Viability of tata motors decision on acquiring jaguar and land rover

Viability of Tata motors decision on acquiring Jaguar and Land Rover.

Introduction

Globalization is becoming increasingly significant as it helps in growing trade between developing countries or outsourcing manufacturing or services to other regions by means of lesser labour cost. Nowadays, a better feature of globalization is “challenging with each one from the world over everything” (Boston Consulting Group in a new book “Globality”).

Rapidly growing countries are fighting for customers in developed countries. These firms from countries like India and China are an excellent example of local companies who are capable of dealing with rising quantity of consumers in their own countries with goods which are cost-effective at much lesser prices and with quality better then developed countries. One example for this is the huge outsourcing industry in India, which employs local labour, still offering world class services to other countries, and still is cost effective. The rapidly growing economies are increasingly more proficient to innovate in expressions of their company models as well as commodities. In addition, businesses from up-and-coming economies obtain businesses in equally developed as well emerging economies, for example Tata steel’s acquirement of Corus, a European steel company. Thus the current trend is of firms from developing countries, acquiring manufacturing operations in developed countries to secure to their customer base.

Global recession has shattered the worldwide auto industry with disastrous effects. Among the primary car manufacturers, global manufacturers like ford and GM were the primary one to file case of bankruptcy. US sales have dropped down by 32 % which has straight effect on Indian car business where GM sales have been fall by 45% ford is 30% and Chrysler losing by 35%. (BBC News online, 2009)

This coming recession were not forecasted or foreseen by many companies, who invested heavily in companies from other countries before the recession. One of the biggest takeovers to happen during the recession was the taking over of the luxury car brands Jaguar and Land Rover by a Indian motor manufacturer – Tata motors. Tata Motors ltd. (TML) acquired these two businesses from Ford motor company for a net amount of $ 2.3 billion in an all cash transaction. (TML press release, 2008) The deal is conditional, amongst others, on obtaining fusion control approval under the Merger law. Tata Motors is mainly based in India and manufacturing and supplies passenger cars, buses and commercial vehicles, mainly in India. It records some 89% of its revenue in India and passenger cars in a diminutive number of associate States. On the other hand, Jaguar is a producer of primarily luxury passenger cars, which Ford acquired in 1989. Land Rover is a producer of primarily sports utility vehicles (SUVs), which Ford acquired from BMW in 2000.

History of JLR – Acquisition by Ford:

Ford acquired Jaguar and Land Rover, which is UK based luxury car producer. This acquirement was an effort by Ford to smash into the luxury car market, which was dominated at the moment by German automakers. In 1998 ford tried to introduce new S type model which was same by name in 1960 followed by another X type model in 2001. However these models did not make much impression on consumers and its sales were dropped. As a result, Jaguar was making losses continuously, and it decided to shut down its one of the manufacturing plant. However Land Rover was making good reputation in the market and it achieved record worldwide sales record in 2006, which increased by 4 % from 2005, and up to 18% in 2007. On the other hand, sales for Jaguar continued to drop, with almost 17% drop in 2007. (All business online, 2009) In the meantime, ford was facing dilemma of its own position. With an increasing price of fuel, healthcare cost for its aging labour force and US shrinking market share had slowdown its economy which result in a weak sales of Sport Utility Vehicles and trucks categories in which Ford was powerful and strong. This made Ford weaker, worsening its financial position. Besides this, there was a stiff competition from Asian auto market which was making small and more fuel efficient cars. All this factors made Ford more vulnerable and it was too difficult for Ford to stay in the market. Ford made a biggest annual loss in the history of the company in 2006 of $12.7 billion. (All business online, 2009)

Hence on account of such losses, it decided to sell out its Jaguar and Land Rover operation to TATA Motors in 2008.

Tata had entered the European global market through its City Rover model, but had failed. Hence, it needed established brands to create its own brand identity in the European market. With this perspective, it acquired JLR who were well established luxury car brands in this sector. TATA is already expert in transportation vehicles like buses and truck by JLR acquisition it wants to enter into luxury passenger cars. Land Rover is well known for its SUV’s and have achieved a systematic growth in past few years. Hence it will return its investment to TATA but the main problem is Jaguar. Ford had already made an investment of $12.7 billion in Jaguar, but failed to revive its image. As it was impossible to sell Jaguar alone, Ford combined the deal with Land Rover which was a profit making enterprise at the time. This was the reason why Ford sold its JLR business to Tata.

