Mark Norbom, the head of General Electric in Japan, wrote recently in the Financial Times about the importance of the “soft side” of a takeover deal. The “look in the eyes that (the buying) company is worthy” has special value, said Norbom, and is something that “does not come naturally to the typical western-trained dealmaker.” Well, it seems to come naturally to Tata and his people. It was evident in the Corus deal, and it seems to be at work again in their Jaguar and Land-Rover plans.

This could, of course, mean that Tata is seen – especially by British trade union leaders – as a soft option who will let workforces carry on as usual. Land Rover has had three years of record sales for Tata to build on. But there’s no telling how long the status quo can last, especially if demand slackens in the United States and elsewhere and Ratan Tata has to institute cutbacks at the luxury car makers.

Tata has said that Land Rover and Jaguar will benefit from India’s low-cost design and IT ability – and boost sales in Asia. His company will “add value in co-operating on engineering and development which are considerably cheaper (in India) than in the West,” he said. Tata Technologies, the group’s advanced industrial design house, is based in Pune and operates in twelve countries, with international headquarters in Singapore. It has been involved in the design of Tata Motors’ cars and vans, but does about 75% of its work for foreign clients, including Chrysler, General Motors (GM), Boeing (BA) and Airbus.

There’s another question hanging over the deal: Tata’s future once its 70-year old patriarch retires. He is not due to step down until he’s 75 – in December 2012 – but has said he would like to go earlier, and there are rumors it could be at the end of this year.

That seems unlikely, if only because there is no clear successor. From inside the Tata family there is a reclusive cousin, Noel Tata, who runs some of Tata’s retail businesses, but there is no sign of him being groomed for the corporate and public life that goes with the top job. One or two top executives from outside the family, and even outside the Tata group, have also been rumored, but none has been publicly held out as a successor.

It is Tata who has provided the personal drive and leadership to turn Tata Motors into a business that can produce the Nano and buy two world famous brands – in the same year. There’s a big job waiting for someone – and Tata is not yet saying who. Until it does, the era of uncertainty at Land Rover and Jaguar won’t be over.