Tata's Takeover of Jaguar and Land Rover: Bumpy Road or Smooth Ride?Published: April 03, 2008 in India Knowledge@Wharton
Will the acquisition of Land Rover and Jaguar be a smooth ride for Tata Motors? That is the question that many observers have been asking since the Tata Group and Ford announced their $2.3 billion deal at the end of March. The takeover has been greeted with jubilation, especially in India, because of the prestige of these marquee brands. On the other hand, skeptics have also been wondering how this acquisition fits in with the Tata Group's overall strategy. What can the Tatas do differently than Ford to ensure that the acquisition pays off? What major challenges will Tata Motors face in integration and marketing? To help make sense of these issues, India Knowledge@Wharton spoke with John Paul MacDuffie, Wharton management professor and co-director of the International Motor Vehicle Program, and Harbir Singh, Wharton management professor and co-director of the Mack Center for Technology Innovation.
An edited transcript of the discussion follows:
Knowledge@Wharton: Let's start with the question that is on everyone's mind. Does this deal make economic sense?
MacDuffie: It's a very fascinating deal. It's clearly not a deal that is trying to build economies of scale in just one business and just reach into new markets. It's quite a differently motivated deal. For Tata it's not the first time that they've reached for a brand with some prestige value as part of expanding their global visibility. So I think viewed as an acquisition that they intend to learn a great deal from, it could very well make sense.
The exposure that the Tatas will have to the high end of the auto business, which they know very well at the domestic end, and to the managing of this very prestigious brand I think could offer a lot of learning opportunities.
Knowledge@Wharton: Harbir, just to follow up on the same issue, the Tatas have the Indica, and they also recently launched the Tata Nano, the famous one lakh rupee car, or the $2,500 car. Do brands like the Jaguar and Land Rover really fit in with that overall portfolio? What's your sense of the fit?
Singh: My sense is that the Tatas are trying to expand their portfolio in general and they are trying to offer [various brands]. I don't think it's a question of the customer viewing Nano, and Jaguar and Land Rover as all offerings of the same company. It's much more a question of like Louis Moet Hennessy having a set of brands and really doing the best you can for Land Rover and the best you can for Jaguar.
In terms of the economic sense of the transaction, I think another way of looking at it is: What's the replacement value of those brands, right? And clearly whatever price they pay is much lower than the replacement value. So the real challenge here for them is to make sure that they can enhance Jaguar in its own terms and enhance Land Rover in its own terms.
Knowledge@Wharton: John Paul, do you agree?
MacDuffie: Yes. Ford of course sold the companies because the company is in deep financial distress and really needed cash now. There can be a dispute, I guess, about whether the price is too high or too low, but the Tatas certainly paid substantially less than Ford did for those brands. And by all counts Land Rover is profitable and Jaguar has made a strong comeback based on building capabilities, improving quality, they have some interesting new products in the pipelines, so I do agree.
Knowledge@Wharton: Did the Tatas did get a bargain, or did they overpay because this was a higher price than the market expected?
MacDuffie: It's always very tough to know exactly and there's always this kind of speculation at the time. I think that Ford was certainly counting on increasing the volumes of these brands -- probably particularly Jaguar -- to a much higher level. And so at a certain point their efforts to greatly expand the volume, I think, probably hurt them somewhat. They were introducing lower priced Jaguars that a lot of people didn't feel represent that brand very well. They were trying to leverage their own Ford design parts from other models. I actually think managing it as a prestige brand from the base that Ford established should work well for the Tatas.
That appears to be their pattern with their acquisitions -- that they by and large allow the management to keep doing what it is doing and, as I said, look for opportunities to learn from these foreign acquisitions.
Knowledge@Wharton: Some critics have been saying that for the Tatas this was a deal motivated more by the desire to acquire marquee or iconic brands, almost like former colonials acquiring the trappings of the former empire. Does that criticism make sense?
MacDuffie: Who knows about that motivation? There's certainly a kind of interest, I think, in the whole deal that comes partly from such associations. One of the other Tata deals that's gotten some attention is the acquisition of Tetley Tea, another British brand, and also of British Steel, the remains of British Steel. And so clearly investing in Britain has worked well for Indian companies.
There were competing buyers, mostly private equity sometimes in partnership with other auto companies. And both the unions and the suppliers of Jaguar and Land Rover very much prefer Tata. I suspect not because they're an Indian company but because of their track record in the way they've managed acquisitions. They by and large have not done wide-scale layoffs, they have not done lots of consolidation; they've focused on leveraging the strengths and the capabilities they have acquired.