Research objectives / Hypotheses:

Prior to this acquisition, Tata was a well known Indian auto manufacturing brand that primarily served the low to mid level segment in India. It did not have any experience of operating in luxurious car market. After the acquisition, it has sustained continuous financial problems due to the ailing Jaguar brand, which resulted in losses of about $ 468 million in 2009. (Business week online, 2009) Hence, this research report is aimed on analysing the business decision taken by Tata motors of acquiring Jaguar and Land Rover Company. With this objective, the research question would be: “What were the reasons for Tata motors for taking over of Jaguar and Land rover”?

Based on the same the following hypothesis is derived:

Hypotheses: The decision of taking over of Jaguar and Land rover is not viable.

Data from secondary sources would be collected to prove the above hypotheses.

Literature Review

Due to economic impact on both the European as well as Indian automobile market, a range of authors have commented on this acquisition by Tata.

Brown Robin and Fogarty Justin (2009) have pointed out that Ford was a much experienced player in the global automobile market as compared to Tata. As per the authors, Ford is well known for producing automobile models that suit the local conditions and so have been popular throughout the world. However, Tata is still a inexpert on such manufacturing, which can be seen in its failed acquisition of City Rover. Further, the authors have also pointed out to the differences in carbon emission rules in India and Europe – a factor that will limit the use of Indian automobile technologies in European market.

Another research carried out by Paul Newton – HIS global insight suggests that though Land Rover is making profits today, this acquisition will not be beneficial to it in the long run. The explanation given by the author with better brands in market, American and European people have started avoided SUV’s completely. Tata motors will need a huge investment to change the image of Land Rover, spending in smaller and economical cars.

M Anand (Outlook Business, 2008) has pointed out to the important fact that Jaguar competes head on with major players like Mercedes Benz and Lexus. These brands are established automobile manufacturers who are considered pioneers in luxury car segment. The author emphasizes that Jaguar can never compete with such major brands. R Duane (2008) have researched on the case study of this acquisition suggesting that Tata can learn to build higher quality autos from the technology of Jaguar and Land Rover.

Mike W Peng (2008) emphasizes that the future of Tata motors – JLR would be decided at Pune, India – the headquarters of Tata motors. Such a statement suggests that Tata would be sourcing the production of JLR to its home base in India. Such an strategic initiative, would be helpful to Tata as the manufacturing cost in India would be much less as compared to that in England.

Anil Gupta and Haiyan Wang (2009) have pointed out to the revenues generated by JLR in the Chinese market. Due to the presence in Chinese market through JLR, Tata motors now find itself with almost $ 2 billion of revenues. Thus, the authors have suggested a positive impact of acquisition done by Tata, which would be helpful to it in the long run. Nirmala Kumar et. al (2009) has emphasized upon the financial power of Indian conglomerates citing Tata acquisition of JLR.

Gautam Kumar and Kuldeep Jain (Business standard, 2009) insists that there is an opportunity for Tata to improve performance at Jaguar by investing in product design and branding.

Main Argument:

On analysis of the various literatures produced on the subject topic, the following research arguments have been made:

• A Ford motor is one of the top automobile manufacturers of the world, with an experience of over 50 years and having a much larger global presence. Compared to Tata motors, it is owner of many reputed brands and hence experience about the automobile market in different countries. On the other hand, as has been cited by Robin et. al(2009), Tata motors has been a regional player catering only to the Indian lower and mid level segment. It does not have any presence in any major market except India. European market is totally a new market for it, with Tata motors management lacking the skill and expertise to compete in such a well developed market. If Ford management were unable to turn around Jaguar, it is hard to suggest that management of Tata motors would be successful in it. Thus, Tata motors should not have entered the market with such a large investment, and instead should have slowly grown their own brand of automobiles gaining experience in this industry.
• Another objective of this acquisition by Tata motors would be to enter the luxury car segment. The luxury car segment is a fiercely competitive segment, with pioneers like Mercedes Benz and Lexus already competing with each other. These companies have decades of experience in manufacturing luxury cars and have perfected the art of its manufacturing. Further, the luxury car brand – Jaguar has lost its brand image, sustaining continuous losses for the past decades. Tata motors would first have to repair the brand image of Jaguar, which would have a heavy cost related to marketing and technological development.
• Land Rover is primarily involved in manufacture of Sports utility vehicles. As per the research done by IHS Global insight, the demand for SUV’s is decreasing. Hence in long run, Tata would have to diversify its Land Rover business in manufacturing lower class cars, which would further call for an expensive technological investment.
• Some authors like Mike W Peng (2008) have suggested that Tata would have planned to shift the manufacturing base of Jaguar and Land Rover to India for cheaper cost of production. But the technological requirement of Indian market and European market is totally different. Tata motors would have to first invest heavily in research and development cost at its Pune factory, before making any such move.
• Jaguar and Land Rover are primarily based in United Kingdom. Though other developed countries have started to recover from the economic downturn, UK is still in a state of financial slump. Analysts have suggested that it would be a minimum 2-3 years before the UK market fully recovers. Until then Tata motors would have to stick with Jaguar and Land Rover, sustaining their losses. Further, governmental and Union pressure in UK would resist Tata from shutting down any plants. Thus, until the economy recovers, Tata motors would have continue financing JLR through the profit generated from its operations in India.

