Hiteshkumar JainWHAT CONVINCED TATA MOTORS TO TAKE OVER THE JLR
Tata might have acquired the JLR in 2008 but the plan for acquisition and internal due diligence started when the first real contact between Tata and Ford took place in early 2007.With a positive intent, Tata Motors began a nine-month internal due diligence process before the acquisition.
The key positives that persuade Tata Motors to go ahead include:
- Both “Jaguar” and “Land Rover” were still “great brands
- JLR had very good automobile plants
- The commitment of the dealers despite losses over the past four-five years.
- Introduction of new models in the pipeline
JAGUAR LAND ROVER DEAL
Tata Motors acquired Jaguar and Land Rover from Ford in 2008 for $2.3 bn (Rs. Approx. 12,000 Cr), merging the two marques into a single company in 2013.
TURNAROUND
“Within a few years of the buyout, JLR made a dramatic turnaround and is the mainstay of Tata Motors’ finances now”
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 automaker, and others before it, had failed.
WHY THE DEAL WAS SUCCESSFUL
MANAGEMENT
The management style adopted by Tata’s was to have decentralized decision making given to Jaguar Land Rover’s managers. This allowed TATA’s to Keep the existing working practices in place and maintain the goodwill of existing managers
RIGHT TIME FUNDING
The global slowdown put the company under tremendous pressure. 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 Cr in FY10, compared with a profit of Rs 2,200 Cr in FY09. The JLR unit made a pre-tax loss of Rs 1,800 Cr as unemployment and the financial crisis damped sales in the US and Europe. Tata Motors also found itself saddled with a debt of Rs 21,900 Cr and faced a tight liquidity crunch.
Given the situation, Tata Motors embarked on a plan to divest stakes in group companies and also got board approval for Rs 4,147 Cr rights offer. The proceeds of which were channeled into Tata Motors to make JLR profitable.
“Crucially, Tata Motors wanted to keep product development plans going, which has paid off with the global economy reviving and customers returning to JLR showrooms”
CASH MANAGEMENT
“Cash remained “priority No. 1” as JLR was hemorrhaging money and the company sought outside help”. The key aim was cost control on a continuous basis.”
A three-tier model was developed:
- The short-term goal was to manage liquidity.
- The mid-term target was to contain costs at various levels.
- A long-term goal that runs until 2014 was drawn up, focusing on new models and refurbishing/ replacing the existing ones.
PRODUCT INNOVATION /EXPANSION:
- Tata Motors invested in many green field & brownfield plants in England to manufacture petrol and diesel engine products. They also invested over £3b in JLR – focused on new product innovation at JLR plants.
- JLR and the China-based carmaker Chery agreed to invest US$2.78 bn in a new joint venture to manufacture JLR vehicles and facilitate the introduction of new high-end models.
- With an eye for future, JLR is setting up manufacturing assembly units in India and China. The Freeland, the cheapest of the sports utility vehicle from land rover will start rolling out from old tata – Mercedes assembly plant near Pune in 2016
- JLR to set up a JV in China which would allow the company to reduce the prices by 35%, making them more competitive.
- JLR Brazil, Itatiaia, Brazil production planned to start in 2016
- JLR Slovakia, Nitra, Slovakia production planned to start in 2018
FINANCIAL PERFORMANCE:
- Tata Motors has seen Revenue grow at CAGR 21% over the last 5 years with Jaguar and Land Rover contributing 81.6% towards sales.
- Operating Profit has grown 24% CAGR over the last 5 years
- Net Profit seeing growth of 11% CAGR over last years
- Tata motors have seen a remarkable growth in market cap over the last years
- D/E is down to 1.2x in FY15 from 6.7x in FY09
Overall, Tata motors with a significant focus on R&D, Product innovation and substantial investments in Developed markets like the UK, US and China have been able to shift their focus on expanding in international markets and also seen JLR contributing more than 80% of consolidated sales across these markets. Going forward, this trend would continue. Also in the near future, JLR plans to set up manufacturing assembly units in India and using its sophisticated technology to innovate products on the domestic front is likely to pay rich dividends.
