Global Insight Perspective | |
Significance | After months of wrangling, Ford and Tata have agreed the conditions of transfer of the Jaguar and Land Rover brands from American ownership into Indian hands. |
Implications | The implications of this sale are wide ranging. For loss-making Ford it will be a bittersweet moment given the money it has invested in the two brands over the years. It will give Jaguar and Land Rover, which are now in a better shape than they have been for some time, a renewed vigour and a range of new models to look forward to. Tata buys two of the world's most famous luxury car brands, but at a time when additional capital expenditure is likely to be required to keep the pair moving forwards. |
Outlook | The future of the two brands under Tata appears to be promising, although the Indian automaker is likely to have to inject a additional capital to offset the affect of economic headwinds and future emissions standards which is likely to make the seemingly bargain price not so cheap after all. |
Nine months after putting its U.K.-based Jaguar and Land Rover brands up for sale, Ford has finally confirmed its agreement to sell them to Tata Motors of India. This confirmation follows months of prolonged negotiations and complex wrangling about the intricacies of the sale, and is in sharp contrast to the relative speed and ease with which Ford managed to sell its other U.K. luxury brand, Aston Martin, 12 months ago (see United States - United Kingdom: 13 March 2007: Ford Announces Sale of Aston Martin).
Ford confirmed a sale price of around £1.15 billion (US$2.3 billion) to be paid in cash by Tata once the sale is completed by the end of the next quarter, pending relevant regulatory approval. However, Ford will then contribute US$600 million to the Jaguar and Land Rover pension plans, essentially making the sale price £850 million. Given that Ford paid £2.5 billion to buy Jaguar in 1989 and £2.7 billion for Land Rover in 2000, this means that Ford has lost US$4.35 billion on the purchase price of the brands alone, even without taking into account the billions it has invested in R&D and other development costs. Although Land Rover has become profitable in recent years, Jaguar is said to have never made a full-year profit under Ford's ownership.
Other confirmed details of the sale include:
- Ford will continue to supply Jaguar and Land Rover for an unspecified period of time with powertrains, stampings and other vehicle components, in addition to a variety of technologies, such as environmental and platform technologies.
· Ford has committed to provide engineering support, including research and development, plus information technology, accounting and other services.
- Ford Motor Credit Company will provide financing for Jaguar and Land Rover dealers and customers during a transitional period, which can vary by market, of up to 12 months.
In a statement, Ford said that both parties believe that these arrangements will support Jaguar and Land Rover's current product plans, while providing them with freedom to develop their own stand-alone capabilities in the future. Neither does either party anticipate any significant changes for the two brands' U.K. employees, the statement said.
"We are confident that [Jaguar and Land Rover] are leaving our fold with the products, plan and team to continue to thrive under Tata's stewardship," said President and CEO of Ford, Alan Mulally. "Now, it is time for Ford to concentrate on integrating the Ford brand globally, as we implement our plan to create a strong Ford Motor Company that delivers profitable growth for all."
Ratan Tata, Chairman of Tata Motors remarked: "We have enormous respect for the two brands and will endeavour to preserve and build on their heritage and competitiveness, keeping their identities intact."
Outlook and Implications
The implications of this sale are numerous. For Ford, it will be a bittersweet moment. Ford desperately needs the US$1.7 billion in cash it will raise from the sale to boost its cash reserves in order to weather the storm in the U.S. economy, although having lost US$2.7 billion in 2007 and a record US$12.6 billion in 2006, it remains to be seen whether these proceeds will allow it to post a one-off profit for the full-year 2008 or not. More critical is the fact that the sale frees Ford from some of the considerable R&D expenditure it would otherwise have had to pump into the two brands, not least as the European Union (EU)'s future emission caps and the U.S. CAFE laws loom large for manufacturers like Jaguar Land Rover. Ford will now be left in Europe with just its core Ford brand and its upmarket Swedish unit Volvo, a far cry from the decade before when Ford proudly created its Premier Automotive Group (PAG) of European premium and luxury brands, consisting of Aston Martin, Jaguar, Land Rover and Volvo.