Singh: I agree with everything John Paul is saying. My comment is that it's important for the Tatas not to get distracted by the nationalism and those kinds of things, which are all inevitable and natural. And I think it's good, the pride is well-placed. You know the pride in Tatas by Indian investors and others is well placed. But fundamentally, this transaction has to perform because it's a large transaction. I think there is a very good chance of performing. But I think it important for them to not get wrapped in the overlay of national pride and British colonialism and all those things.
Knowledge@Wharton: Ford really had a tough time during the many years that it owned these brands. What could the Tatas do differently to make sure that the acquisitions pay off?
Singh: It's correct that Ford struggled quite a bit with these transactions. One of the issues that John Paul mentioned earlier was that Ford is in financial trouble. So if you were to think about Tatas' approach to all of this, they could get a good price because it's a distress sale.
I mentioned market replacement value and there is a good chance that the $2.3 billion is well below replacement value because Ford bought Jaguar for a similar reason. They wanted that luxury nameplate. And Land Rover also is a high-end nameplate. But we can also ask that based on these multiple bidders present, that what we will get is kind of almost an auction-like value, right? Except that it will, given that the bidders are all well-informed and they have had access to the books -- this is a private transaction, it's not a public transaction -- I would think that $2.3 billion is probably a fair market value. And I say that obviously without access to the books.
So looking ahead then, what can the Tatas do differently? I think what the Tatas can do differently is to manage the supply chain effectively and take advantage of their experience in managing manufacturing companies in England and in Europe, specifically with Corus, that they have had some experience with. And to preserve the sources of value where they are and enhance them where they are, they should try that and not integrate quite as much as Ford and Jaguar did with the Jaguar X type and the Ford Lincoln counterpart.
Knowledge@Wharton: You have looked at other mergers that the Tata Group has done. Is it your sense that Tata Motors will try to integrate Jaguar and Land Rover with their other automotive operations? And if so, what do you think will be the major challenges involved?
Singh: Just speaking of Tata's experience with M&A in general, they as a group have shown boldness in going beyond national boundaries and making rather visible transactions. I think each of the operating companies is very professionally run and I think there is some opportunity for learning across [organizations]. You know, what did the Tetley acquisition tell the Tata Group about cross-border acquisitions and what does the Corus experience more recently tell them about manufacturing-based acquisitions? I think they are going to try to transfer some of that learning to Tata Motors. That will be very effective.
Knowledge@Wharton: John Paul, what challenges might the Tatas face and how they should tackle them?
MacDuffie: When you think of other big mergers or M&A activity in the auto industry, this may bring to mind for some people something like DaimlerChrysler in the sense that you had a high-end brand combined with a set of more mass-market brands. At first people thought this meant that there was not going to be a great deal of conflict for the two companies because they would operate in those different parts of the market. That quickly turned to criticism that they weren't achieving synergies from the deal and toward the end of that somewhat ill-fated union -- they were trying in fact to leverage more Daimler engineering and parts into Chrysler vehicles. In the end, of course, it fell apart and Chrysler was sold.
To me there is such a huge range between the Tata domestic products and these luxury brands. There is also the complete physical location of the supply chains and the manufacturing facilities. I agree with Harbir that this is probably a case where rather less actual integration activity but more focus on where experiences in other acquisitions can be transferred is the way to go.
Singh: Just to add to that comment, I would say that value engineering may be very important. They will bring some value engineering skills, which I think the Tatas definitely have.
Beyond that, I think it's much more a question of [whether] the price was right in relation to the value that the Tatas would get down the road. That's going to be the key determining factor. Of course, there are many cultural issues we can also talk about.
Knowledge@Wharton: What cultural issues do you think will crop up between Tata Motors and the new acquisitions?
Singh: John Paul talked about Daimler and Chrysler, right? A lot of [the problems] seemed like national cultural differences in addition to differences just in terms of how you produce a very high-end automobile and a medium-priced automobile. Those cultural issues, organizationally, began to play a significant role and became significant challenges.
What Tata needs to do is to avoid some of those dynamics. They have to avoid nationalism from rearing its head, particularly in Jaguar/Land Rover, from their end because I don't think it is productive to have that.
Secondly, they have to ensure that Land Rover and Jaguar achieve their potential and manage them as if they were luxury manufacturers themselves -- do value engineering on the backend but give the resources necessary for maintaining and enhancing the brands. That really calls for the Tata executives to kind of transform their thinking and bring into the luxury end or the higher-end price point the value engineering and some of the frugality that they would have a better handle on. That's a challenge.
