Mumbai: In the summer of 2007, before Tata Motors Ltd took over Jaguar Land Rover (JLR), Ratan Tata and Ravi Kant embarked on a trip through the US. Their objective—to gauge whether the legendary British marques still evoked enough passion in the biggest market for the vehicles to justify the acquisition.
The Tata group was among those that Ford Motor Co., which owned JLR at the time, had approached earlier in the year to discuss a possible sale. Among the people that chairman Tata and Kant, then managing director of Tata Motors, met were the long-suffering dealers of the two brands. Despite the dismal performance over the past few years, the dealers still kept the faith, the Indians were heartened to learn. A few months later, when Kant did the rounds of dealers in the UK, he met with much the same response— they still believed in the brands.
But when the $2.3 billion (Rs 10,258 crore today) deal took place the next year, it was quickly apparent that Tata Motors couldn’t have picked a worse time to make an acquisition of this magnitude. The collapse of the mortgage market in the US had set off a financial crisis and anyone who had cash wasn’t in the mood to lend it.
Two years and a few months since then, JLR’s contribution has helped Tata Motors post a steep rise in profit in the quarter to 30 September. So how did an Indian company that specialized in cheap small cars, on the one hand, and trucks, on the other, succeed where an iconic auto maker, and others before it, had failed.
The top executives at Tata Motors, usually most reticent, opened up for the first time about the JLR story at an exclusive interaction in Bombay House, the Tata group’s headquarters. Those present at the meeting included Carl-Peter Forster, managing director of Tata Motors group, Ralf Speth, chief executive officer of JLR, and a top group executive who was intimately associated with the turnaround saga, but insisted that he remain unnamed as he wasn’t directly associated with the unit any longer.
Soon after the acquisition in 2008, Tata Motors found itself saddled with a debt of Rs 21,900 crore, an uncomfortable position for a company that had been virtually debt free.
Meanwhile, at the other end of the spectrum, through 2008 and the early part of 2009, Tata Motors was also involved in developing and launching the world’s cheapest car, Nano, a project that was fraught with its own melodramatic ups and downs. But that’s another story (see WEF special supplement).
At JLR, the product wasn’t moving and Bombay House was beginning to feel stretched. Amid talk of the UK government contemplating a bailout of JLR, Tata Motors’ market value plunged toRs 6,503.2 crore, with the stock hitting rock bottom Rs 126.45 on 20 November 2008. The market capitalization was less than what it had paid Ford for JLR.
“The global slowdown put the company under tremendous pressure because the management of JLR had just separated from one big organization and was attaching itself to another not-so-big group and they were not yet kind of experienced living independently,” said the Tata executive mentioned above. “We were bleeding. Banks were not giving any money, they were not available, they were closed. And we needed money.”
That’s when Ratan Tata came through for Tata Motors, with the parent pumping in capital, driven by the belief that the JLR acquisition was right and would work. While the turnaround, when it took place, came as a surprise, Tata Motors saw it three-four quarters in advance.
But before that, in the fiscal ended March 2009, Tata Motors posted its first annual loss in at least seven years after sales at the luxury units plunged amid the global slump. The consolidated net loss was Rs 2,500 crore in the year ended 31 March, compared with profit of Rs 2,200 crore in the year earlier. The JLR unit made a pretax loss of Rs 1,800 crore as unemployment and the financial crisis damped sales in the US and Europe.
Cash remained “priority No. 1” as JLR was haemorrhaging money and the company sought outside help.
As JLR didn’t have a cash management system of its own, Tata Motors turned to consultants KPMG, Forster said.
For the next few months, “cash started to be managed on an hour-to-hour basis— what cheque was going out, what cheque was coming in”. KPMG declined to participate in the story. Around the same time, in the spring of 2009, Munich-based Roland Berger Strategy Consultants was brought in to keep a tab on costs. The mandate to Roland Berger was simple: make JLR profitable.
“A three-tier model was developed,” said Wolfgang Bernhart, partner, Automotive Competence Center, Roland Berger. First, a short-term goal to manage liquidity with the assistance of KPMG was put in place.
Then came a mid-term target to contain costs at various levels and the formation of 10-11 cross-functional teams, Bernhart said. A number of management changes, including new heads at JLR, were made. Finally, a long-term goal that runs until 2014 was drawn up, focusing on new models and refreshing the existing ones. The key aims—cash management and checking costs.
When Roland Berger added up the money that could be saved, the company was astonished at how high the figure was.
A team of young managers was put in charge, in an approach similar to the one followed in the 2003 restructuring at Tata Motors, with reviews on a daily basis.
Tata Motors also embarked on a plan to divest stakes in group companies to raise cash: In September 2008, it sold a 1.3% holding in Tata Steel Ltd to holding company Tata Sons Ltd for a total Rs 485 crore. In November 2008, the board approved a Rs 4,147 crore rights offer, which was completed in June this year.
All proceeds were channelled into Tata Motors to make JLR profitable. Crucially, Tata Motors was able to keep product development plans going, which has paid off with the global economy reviving and customers returning to JLR showrooms.
The programme also saw the workforce being trimmed since July 2008 by around 11,000 from a gargantuan workforce of 27,000 at JLR. According to chief financial officer C. Ramakrishnan, who spoke to analysts after announcement of the September quarter results, the workforce was trimmed by another 1,800 to 16,000.