Ironically for Ford, Jaguar and Land Rover could now be said to be in better shape than ever before, suggesting that Tata has bagged itself a bargain. Although Ford has not been the best parent to the two brands, it cannot be accused of being the worst either. Both have had a steady trickle of investment for new models and R&D over the years and thanks to Ford's restructuring efforts, their U.K. manufacturing operations are considerably leaner and more efficient than they have ever been, although this does not mean that they do not still have an overcapacity problem. Jaguar recently launched the S-Type replacement, the XF to rave reviews, and there is much optimism surrounding the recently revealed Land Rover LRX concept, which will almost certainly make it into production by the end of the decade. On the other hand, looking beyond those two models the picture becomes much murkier, not least as tough EU emission limits, which will surely pose both Jaguar and Land Rover considerable problems, further clouds the scene.
For the Tata Group, the acquisition of the pair will add to the stable of international brands it has bought over the years to underpin its own businesses. These have included U.K.-based Tetley Tea, the commercial vehicle arm of the South Korean Daewoo Group and Anglo-Dutch steelmaker Corus, for which it paid US$13.7 billion a year ago. That acquisition has not lead to the job losses that some may have anticipated. Having added these and other businesses to its family, Tata has a reputation for nurturing brands, which bodes well for the future of Jaguar and Land Rover, both of which are likely to require considerable care for some time yet. The Tata Motors unit which Jaguar Land Rover will come under has already gone ahead and taken on additional debt including US$1 billion through a long-term securities issue, and a further US$3 billion short-term bridging loan that is thought to come from a host of financial institutions (see India: 21 March 2008: Details of Tata's US$3-bil. Bridging Loan Emerge). As well as funding the acquisition, some of this is likely to go into the coffers of the brands and fund the future investment that will be required to keep them going. However, what the deal will do to the financial credibility of the firm is anyone's guess, given that ratings agency Standard & Poor's had threatened at the beginning of the year to downgrade the company should the deal take place and a fall in Tata's share price on the morning of the deal's announcement. This situation is likely to become even more poignant as the firm will no doubt have to look at longer-term financing by the end of the 15-month period for which the bridging loan is in place. Added to this will be the current crisis in the credit markets which could present additional costs to borrowing, although the amount that it will need is likely to depend on a programme of divestments that it is looking to undertake to unlock value from within, which has been mentioned by the Tata Motors chief financial officer (CFO) C. Ramakrishnan in a teleconference following the announcement.
As mentioned above, a big part of what Tata has acquired is the brands itself, and the exposure given by the deal will push the firm further into the international limelight, which may reflect positively as its auto arm seeks to do greater business outside India. Also, no mention has been made as to what Ford will do with the Rover brand, which it bought from BMW in 2006 to protect the Land Rover and Range Rover nameplates. If this has been included as part of the package, this may lead to Tata using this marque as well, possibly using it to market its own vehicles where its name is not well known.
The questions raised as to the future of the brands will not be something that Tata will be taking lightly, and it will be interesting to see how it tackles this. Although it will retain Ford's help with regards R&D and technology for sometime following the deal, its ambitions will no doubt lie in working with an existing close partner or being self-sufficient in this quest. Depending on how binding the contract of sale has been this could mean that the Fiat Group, a close collaborator with Tata already, may come on board with the development of future platforms and powertrains. One must also not forget that Tata has an increasingly successful group of in-house development firms including its component supplier unit Tata AutoComp on which it could draw, while most automakers already buy in sophisticated technology such as safety systems from external contractors. Both the brands also have largely self-contained engineering facilities with a great deal of expertise which are unlikely to require Tata's immediate input anyway.
Ultimately, whether the brands will be a good fit within the business and successful under Tata remains to be seen, but given the condition in which Ford has left them, the short term at least appears promising. Economic conditions and future emissions requirements may conspire against the two brands but should Tata be prepared for these and have adequate capital with which to ride out these storms, the future could well bright, although this is likely to make the seemingly bargain price for the two brands appear less so through time. If Tata can promote these vehicles in emerging markets though, and spread the risk from mature regions it could give itself an easier time. Further down the line, it may also be able to improve the profitability of the brands, giving increased stability to them both by sourcing components from lower-cost regions when the contract guarantee with the unions begins to run out. This could be one area in which the firm will reap big rewards, although it will need to wait for the time to pass before capitalising on it fully.