MacDuffie: Thinking back to the DaimlerChrysler situation, clearly a big factor from the very beginning was a sense that the Chrysler management had that essentially it was a takeover, and control coming from Stuttgart was really the dominant factor. A lot of executive talent left in the very early days. It already appears to be clear that a lot of the Jaguar and Land Rover management will stay in place. They seem to have already gotten those assurances, again [with] the care with which Ratan Tata himself and his staff spoke with the Union and suppliers to ensure them continuity. I think they have already approached some of those challenges associated with the transition very skillfully.
I also noted in just one press account of the approach that Tata has taken with some of the acquisitions, something that I have seen as being very effective in, for example the Renault/Nissan alliance, which is essentially allowing a lot of decentralization. But reaching into the organizations for talent, sometimes lower down in the ranks, assembling task forces to work on certain important strategic issues and then letting their recommendations come up to a senior-level and trying to enact them quickly and providing resources for them. So again, based on not a lot of information, my sense is that they are approaching this quite skillfully so far.
Singh: Sometimes we think about these companies as homogeneous entities. So Tata produces lower-priced or medium priced -- in developing countries -- automobiles. And Jaguar and Land Rover are luxury automobile manufacturers. I agree with John Paul's point that when you break it down to the operational level, and the automobile design groups and so on and so forth, the supply chain, there are a lot of commonalities in how you think about the engineering of these automobiles. And to try to develop task forces that can find the best of both practices and in fact transfer learning across organizational boundaries is entirely possible. And the Renault/Nissan example is an excellent one where they actually went in and turned around Nissan. Everybody thought that it was very, very difficult to do. So that was a concrete example that actually can be emulated in this setting. I think that's a great point.
Knowledge@Wharton: Apart from the operational and cultural issues, there is also a marketing challenge that Tata will face. How do you think that should be tackled?
MacDuffie: Our basic stance is that a lot of management of those brands should probably continue without a great deal of change. This is a new area for Tata to learn from. I noticed one quote from Shekhar Kapur, the director of two movies about Queen Elizabeth, who lives in London. He talked about a sense of pride that he felt at hearing about this acquisition. So there probably is an opportunity…I wouldn't say to play to nationalism per se, or to this colonial reversal kind of angle, but in fact to market to successful Indian expatriates around the world, and perhaps in India as well. But I think particularly in countries around the world that is a desirable market and there are some opportunities there.
Singh: I would agree with that. I think if you think about the target group as a whole, on one hand the challenges are that you don't want to dilute the nameplate of Jaguar and Land Rover with the lower-cost kind of imagery.
But Tata as a group has marketed luxury products as well. I mean, they have a jewelry division that's very successful. I'm not suggesting they use the jewelry kind of approach. But they certainly have the diversity of perspectives within the group to more than tolerate luxury products and other brands.
If you look at Tetley Tea, most people don't associate that with the Tata ownership outside of India. And Tetley has thrived as a brand. I can see them replicating that kind of approach, where they keep the brand intact and keep the management largely intact. And they may try to infuse knowledge where they think that is beneficial.
Knowledge@Wharton: Let me conclude by asking one final question to both of you. If Ratan Tata, head of Tata Sons and Tata Motors, were in the room with us right now, what advice might you give him?
MacDuffie: I think I would emphasize two things that have been themes here. One is focus and not being distracted. There is a need to extract value from this and that will largely depend on being highly focused at finding what it takes to make Jaguar and Land Rover succeed. Grander schemes that involve trying to leverage these brands across the rest of their portfolio I think probably don't make a lot of sense at this point.
But secondly, the theme of learning… that already appears to be a thrust of some of the emerging market multinationals, that when they acquire access to learning and the chance to develop new capabilities is really the motivation and not simply ways to get scale or take cost out.
If they can stay focused on that, the companies that I have followed for many years in the auto industry that have consistently been successful --Toyota most notably --have kept that focus on learning and improvement at the forefront consistently in good times and bad. I would urge that on Mr. Tata.
Singh: I would say three things. The first, of course, is I would be honored to be in his presence and compliment him on his statesmanship. He has led a group that already had a tremendous reputation but he has taken it to new heights.
The second thing is to say that he should trust the CEOs of his companies -- and he does -- and see how they can get the most value out of these transactions, not just Tata Motors but also Tata Steel and the other transactions that these companies are doing.
The third is to talk about sharing learning across the Tata Group. I think each of the companies is doing that. The question is how they can get the most out of transferring knowledge across the group. Related to that is the point of discovering a unique style that is appropriate for such business groups.