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Case Study: Acquisition of Jaguar and Land Rover by Tata Motors
In 2008 Tata Motors, an Indian automaker wanted to expand its product portfolio and diversify its market base . It acquired the two iconic British brands Jaguar and Land Rover from the American automaker Ford Motor Corporation. This acquisition gave the company access to premium cars, a chance to add two iconic luxury brands to its stable and a global footprint. It gave struggling Ford a chance to rid itself of two loss-making vehicle units. The deal was transformational. It catapulted Tata Motors from a commercial vehicle and small-car manufacturer to a global player with marquee brands in its portfolio. The scale of the acquisition also was large relative to the size of Tata Motors.
The purchase especially that of Jaguar, by an Indian company was viewed as toppling of the world order and many critics expressed doubts about Tata’s ability to retain the quality and standard of Jaguar Land Rover. Tata Group Chairman Ratan Tata assured the world that “we have enormous respect for the two brands and will endeavor to preserve and build on their heritage and competitiveness, keeping their identities intact.”
For the 12-month period ended Dec 31, 2010, the auto maker’s revenue was in excess of 9.2 billion pounds ($15 billion), and net income for that period was $1.5 billion. The Tata Group, led by Mr. Ratan Tata, was determined to make the deal work and put to use the group’s management skills, financial resources and credibility. To staunch the hemorrhage at the British unit, Tata’s management focused on reducing costs , improving efficiencies and managing cash flow — lessons that Tata Motors had learned during the downturn in 2001. Tata also infused $1 billion to fund operations and new product launches. When the market turned, the premier car maker was well poised to reap the benefits and turned profitable during the quarter ended Dec. 31, 2009, with a net profit of 55 million pounds ($90.6 million).
History of of Jaguar and Land Rover
Jaguar Cars Limited which is based in the UK is one of the world’s premier manufacturers of sports saloons and sports cars. It was originally founded in 1922 by Sir William Lyon as Swallow Sidecar Company but following a merger with British Motor Corporation in 1968, it was subsequently acquired by Ford in 1989. Land Rover is currently a luxury type 4-wheeled drive, all terrain vehicle manufacturer based out of Gayden, Warwickshire England. After developments, this became a porch of a variety of four-wheel drive models such as Discovery, Defender, Range Rover and Freelander. In its history this company has had a number of ownership. In 1967 Leyland Motor Corporation absorbed the Rover Company. Leyland then formed a merger with the British Motor Holdings and formed British Leyland. The new company broke up in the 1980s but in 1988 the Land Rover (Rover Group) was purchased by British Aerospace. The Rover Group was acquired by BMW in the year 1994 but the merger broke down in 2000 where The Rover Group was taken up by Ford Motor Company. After its acquisition of both Jaguar and Land Rover, Ford setup Jaguar Land Rover to manage the operations of both Jaguar and Land Rover as a single entity.
Ford bought Jaguar for $2.5 bn in 1989 and Land Rover for $2.7bn in 2000 but received only $1.7bn from the sale of the two brands. The main reason for selling off Jaguar was that Ford incurred losses of around $700mn in the recent years prior to selling it off and according to some estimates cumulative losses of $10bn during the 19 years that it owned Jaguar. One of the main reasons for this was the increasing competition it faced from luxury carmakers like BMW and Mercedes Benz which had wider product portfolios as compared to Jaguar. Due to this, while BMW and Mercedes Benz sold around 1.6mn and 1.3mn units a year respectively, Jaguar’s sales dropped from a peak of 130,334 in 2002 to 60485 in 2007.This prevented it from achieving economies of scale and put it at a severe cost disadvantage as compared its competitors. The high manufacturing costs in the United Kingdom was also contributing to its losses. Jaguar had been the main source of losses among the company’s PAG brands. In2004, Ford restructured Jaguar in 2004 which consisted of closing down a U.K. plant, firing 1,150 employees, scrapping a target to build 200,000 vehicles a year and exiting Formula One auto racing. It also invested $2.1bn in Jaguar in 2005 which was almost as much as it paid for it in 1989.
Land Rover was much better off compared to Jaguar and is renowned as one of the best four-wheel drive vehicles in the world. Its new products like Range Rover sport had also achieved considerable success. But the new and successful Range Rover Sport TVD8 emitted around 294g/km of CO2 even while Europe was moving towards tighter emission norms which would have required vehicles to cut down their emissions to 130g/km of CO2 by 2012. According to some experts companies might have to spend as much as $3000 per vehicle to meet these emission targets. Apart from all this, Land Rover also needed substantial investment in its R&D efforts in spite of pumping in $400mn the year previous to the deal. Ford suffered losses worth $12.6bn in 2006 and $2.7bn in 2007 and did not have the cash reserves required to revive the two brands. In order to revive the Jaguar brand Ford needed to broaden its product portfolio which would have required it to pump in big money in new product development . This as well as the requirement for cash by Land Rover caused Ford to sell off its two premier brands.
