The cat's in the bag

Last summer, when Ford indicated that it wanted to sell Jaguar and Land Rover, most observers regarded Tata as the outside bidder. What did an Indian company that makes small cars and trucks know about running a premium car business?

Private equity firms were the favourites. In the US, Cerberus Capital had recently acquired Chrysler, de-merging it from Mercedes. It looked like the new business model for the motor industry. One Equity Partners, TPG, and Ripplewood Holdings, all employed former Ford executives with experience of the Jaguar and Land Rover and were full of optimism for an independent future for the brands. But then came the credit crunch.

Tata and Mahindra & Mahindra had remained steadfast and by December, Ford declared Tata the preferred bidder. Ford’s bosses won’t elaborate on the negotiations but remind us that from the outset they said that they wanted to sell both marques as a package (there was clearly more interest in profitable Land Rover than loss-making Jaguar) and that, if other things were equal, another motor manufacturer would be the most suitable buyer. They also said that Ford would prefer to sell outright, rather than keeping a share of the equity, as it did when Aston Martin was sold to Kuwait investors.

Ford, which lost $2.7 billion last year, didn’t sell its crown jewels just for the cash. Tata will pay $2.3 billion but Ford will contribute $600 million to top up the Jaguar and Land Rover pension funds. It was not a high price for two world-famous brands – barely twice what Ford received for the much smaller and more specialized Aston Martin.

Ford chief executive Alan Mulally has focussed on ‘One Ford’, a programme to revive the Ford brand, especially in the United States. He wants to simplify the company, to stop funds and management attention being diverted to peripheral parts of the business. ‘Premium brands account for only 6 per cent of car sales,’ Mulally said earlier this year, adding that Jaguar and Land Rover were ‘ready to fly’. Analysts expect that Volvo, the only remaining member of Ford’s vaunted Premier Automotive Group, also will be sold in the not-too-distant future.

Will Tata succeed where Ford has failed? And how will it handle two brands which have a classy image but a patchy reputation for quality and reliability and – in Jaguar’s case – a knack of misunderstanding the market and producing the wrong cars at the wrong time?

The consensus in Britain seems to be that Tata will be a good custodian of Land Rover and Jaguar. News of the acquisition was welcomed by company insiders, the trade unions, dealer groups and industry commentators.

Tata made all the right noises in the lead-up to the deal. Here is what chairman Ratan Tata said a month before the agreement:

‘Land Rover and Jaguar are iconic brands which I respect enormously.

Our interest is not based on out-sourcing or taking technology. We are interested in the brands themselves. Our plan is not to tinker with the brands in any way. We want to retain their image, touch and feel.

‘This is not a hostile takeover. We were invited to bid and pleased to be considered suitable owners. We have a global responsibility to make these brands grow and take them forward.’

Asked whether he expected any customer reaction to Jaguar and Land Rover having an Indian owner, Tata said: ‘Many people, I imagine, didn’t know that Ford owned them for many years. We are very conscious that these brands belong to Britain. Who owns them is not as material as the brands, the enterprise and people involved.’

So what has Tata bought? In terms of facilities, there are three car factories – at Castle Bromwich and Solihull in the English Midlands and Halewood near Liverpool – and two well-equipped technical centres – Gaydon (Land Rover) and Whitley (Jaguar).

Land Rover has five model ranges – Freelander, Defender, Discovery, Range Rover, and Range Rover Sport - built on three ‘platforms’. Jaguar’s four models – X-Type, XF, XJ and XK - each have their own chassis structure, the XJ and XK using an advanced aluminium construction technique.

Land Rover sold 226,395 vehicles last year and is thought to have made about $1 billion profit (Ford does not break down the figures by company). Jaguar sales for 2007 were 60,485 and it continued to lose money, probably around $250 million. Land Rover is at a record volume – it grew by 17 per cent last year alone – but Jaguar has come way down from a high of 130,344 cars sold in 2002.

Most Jaguar and Land Rover engines are made in Britain, at Ford plants at Bridgend in Wales and Dagenham near London. Ford will continue to provide engines, stampings and other components and becomes the main supplier to the new owner. It is understood that the terms of the sale include a restriction on Ford technologies being shared with a third party. That may thwart the ambitions of Fiat, partner in several joint ventures with Tata, which been eyeing the Jaguar XF chassis platform as the basis for a new Alfa Romeo.

Tata has accepted the current business plan for the two brands which suggests that not much will change before 2011. It also implies that the next model programmes, like the re-skinned Jaguar XJ and Land Rover LRX, can progress to production – they had been put on hold during the sale negotiations.

It has agreed that, in that time frame, there will no moves to close any of the three factories. But eventually such rationalization seems inevitable. In most parts of the motor industry a total production of less than 300,000 cars a year would be accommodated in one plant.

Although Ratan Tata stresses that the purchase was not driven by a desire to take technology, having Land Rover can do nothing but benefit Tata’s own vehicles in the future. Land Rover expertise can and will be used to upgrade its own 4X4s which would then find a wider market in Asia as well as the Indian sub-continent. Tata’s renewed SUVs could also be sold as a less-expensive range alongside the premium Land Rovers in developed markets.

But if Land Rover is a good fit with Tata Motors, Jaguar stands isolated, an ageing aristocrat that has fallen on hard times. Its latest model, the swoopy XF sports saloon, has been well received but can only do so much to reverse a relentless decline in sales.

The Jaguar business plan, which Tata has endorsed, envisages settling at a much smaller production volume than Ford’s 200,000 a year target of eight years ago. The new version of the XJ flagship, following the modern design cues of the XF, will appear at the end of next year. The small X-Type, based on the Ford Mondeo, is expected to fade away not long after.

Jaguar’s management has ideas to invigorate the brand. It would like to have a smaller sports car to challenge the Porsche Boxster and has proposals for a series of variations on the XF and XJ. The trouble is that all these need money, Jaguar has not been making any, and Ford was unwilling to put in further investment. It remains to be seen how far Tata’s funding will extend. But unless the range is widened it is hard to see how Jaguar will grow.

While Jaguar has suffered, particularly in the United States, from mis-reading customer requirements – it maintained its traditional English country-house style while buyers were demanding something more modern - part of Land Rover’s success is because it has remained faithful to its origins.