From the above arguments, it is clear that Tata motors have made a mistake in acquiring Jaguar and Land Rover. Ford had purchased Jaguar at $ 2.5 billion and Land Rover in $ 2.7 billion, while Tata motors got the combined Jaguar and Land Rover for $ 2.3 billion. (M Anand, 2008) Though, financially these figures may sound to be beneficial to Tata, it does’nt include the cost of investments amounting to millions of pounds required to turn these businesses into profitable ventures.

Thus, it is proved that the decision of acquiring Jaguar and Land Rover was not a viable one. Hence our hypothesis is proved ‘true’.

Conclusion:

Tata motors have been posting continuous losses after their acquisition of JLR. This has been mainly due to the sick operations of JLR in Europe which has impacted the brand image of Tata. Tata does not have the expertise or the experience of running a major luxurious brand like Jaguar. Tata group needs to create an effective management that can successfully convert these ventures into a profitable venture. Further, it also needs to develop a strategy to reduce the operational costs of Jaguar and Land rover. Building a new brand image of JLR also needs to be a priority of Tata that would help it in turning this into a profitable venture. The European market is also much different compared to Indian market, with much advanced technology requirement. Tata would need to study these requirements and make a heavy investment for rejuvenating these two ailing companies.

Tata has already started taking remedial steps to ensure that its acquisition becomes profitable. It has launched Jaguar and Land Rover in India in 2009. India being a large market, presents an enormous opportunity for Tata to succeed. Tata have also started rationalizing their product portfolio, concentrating on few brands. Tata has invested almost $ 2 billion in operations of Jaguar and Land Rover. Thus, Tata is putting maximum to make this acquisition a profitable venture.

Reference:

• M Anand (2008), “Cover Story Tata Jaguar Land Rover” Outlook Publishing. Available online on URL :http://books.google.co.uk/books?id=kjEEAAAAMBAJ&pg=PT27&dq=tata+motors+jaguar+land+rover&cd=1#v=onepage&q=tata%20motors%20jaguar%20land%20rover&f=false

• [Accessed online on 30.11.09]

• R. Duane Ireland, Robert E. Hoskisson, Michael A. Hitt (2007) “Understanding Business Strategy: Concept and Cases” Cengage learning, Available on URL : http://books.google.co.uk/books?id=jX7RXTi8MTEC&pg=PT151&dq=tata+motors+jaguar+land+rover&cd=2#v=onepage&q=tata%20motors%20jaguar%20land%20rover&f=false

• [Accessed online on 25.11.09]

• Mike W. Peng (2008), “Global Strategy”, Cengage learning. Available on URL:http://books.google.co.uk/books?id=EizYm46Kv_AC&pg=PT294&dq=tata+motors+jaguar+land+rover&lr=&cd=17#v=onepage&q=tata%20motors%20jaguar%20land%20rover&f=false

• [Accessed online on 20.11.09]

• Mehul Srivastava (2009), “Tata: Clawed by Jaguar and Land Rover”, Business Week Magazine online. Available on URL: http://www.businessweek.com/magazine/content/09_37/b4146064057051.htm

• [Accessed online on 1.12.09]

• Mehul Srivastava (2009), “Tata: Still reeling from its Jaguar Land Rover Buy”.Business Week Magazine online, (2009), Available on URL: http://www.businessweek.com/globalbiz/content/aug2009/gb20090811_307608.htm

• [Accessed online on 1.12.09]

• Douglas A Boulduc (2009) “Fortunate Ford and Tough luck Tata”, German auto industry newsletter. Available on URL: http://www.autonews.com/article/20090719/BLOG08/907199997#ixzz0bbcCzvUa

• [Accessed online on 15.11.09]

• Tata motors press release (2008). Available from URL:
• http://www.tatamotors.com/our_world/press_releases.php?ID=370&action=Pull

• (Accessed online on 28.12.09)

• Paul Newton (2008), “JLR going to TATA”, Business week journal
• Gautam Kumar, Pradeep Jain (2009), “TATA”, Business journal
• Brown Robin,Fogarty Justin (2009), “Tata: Clawed by Jaguar and Land Rover” Business week magazine.