Ford’s North American automotive operations were the main sources of the record 2006 losses registered by the company. This was due to the declining sales and profitability of its pickup trucks and sports utility vehicles which were the main source of revenues for the company. Also the company’s own Lincoln unit which was No.1 in luxury sales in the US in 1998 dropped to No.7 in sales in 2006 since it purchased Volvo and Land Rover. Therefore in order to focus more on its core operations and concentrate its management resources on its core activities, Ford decided to do away with its Jaguar and Land Rover brands. Ford might also have sold the two brands since they are not at the core of the company’s overall automotive business and the cash that they received from the deal could have been used to restructure its North American operations.
Acquisition of Jaguar and Land Rover by Tata Motors
In the year 2007, the Ford Motor Company, a widely respected company which also happened to be the world’s third largest automaker based on vehicle sales worldwide, reported the largest annual loss in the history of establishment of the company since 1903. The Company reported a loss of $12.8 billion. It also stated that it would not return to profitability until 2009. Ford stated that weak economy is the primary reason to sell Jaguar and Land Rover. The two brands were however suffering losses often resulting in closure of few manufacturing plants and heavy cut in workforce
Tata Motors Limited stood to have both strategic and economic gains form the acquisition of both Jaguar and Land Rover. First and foremost, the deal would assist the company in acquiring a global footprint as well as entering the prestigious segment of the worldwide automobile market. After this deal, Tata Motors owned the cheapest car in the world (The Nano) going at around 2,500 as well as some of the most expensive and luxurious vehicles such as Land Rover and the Jaguar. Though the deal solicited some skepticism based on the fact that Tata was an Indian company that was about to display the luxury brands, ownership should not be a major issue in terms of the sales, service and marketing. Tata Motors will be promoted to become a major player in this industry after the acquisition of Jaguar and Land Rover both of which have global presence as well as a good repertoire in terms of established brands.
The deal would also assist Tata Motors in reducing the dependence of the company to the Indian market which was at 90% of the company’s sales before the acquisition. It is in this view that the company stands to gain a lot from the deal as its market would be spread out to other geographical regions across the globe . The opportunities in terms of the diverse customer segments would also be increased.
There was the possibility of increased in terms of economies of scale which in turn promotes the cost efficiency . In real sense the deal will appear as an amalgamation of three different companies that have already gone into the market and as a result, the new firm that will be formed after the acquisition will have some increased operation scale. This will mean that the output production will rise and as a result the cost per unit production will be greatly reduced.
Tata Motors Limited prospected that the acquisition of the two Brands would enable it to have an all-inclusive line up of products ranging from cheapest to the most expensive automobiles in the market. The company has marked its presence in the local market (India) in the low as well as the mid-class market segments and after the acquisition; the company is likely to experience some of the segmentation of the markets that it has never plunged into. Jaguar cars are prestigious and luxurious and as a result the cars have an established market for most of the celebrities especially in the music world. On the other hand the Land Rover is a heavy duty vehicle and based on the fact that it is a four-wheel drive it is preferred by most of the governments to carry out different tasks in the rural areas where the road network is not developed, the vehicles are also famous among the affluent class of citizens and therefore the deal will enable Tata Motors to plunge into these market segmentations in which the company was not famous in.
It is also worth to note that the other than the product incorporation, the company was facing tight competition from some of the chief opulence vehicles producers. This segment of the market brought a lot of profits to the company it was highly competitive in terms of the global market. It was the prestigious brands that dominated the market based on the fact that they had the support of the big automobile companies. The German Porsche and the American Volkswagen companies backed some of the luxurious brands such as Audi and Porsche. Other brands that had the support of big companies included Mercedes, Lexus, Alfa Romeo, Ferrari and Fiat. After the deal, Tata Motors Limited would now be able to tackle these brands competitively.
What Strengths of Jaguar and Land Rover Were the Most Valuable for Tata?
