Tata Purchase of Jaguar-Land Rover a Dicey Gambit: Doron Levin

Commentary by Doron Levin

April 3 (Bloomberg) -- Count investors among the wary in regard to Tata Motors Ltd.'s $2.3 billion agreement to buy Jaguar and Land Rover from Ford Motor Co., announced last week.

Starting last October, when Mumbai-based Tata Motors first surfaced as the leading bidder for Ford's U.K. auto brands, Tata common shares have fallen about 25 percent so far, more than the 14 percent drop for the Bombay Stock Exchange's main index and more than the 22 percent drop for the Bloomberg Europe Autos Index.

Tata says it will have to borrow heavily -- a $3 billion bridge loan for 15 months -- and will sell assets to repay the debt and to provide funds for costly investments in new models, such as the $2,500 Nano microcar it plans to start selling in India later this year. The carmaker's five-year credit-default swaps, reflecting the rising default risk of the company's bonds, have more than doubled in price since Ford named it as the preferred bidder on Jan. 3.

A key question, beyond finances, is whether the Indian conglomerate's lack of experience in the global luxury-car arena will hobble its collaboration with Jaguar-Land Rover's British management. Besides money, Tata doesn't bring much to the party, as Volkswagen AG did when it contributed the engine block and other parts for the Bentley Continental GT after buying the Bentley brand.

We Know Best

Ford looked as if it had everything when it bought Jag. But its top-down ownership strategy failed because the automaker tried to inflate sales by palming off mass-market cars at luxury prices. Ford's losses at Jaguar since buying it in the late 1980s, so far undisclosed, might be $30 billion or more, according to estimates of some outside analysts.

Over almost two decades the Dearborn, Michigan, automaker tried to push Jaguar's unit sales toward 200,000 annually by designing pedestrian models such as the X-Type and S-Type that weren't special in terms of design or features, even though they carried fancy price tags and competed against Lexus, BMW and Mercedes.

After having to discount the X-Type and S-Type, Jaguar's image was cheapened, hurting sales of its bigger, more expensive models such as the XKR coupe that costs as much as $92,000. Jaguar unit sales last year were roughly 60,000 worldwide; Land Rover sold about 225,000.

Off-Road Winner

Ford did well with Land Rover, keeping it profitable, though the automaker never could forge a comprehensive strategy for luxury vehicles that also included Lincoln, Volvo and Aston- Martin. Ford's chief executive, Alan Mulally, who took office 18 months ago, decided to streamline luxury marketing around Lincoln and raise cash, first by selling Aston-Martin and then the remaining two English names.

Tata Motors, posting only one annual deficit since its founding in 1945, has assembled trucks for Mercedes-Benz and slowly developed its own models, first trucks and utility vehicles and later cars. Among them is one the company claims to be India's ``first full indigenous passenger car'' in 1998, the subcompact Indica. The Tata family's industrial empire, by contrast, has global interests as varied as steel and tea.

In all likelihood Tata will allow Jaguar and Land Rover to pursue their current business plans. ``The Tata Group has done a lot to say they will pursue a more or less hands-off approach,'' said Simon Warr, a company spokesman in Coventry, England. He says operations of the two car lines now are profitable.

Heir Apparent

Jaguar's first big test is its replacement for the S-Type, the XF sedan, introduced in the last month as a competitor to the BMW 5-Series. Depending on options, XF is priced between $50,000 and $62,000.

Edmunds.com, an automotive Web site, gave XF a positive review, complimenting its ``refined ride, sporty handling, apart-from-the-pack interior and exterior design (and) powerful performance from V-8s.''

Tata could do worse than to study how Volkswagen bought and revived the failing Bentley brand in 1998, giving it just enough support in terms of money and technology, while letting British management take care of business.

David Reuter, a Bentley spokesman in the U.S., said 2006 was the first year for which VW has disclosed any financial information about Bentley's performance, reflecting a profit of ``several million euros.'' What VW doesn't disclose -- and what Tata soon will learn -- is how many billions VW and other makers of luxury cars must invest to stay current on myriad technologies in order to keep pace with new regulations as well as Lexus, Mercedes, BMW, Porsche and others.

The prospect of such outlays is at least one reason so many holders of Tata stock and bonds have voted with their feet.

Yet the risk of a catastrophe with Jaguar and Land Rover is one that Tata must accept if it intends to be a worldwide automaker instead of a local one. Tata has a golden opportunity to gain knowledge and expertise in world luxury markets.

Absent such expertise, the Indian company could one day become the bauble of some other automaker trying to capitalize on the rising Indian car market.