With a humble beginning in 1945 as TELCO (Tata Engineering and Locomotive Company), Tata Motors became a true Indian multinational company by acquiring the South Korean truck major Daewoo Commercial Vehicles Company in 2004 and later the famous Jaguar Land Rover (JLR) division from Ford in 2008.
A look at the company timeline shows the clear evolution of Tata Motors (TAMO):
|1945||Founded as a Locomotive Manufacturer|
|1954||Entered the Commercial Vehicle segment through a JV with Germany’s Daimler-Benz|
|1991||Entered the Passenger Vehicle market through Tata Sierra (SUV)|
|1994||Launched the famous Tata Sumo|
|1998||Launched Tata Safari & Tata Indica|
|2004||Acquired Daewoo Commercial Vehicles Company, and renamed it as Tata Daewoo|
|2005||Acquired a 21% stake in Spanish bus & coach company Hispano Carrera|
|2006||Formed a JV with the Brazil-based Marcopolo (Tata Marcopolo Bus)|
|2008||Acquired the English carmaker Jaguar Land Rover from Ford Motor Company|
|2009||Launched the world’s cheapest car Tata Nano. Production ended in 2018|
|2010||Acquired an 80% stake in the Italian design and engineering company Trilix|
|2020||Announced it would spin off its PV arm as a separate unit within the company|
TAMO was always a market leader in the commercial vehicle segment with few companies giving it strong competition. However, the PV segment was where the real margins and the competition lied. Tata successfully launched Sumo and Safari and ventured into the smaller car segment through Sierra & Indica. Though, these launches were not as successful as Ratan Tata initially thought.
In 1999, Ratan Tata contemplated on selling of its personal car segment especially after Indica started to lose steam. Auto major Ford was invited as a potential buyer to this segment. However, Ford officials humiliated Tata bosses by saying “you do not know anything, why did you start the passenger car division at all’. Nine years later, Tata’s took sweet revenge, buy purchasing the JLR segment from Ford. Ford officials later commented that Tata’s did them a big favour through buying their car (JLR) division
The JLR Deal
In the year 2008, TAMO made a very bold & aggressive acquisition. It purchased the struggling & beleaguered UK luxury carmaker, Jaguar Land Rover (JLR) by paying out close to 10,000 cr INR (US$ 2.3 billion) and promised to turn the company around. TAMO did not inherit any of the pending debt liabilities of JLR – the acquisition was totally debt free. Interestingly, Ford had purchased Jaguar for US$ 2.5 billion in 1989 and Land Rover for US$ 2.7 billion in 2000. However, over the years, Ford realized that it was failing to churn the desired benefits from these acquisitions.
What was the reason to suddenly acquire a luxury car maker? What were the acquisition dynamics?
The reasoning behind this acquisition was threefold. First, JLR would help the company acquire a global market and enter the luxury and high-end premier segment of the global automobile market. After the acquisition, Tata Motors had the cheapest car in Nano, and luxury names like the Jaguar and Land Rover, thus having a great diversified portfolio. Second, Tata also received access to 2 advanced design studios and technology as part of the acquisition deal agreement. This provided Tata Motors direct access to superior technology which allowed them to improve their Indian core products portfolio, i.e., internal noise and vibration problems in Safari and Indica. Third, the cost advantage as steel maker Corus (another acquired Tata group company) was the main supplier of automotive high-grade steel to JLR and other automobile industry in American & European markets. This would have provided a synergy benefit for TATA Group on a broader level.
Was the deal then successful for TAMO or was it a bumpy ride?
Tatas quickly realized they couldn’t have picked a worse time to make an acquisition of this scale. The subprime crisis in the US had set off a Global Financial Crisis (GFC) and anyone who had cash certainly wasn’t in a lending mind-set. Fast forward and within two years and a few months, JLR’s contribution helped TAMO post a meteoric rise in profit in the September quarter.
So, how did an Indian auto company that specialized in cheaper small/hatchback cars, on the one hand, and CVs like trucks, on the other, succeeded where an iconic auto maker, and others before it, had failed miserably. Let’s deep dive.
Soon after the deal in 2008, Tata found itself loaded with a debt of 21,900 cr INR, a weird position for a company that had almost zero debt. TAMO’s market value fell to 6,503.2 cr INR, with the stock hitting the lows of 126.45 INR in November 2008. The market cap was now less than what it had paid Ford for acquiring JLR. Shocking right?
TATAs were bleeding and bleeding bad. Financial institutions were not lending any money, they were not available, they were closed. And Tata’s needed money, especially as the Global Financial Crisis was going on. That’s when the patriarch Ratan Tata came in for Tata Motors, with the parent capital pumping, driven by the sole belief that the JLR acquisition was correct, and they had to make it work.
Cash remained the top priority, as JLR was losing money and the company sought external help in the form of KPMG as a consultant. The company started to manage cash on an hourly basis (what cheque was going out, what cheque was coming in). In early 2009, Roland Berger Strategy Consultants was hired to keep a check on costs. The mandate to this Munich based consultant was straightforward: to make JLR profitable.
A short-term target to manage the liquidity concerns with the help of KPMG was put in practice. Then came a mid-term strategy to contain costs at various tiers & levels and the formation of ten to eleven cross-functional groups (teams). A number of top hierarchy changes, including new bosses at JLR, were done. Finally, a long-term target was sketched up, focusing on newer models, and refreshing the existing ones. The key goals—cash management and checking costs.
Tata Motors also embarked on a plan to divest stakes in group companies to raise cash – all proceeds were funnelled into TAMO to make JLR profitable. Interestingly, Tata’s were able to keep product development plans intact amidst the GFC.
These initiates also saw the labour and the general workforce being trimmed by around 11,000 from a huge workforce of 27,000 at JLR.
Results started showing up when and the margins rose by a whopping 13.7% from 2.9% in September quarter FY 09-10, reflecting the improved dynamics of the company as revenue rose exponentially on the back of new product launches and improved global market sentiments. JLR’s turnaround was also aided by external factors such favourable currency movements.
Sales became buoyant with the introduction of newer, fuel-efficient, and contemporary models coupled with the revival of demand in key markets such as the US and Europe. The debt-to-equity ratio came down to 1.6x from 4.5x at the yearend 2009 at the consolidated level.
Does this mean that Tatas turned around the JLR into a successful acquisition? Is it really the case or is there something else that was left to ponder on – especially in the last 5 years? Stay tuned, Part 2 coming soon….