Through Tata Motor’s acquisition of two of the most respected and iconic British brands that is Land Rover and Jaguar from the Ford Motors based in the United States, Tata motors stands to enjoy some gain on several grounds from that deal. This acquisition came in handy for Tata since it helped the company in acquiring a global foundation hence ushering them into a more extended premier segment in regard to the global market of auto mobile products. Through this acquisition Tata would slide into possession of the cheapest car in the world thus the Nano at $2,500 in addition to recognized and well respected luxurious brands like the Land Rover and the Jaguar.
Tata motors acquisition of these two top brands would help it reduce its over dependence on India as it formed its capital marker accounting for almost 90 percent of all of its sales. The company was convinced that this acquisition would present the company with a lot of opportunities to venture its business across different segments that marked a lot of potential in customer acquisition . In this regard Tata gained almost a 100 percent stakes in some companies. For instance it gained stakes in three U.K. pants, approximately twenty six sales companies nationwide, two advanced engineering and design centers, IP right, allowances for taxes amounting to approximately $1.1 B in addition to $600 worth of pension.
Tata’s main motivation in making this acquirement was based on the fact that they would be now able to outsource their products to many countries globally. Other than taking technology from these two brands Tata intended to use their strong markets so that they can introduce their other brands in those areas where these two brands have already penetrated and established in a bit to expand their market a bit more.
As highlighted above Tata wanted to build a name outside India and hence make its presence felt in India. Most of it brands had only established a strong market in India and hence not particularly popular in the global market. Tata therefore capitalized on its desire to establish a greatly diversified line up of auto mobiles as this acquisition helped it up grade since it now recognizes as one of the manufactures that owns the cheapest car to some of the world’s most expensive models. Apart from this Tata gained in terms of new technological know-how and all the viable networks that can come as a log with is such a chance hence as earlier stated it will be able to penetrate the global market and hence compete with other manufactures who have already embraced latest technology. On top of this Tata would also be able to upgrade its old products that it has been offering in the blooming local or home market. In addition to using the companies technology Tata will also use its facilities of production to make desirable improvements in its trucks and cars. Though the acquisition will cost Tata Company an approximate of $1 Billion it would actualize Tata’s dream to go international band hence become one of the first brand in India to make global products hence its business will achieve diversity overseas.
Major Challenges of Acquisition
Despite the benefits that have been identified above Tata also underwent some major challenges as a result of the acquisition of the Jaguar and the Land Rover. One of the major challenges that the Tata Company would face was nurturing these two brands and making them thrive in their own books in the market. The jaguar and the Land Rover are luxurious and expensive cars and there fore Tata has the uphill task of maintaining it standards and also up grading them so that they will be able to compete with other luxurious brands who are upgrading day in day out in a bid to try and fetch good market by attracting more customers.
On the other hand the acquisition also goes to the negative for Tata since it increased Tata volatility in earnings since this happened at a very difficult economic crisis in the JRL’s chief markets including the United States and also Europe. Tata motors were liable to incurring huge capital expenditures in its plan to make investments in another U.S $2.3 billion it would spend on the acquisition. Tata motors had also at the same period incurred huge capital expenditures in regard to making developments on one of its cheapest cars the Nano in addition to a joint venture with fiat in order for them to make their manufacturing of some of their vehicles in India.
The other problems will be that Tata will encounter difficulties in leveraging Jaguar and Land Rover dealers to sell Tata’s products. This is because Tata has no obvious synergies between them and JLR and in addition to this Tata has no expertise in kits marketing segments especially at such at a time when some of the markets like the United States and Europe are at a low tide. Tata Motors will also have to contend with stiff competition from other companies that have a good command in selling luxurious car in market segments that have been highly profitable but have been facing intense global competition. These segments have other dominant brands which receive a lot of support from big automobile companies. For instanced the Volkswagen which is a car manufacturer of the American decent had been very aggressively backing up their brands like Audi as well as other models like the Mercedes from Daimler and Toyota with it Lexus were putting a lot of pressure on Tata.
The other major challenge that Tata will have in regard to making sales in the Jaguar and the Land Rover will be to sell them in a market that is so competitive and one which is not also growing. If stricter impositions on emission norms are made it would also be a very big challenge for Tata Motors Limited. Apart from these emission and competition norms Tata Motors Limited also face a major challenge in the funding as well as management.
To go back to the governments tendency to make increments in markets that are developing to impose emission norms that are stricter the future of Tata Motors would be facing an uphill task. Though ford continues to support Tata Motors with engine supplies and technological support, Tata will eventually have to come up with their own capabilities in regard to building engines that are more advanced, safer and transmission systems in order to be at par with other luxury vehicles manufactures. Failure to establish such kinds of capabilities difficulties will arise in distinguishing Tata’s brands from those of its competitors.
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