JLR’s turnaround has been aided by external factors. In a 9 November earnings call with analysts, Ramakrishnan said margins had benefited from favourable currency movements, widening by one percentage point to 16.6%, over the first quarter of 2010-11. However, the extent of the turnaround can be gauged when margins are compared with corresponding quarter of previous year. Margins rose by a whopping 1,370 basis points or 13.7% from 2.9% in 30 September 2009-10, reflecting the changed dynamics of the company as sales rose sharply on the back of new product launches and improved market sentiments. About half the firm’s turnover is dollar-linked while one-fifth is linked to the euro. The rupee has strengthened against both currencies this year. Since January, the pound has strengthened 4.9% against the dollar and 7.7% against the euro.
Sales are buoyant thanks to the introduction of newer, more fuel-efficient and contemporary models coupled with the revival of demand in the firm’s key markets such as the UK, the US and Europe. Despatches of JLR models to dealers globally rose to 115,508 units in the six months to September from 80,252 in the year ago. The new Jaguar XJ has been especially successful, with 8,700 of them having been sold since the model’s launch in mid-May.
With JLR accounting for more than half of Tata Motors’ business, the company posted a 100-fold jump in profit in the three months to 30 September. The debt-to-equity ratio is down to 1.6 times at the consolidated level from from 4.5 times at the end of 31 December 2009. That’s high but comfortable given surging volumes. The share has risen to a respectable Rs 1,302.15 at close on 10 November on the Bombay Stock Exchange, taking market capitalization to Rs 79,573.08 crore ($18 billion).
The first real contact between Tata and Ford took place in early 2007 when Ratan Tata got “an informal brief” on JLR. Tata asked Kant and other senior Tata Motors executives if the acquisition made sense. When he got a positive answer, Tata Motors began a nine-month due diligence process.
There were five key issues that persuaded Tata Motors to go ahead. While Jaguar had a mixed reputation, both were still “great brands”. Ford had pumped in a great deal of cash to improve quality and it was just a matter of time before this made a difference. Second, JLR had very good automobile plants. Third was the steadfastness of the dealers despite losses over the past four-five years.
Jaguar cars had already started moving up the ranks of the annual JD Power customer satisfaction rankings. Besides that, there was a crop of great new models in the pipeline, among them the Jaguar XJ and XF and the upcoming Land Rover, which convinced Tata Motors that JLR was on the cusp of change.
Ultimately, Forster says, it boiled to down to this: JLR had a good engineering base and “a very passionate and committed group of people wanting to create new products.
“So if you put it all together, we have a recipe for success,” said the Tata executive cited above. “What else can you ask for? At least there was no doubt in Mr Tata’s mind and my mind that we should go for it with a single-minded focus and we went for it.”
One of the early endorsements that Tata Motors got was from the unions, though they gave the firm a grilling.
“We had this meeting (in late 2007) with the union, a very difficult one for three hours. It was eyeball-to-eyeball. Dave (Osborne, Unite’s lead negotiator for the car industry) and Tony (Woodley, Unite joint general secretary) were asking very tough questions. We didn’t have too much hope,” said the Tata executive. “But somewhere in my heart I felt the meeting had gone well. We came out very transparent, sincere, and honest.”
The union leaders told the media after the meeting that their preference was for the Indian company.
While Tata Motors seems to have done all the right things up until now, making the acquisition fit with Tata’s strategy of developing low-cost cars for emerging markets won’t be easy.
“Tata has done a good job in a difficult period,” said Prashant Kale, professor of strategy at the Jones School of Management at the Texas-based Rice University. “But to me, this is more of a standalone turnaround of JLR until now,” said Kale, who works with some Tata group companies
“On the face of it, there seem to be limited operational synergies between JLR and Tata Motors’ remaining passenger car business, given the difference in the primary segments they cater to and the underlying value chain or business models of the two. How Tata Motors is able to leverage those synergies would be interesting.”
Forster is of the view that more than synergy, the group will stress on entrepreneurial spirit.
While Speth says it is time to enjoy the fruit of the investment made in 2007-08, Forster, careful not to appear complacent, says seeds “are being sown to be reaped in 2014.”
Tata Motors plans to pump £800 million-1 billion (Rs 5,728-7,160 crore) into JLR in the next three-four years for product development, technology upgradation and capital expenditure needs. The UK subsidiary, which contributes two-thirds of Tata Motors’ consolidated revenue, has been generating a cash profit for the last four quarters. In the three months to September, JLR made a cash profit of £351.9 million, up 12% from the year earlier.
With an eye to the future, JLR is setting up manufacturing assembly units in India and China, the markets touted as the fastest growing in the world.
The Freelander, the cheapest of the sports utility vehicles from the Land Rover stable, will start rolling out from the old Tata-Mercedes assembly plant near Pune next year. JLR is also in advanced negotiations to set up a joint venture in China, Speth said, adding that this will allow the company to reduce prices by 35%, making the vehicles more competitive.
“We can rethink our aspirations in China (a market with a size of 17 million cars) through this JV,” Speth said.
Since the Tata Motors acquisition, JLR has been looking at the Bric (Brazil, Russia, India, China) nations with greater interest, he said. These nations account for 31% of sales and the company wants to raise that to 37%. Speth expects China to account for 16% of the company’s total sales over the next few years.