Revenge or Vision?

I am assuming that everyone reading this blog knows about the Tata-Ford deal, unless you are an extraterritorial person. It was a really proud moment for India as an Indian auto company had acquired one of the largest automobile players, not just in the UK but in the entire world. Ford was the pioneer in supply chain automation and was also the first auto company to come up with something that is an integral part of all auto companies: the assembly line.

 There was a time when the global auto industry was an oligopoly between Ford, GM, and Chrysler. 50 years down the line, none of the companies' have what they once had when they were young. The 2008 financial crisis completely killed GM and Chrysler. Ford somehow managed to survive, but they posted one of the biggest losses in the history of the auto industry: $12.7 billion.

Back in the 1990s, Ford wanted to diversify their product segment by entering the luxury car market, and hence they acquired four major luxury brands:

1. Aston Martin
2. Volvo 
3. Jaguar 
4. Range Rover

After the purchase, Ford formed an organizational division called Premier Automotive Group to oversee the operations of the luxury brands. Ford wanted to compete with high-end automotive marques like Mercedes-Benz and BMW. But unfortunately, it didn't happen. PAG didn't perform well due to the rising cost of production and falling demand in the western markets. Following the 2008 crisis, Ford's gigantic loss raised a lot of questions about their profitability.

It was expected that Ford would take at least two more years to turn profitable. So, to repay the standing loans and reduce losses, the company decided to dilute a few of its assets, and hence it sold Aston Martin to a group of investors for $925 million. As of 2023, Aston Martin has a market value of $2.35 billion. They also handed over the keys of JLR to Tata Motors on a cash-free, debt-free basis.

 

Now a billion-dollar question arises: why did Sir Ratan Tata's Tata Motors want to buy a cash-draining company after failing in their domestic market with their flagship car, the Indica?

 

Automobile manufacturing is a capital-intensive industry that operates in cycles. Managing an auto business is very tricky. One thing that makes this business unsexy is that it depends on consumer choice, which is dynamic. But to attain success in the competitive market and manage business risk, a company needs to be a global player and develop strategies based on its internal strengths and external opportunities.

 

Tata Motors survived and grew in the global market when every other company was struggling with either recession, rising inflation, or higher exchange rates. Entering the global market when the global markets are hammered is something that only Tata can think of. They acquired the acquisition and diversification strategies.

It acquired JLR for several reasons:

 

1. Diversification of portfolio: initially, Tata had only a passenger vehicle division. But with the purchase of JLR, it entered the high-end premier car segment. Acquisition is always more favourable than using your own resources to launch a new vehicle, at least in the auto industry. The probability of customers liking a new luxury car manufactured by a passenger car manufacturer was low. Eventually, the company went from owning the world's cheapest car, the Nano, to one of the most luxurious cars.

 

2. Enhancement of the core product: Cars like the Indica and Safari had some issues like internal noise and vibration problems. And, as a part of the deal, Tata got two advanced design studios and technology, which helped them improve their core product offering. Below is an example of an old vs. new Tata Safari.

 

3. Expanding presence in the international automobile market: initially, Tata was serving only the Indian market with mid-range passenger vehicles, but with the acquisition of JLR, new markets opened with expansion opportunities. JLR had demand in the North American and European markets for their luxury cars. Moreover, they had their own arsenal of retailers as well as dealers in place. This helped Tata march into uncharted territory. The JLR acquisition also gave Tata instant recognition and credibility as it had a global presence and a repertoire of well-established brands.

 

4. Reduced the dependency on the domestic markets: This deal helped Tata Motors reduce their dependency on the domestic markets and spread out to other geographical areas across the globe. Tata's footprints in Southeast Asia helped JLR shift its dependency from the US and western Europe. 

5. Cost competitive advantage: Before Tata acquired JLR, they acquired the European steel giant, Corus Steel. This generated cost synergy for the company, as Corus was the main supplier of the automobile industries in the US and Europe.

Moreover, TCS provided engineering design and sourcing services to JLR, and INCAT provided services like supplier programmes, consulting services, and global outsourcing. Vertical integration at its best. That's how they controlled their factor costs.

 

JLR has become one of the main sources of Tata Motors revenue. Because of the right funding decisions, Tata Motors posted its first consolidated net annual loss in seven years of Rs 2500 Cr in 2019, compared to a profit of Rs 2200 Cr in the prior year.

Cash control was the utmost priority of Tata motors. It had developed a 3-tier model for cash management. Their short-term goal was to manage liquidity and their mid-term goal was to contain costs at various levels. Why Tata earned the recognition can be judged by the fact that they had already planned out their 2014 operations back in 2008. And just reminding you, this is an auto business that they run where you don't know which currency to hedge in the futures to keep the factor cost in control. 

A JV with a Chinese carmaker- Chery helped JLR reduce their production cost by 35%. Tata motors also planned to pump Rs 5000-Rs 7000 Cr into JLR for product development, technology upgradation, and capital expenditure. Tata motors revenue grow at CAGR 21% from 2010-2015 with JLR contributing 81.6% towards sales. Tata motors proved everyone wrong with their strengths, managerial competence, experience of working in a large market like Indian and great brand and deep pockets. 

Today, Tata Motors is around 78 years old and shows no signs of stopping anytime soon. There is a reason why Sir Ratan Tata holds a special place in every Indian's heart. A man of few words who believes in portraying results rather than talking about ideas. I know it's not only Sir Ratan Tata who transformed the company into what it is today. There are many invisible hands that have contributed to the success of Tata Motors. What I think is that a large part of what the company is today goes to Sir Ratan Tata. He globalized the group by undertaking some serious acquisitions like Tetley, Corus Steel, JLR, and many more. He is the reason why we can proudly say that the largest employer in the UK is an Indian conglomerate. Reparation for Tata's is slightly different from what Mr. Shashi Tharoor thinks. 

Recently, Tata Motors completed the acquisition of Ford's Gujarat plant and is all set to increase its production capacity. It's going to be hard for a long-lived monopoly like Maruti to compete with Tata Motors. Whatever the future holds, I know the match would be worth watching. So, grab some popcorn and let Mr. Chandra do his work while we own some Tata shares, eat some dividends, and enjoy the journey.

 

Happy Investing.