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Low-cost sourcing key for profits

Low-cost sourcing key for profits
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First Published: Fri, Jan 04 2008. 12 02 AM IST
Updated: Fri, Jan 04 2008. 12 02 AM IST
Mumbai/New Delhi: The best way for Tata Motors Ltd to make profits, once it successfully closes the deal to acquire the Land Rover and Jaguar brands, would be to run them as stand-alo-ne units and offer support, such as components and engineering sourced from lower-cost countries, including India, analysts say.
Tata Motors was formally named on Thursday as the potential buyer by Ford Motor Co., subject to successful negotiations.
“This is a new area they (Tata) are getting into,” said Ashvin Chotai, an independent automotive industry consultant based in London. “If they can keep the face (of Land Rover and Jaguar international) and then gradually bring in benefits like parts outsourcing and Indian engineers... that’s the best way.”
While Land Rover returned to profitability in the second quarter this year and has had a record year so far in terms of sales, Jaguar has remained unprofitable ever since Ford bought the company in 1989.
Worker representatives at Jaguar point to older products in the Jaguar stable and lack of a diesel engine, popular with buyers, until some time ago as reasons for the decline of the brand.
Analysts agree some sprucing up is needed.
“It might come to the question of how much money they are willing to throw in Jaguar,” said Chotai. “You need one or two amazing winning products, maybe bring in outside designers and jazz up the marketing.”
Ford, the world’s third largest car maker, put the companies up for sale as a package after integrating the operations of the two brands in engineering, production and component sourcing. But, those moves and significant capital infusion haven’t revived profits at Jaguar.
“Any buyer of Ford’s Jaguar and Land Rover brands will have to figure out how to lower the cost of production. To begin with, this is going to be very difficult, since a company buying the brands will also be taking on some of the legacy issues,” said Abdul Majeed, who consults on automobiles for PricewaterhouseCoopers. “An Indian buyer would look to leverage the costs in terms of sourcing from local component makers and moving research and development here.”
Tata Motors, which is readying to unveil the world’s cheapest car—at Rs1 lakh, or $2,500—next week, doesn’t have the experience of managing premium car brands.
In India and other markets, it sells cars in the lower end of the different segments in addition to selling trucks and buses.
But, marketing premium vehicles is not the only thing Tata will have to worry about. It will need to get the brands to become more competitive in a marketplace where rivals, such as Daimler AG, have already moved some of their manufacturing to lower cost countries, including India and China, to stay competitive.
While Land Rover and Jaguar have remained predominantly British-made vehicles, India has also emerged as a low-cost destination for international luxury carmakers, such as BMW AG, who have drawn up plans to buy auto parts and tap into relatively inexpensive engineering talent. Audi AG is also locally assembling some of the cars it sells in India.
Auto parts exports from India increased to $3 billion in 2006-07, from $2.1 billion a year ago, according to the Automotive Component Manufacturers Association of India (ACMA), an industry body. The bulk of the sourcing, however, is for non-premium cars.
Four vendors that Mint spoke to say it would take some time before orders come to Indian component makers, though they insist quality of components won’t be the hurdle.
“All ongoing contracts (which Jaguar and Land Rover have with current suppliers) will need to be honoured and any new orders for Indian vendors can only happen in a period of two-four years,” said A.K. Taneja, president, Shriram Pistons and Rings Ltd, which supplies to Tata Motors, but has no current vendor relationship with the British brands.
Low volumes also make orders from the British brands less lucrative to some Indian suppliers.
“The real potential for Indian component makers is to focus on volume vehicles. These brands (Jaguar and Land Rover) do not offer too many outsourcing opportunities,” said Vishnu Mathur, executive director of ACMA.
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First Published: Fri, Jan 04 2008. 12 02 AM IST