Buyers Remorse: Will Tata Rue the Purchase of Jaguar and Land Rover?

I spent a good portion of last week sifting through various articles about Tata’s purchase of the Jaguar and Land Rover marks from Ford. I was quite disappointed in what I read, mainly due to a lack of depth in analysis. Most of the articles I read extolled the virtues of Tata’s acquisition – hailing it as a wonderful play into the luxury segment of the market, or applauding Tata’s ambition in trying to become a truly global automaker.

I, quite frankly, think that this deal is destined to fail (I’ll come back to that in a minute).

For Ford, by contrast, this is an unambiguously good (and timely) outcome. In fact, that they received anything greater than $0 is remarkable to me. I wouldn’t have been surprised to see Ford pay someone to take both firms off their hands in much the same way that Daimler paid Cerberus to take Chrysler (see Divorced). Ford, after all, is a struggling giant, trying to do the best it can to survive in a competitive, mature, and low-margin industry. After a valiant effort and many attempts over the years, they could just not make Jaguar or Land Rover consistently profitable (although LR was marginally profitable on an operating basis this past year). The cost structure of Jaguar and LR (from a labor rate standpoint), their liabilities (from a pension perspective), and the demand for their products (with tired designs and out of favor models) were untenable for Ford in the long run. Ford really had no other option but to abandon ship.

That notwithstanding, Ford executives should be jumping for joy that they finally rid themselves of these two money pits, and ecstatic that someone actually paid them for the privilege.

For Tata, while bold, the deal just doesn’t make much sense. Aside from several luxury brands, an increased global presence, and some notoriety, I’m not sure what Tata gains. For example:

  1. Where’s the synergy? Can Tata and Jaguar/LR share components, design, production, dealerships, or management? On its face, the synergies are just not there. But perhaps the investment was made for learning purposes, with Tata hoping to use Jaguar/LR capabilities to improve the quality and/or image of their existing automobiles. Possibly.
  2. Can Tata rationalize Jaguar/LR’s production to make them more profitable? Actually, they cannot. They made pledges not to cut staff or close plants. And it’s unlikely that they would be able to reduce costs substantially by sourcing parts and supplies from India.
  3. Can Tata right a ship that larger, more experienced, more formidable competitors had been unable to? In Jaguar and Land Rover, Tata is inheriting pieces of the old British Leyland Motors (Jaguar, Rover, Austin, Morris, etc.) that all tolled experienced (and continues to experience) more than 40 years of uncompetitiveness and underperformance. Quite simply, they are inheriting a lot of baggage (see Riding the Elephant for more background on British Leyland). It will be difficult for Tata to overcome this tremendous inertia.

Some analysts have argued that Jaguar and Land Rover were purchased on the cheap (at $2.3B minus $600M that Ford is throwing in to offset pension liabilities), and at the right time – when both Jaguar and Land Rover have a stable of new models about to hit the market (e.g., the Jaguar XF and the Land Rover LRX). These analysts point out that if these new models hit it big, it will make Tata’s acquisition look like a steal. However, this assumes that Tata can revive flagging sales at Jaguar and Land Rover in the middle of a downturn. Likewise, it assumes that Tata, by simply owning the brands, will not dilute their image. Finally, it assumes that the Jaguar and/or Land Rover brands can be revived after years of neglect and consumer dissatisfaction, and that consumers will once again be interested in buying relatively expensive, gas-guzzling cars and SUV’s (especially in the case of LR).

For all these reasons, I remain skeptical. In fact, I think this deal is DOA. The only question in my mind is how long before the Jaguar and Land Rover glide path to extinction.

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4 Responses to Buyers Remorse: Will Tata Rue the Purchase of Jaguar and Land Rover?

  1. Neale Webb says:

    There is an important factor I believe you may have overlooked or, at least, not given sufficient weight: Tata cares about Jaguar and Land Rover. They really want the brands to succeed for the sake of the brands themselves. I do not believe a soul-less giant like Ford would have had the same sensitivity. The same dedicated, enthusiastic people will be building and designing these cars and the marketing is already on-target – I see the sale to Tata as the brands now about to receive the care and attention their respective breeding deserves.

  2. Patricia Hoeltge says:

    My view is that this is a cycle that we have seen before decades ago in Japan where Japanese carmakers were know for small efficient inexpensive cars and then took on the challenge of making luxury sedans and have succeeded. By giving these two upscale well positioned brands a chance to motivate their companies to achieve their bests with the onset of new models to show the world that they truly are world class and ultimately will get Tata to increase their global reach and scale. I welcome your thoughts.

  3. You both raise some interesting, and valid, considerations. I am not able to completely refute either, but will point out the following:

    Neale, it’s unclear to me why they should be less of a cash drain on their current parents (Tata) than they were on their previous parents (Ford). As much as Tata may want the brands to succeed, no amount of want will change their tired designs and uncompetitive cost structure. It takes a tremendous amount of money to change the former, and lots of restructuring to do the latter (which the guarantees they provided prohibit).

    Patricia, I like your point about the Japanese auto manufacturers. It’s true that they were able to successfully enter the luxury market after years of focus on small, efficient, inexpensive cars. However, the Japanese auto manufacturers (Toyota, Nissan, Honda) were able to extend their brands internally rather than rely on doing so through acquisition. Acquisitions in this arena (between upscale and downscale brands) are especially difficult to pull off. In this sense then, I see the Tata/Jaguar/Rover combination as more akin to the DaimlerChrysler union than the example of the Japanese manufacturers.

    Just my thoughts, …but I certainly welcome your input.

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