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:
- 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.
- 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.
- 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.