Mumbai: Two years after Tata Motors Ltd acquired Jaguar Land Rover (JLR), the UK-based luxury car maker will make its first substantial move to take advantage of its Indian connection by setting up an office in Pune to source components from Indian vendors, two persons close to the development said.
The office will be operational by 1 April, and will comprise a small team that will develop a sourcing base from India for JLR vehicles made in the UK. The team will initially focus on components for the Land Rover, one of the persons said.
Photo by Bloomberg; graphic by Yogesh Kumar/Mint
The team may include a representative from Tata Motors, a move Mint could not independently confirm.
“Tata Motors has always said if there are opportunities the two sides will be encouraged to harness each other’s strengths,” a spokesperson for Tata Motors said in response to a Mint query.
The new office is part of an effort towards deriving long-term benefits rather than a short-term cost-cutting exercise, one of the two persons cited above said.
“The team will work closely with vendors to develop new components from the inception stage and take advantage of cost, but not at any cost,” said the person, adding that the team was put in place in February by the UK office.
Pune is already home to Tata AutoComp Systems Ltd, the holding company for a slew of joint ventures for components.
In the past, at various media conferences, Tata Motors’ vice-chairman Ravi Kant and newly appointed chief executive officer David Forster have maintained that the focus of the integration exercise between JLR and Tata Motors is more about “capabilities sharing” rather than “components sharing”.
Other global auto makers such as Bayerische Motoren Werke AG, AB Volvo and Daimler AG unit Mercedes-Benz India Pvt. Ltd, among others, have sourcing offices in India, but these also source components for their local factories besides their overseas plants. The JLR office, in contrast, will focus entirely on components for its UK plants.
A. Venkataraman, partner at global consulting firm AT Kearney, said component sourcing had become a crucial function and was inevitable for industry segments across verticals to trim costs.
“Almost two-thirds to half of savings are accounted for by the sourcing function,” Venkataraman said.
However, a vendor who was approached by the JLR sourcing team said the low volumes for the shortlisted parts to be procured from India did not justify investment in tooling and other processes. The vendor declined to be named.
Soon after the acquisition in 2008 of troubled Jaguar Land Rover, which reported a Rs2,400 crore loss the following year, the Tata group appointed German consulting firm Roland Berger Strategy Consultants GmbH, its in-house think tank Tata Strategic Management Group and KPMG International Cooperative with a brief to trim costs and to study cash flow management at the UK firm. Even before hiring them, the company cut 2,200 positions in the workforce to save on costs.
Some of the recommendations by KPMG have resulted in gains for the firm. For instance, a new inventory planning approach has led JLR to send smaller consignments to countries such as Australia only after orders are received instead of sending a consignment that would then take months to sell. Also, given that some markets have long credit cycles, the firm now only dispatches consignments against letters of credit, keeping receivables under control.
A revival in the auto market, coupled with the job cuts and inventory management changes, helped move JLR to a profit of Rs416 crore for the quarter ended December.
Tata Motors’ automotive debt-equity stood at 4:1 at the end of December, compared with around 6:1 at the end of September, partly because of fund-raising through the issue of global depository receipts in October.
Margins benefited in the December quarter on recovery in volumes and cost cutting initiatives, said Joseph George, an analyst at BNP Paribas Securities India Pvt. Ltd, adding that he expected the performance to be maintained. “Here on, the benefits of sourcing from low-cost countries will be seen,” he said.