BOOK REVIEW
Title: Jewels
in the Crown
Author: Ray Hutton
Publisher: Elliot and Thompson Limited, 2013
Price: Rs.
699/- in India, 20 Pounds Sterling in the UK
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The Steak and the
Sizzle
When Ford bought Jaguar for 1.6 billion pounds in 1989
without having had the time and opportunity to do its ‘due diligence’ exercise,
writes Ray Hutton, it discovered that Jaguar’s tangible assets amounted to just
300 million pounds sterling.
Red Poling, Ford’s Chairman at the time, challenged John
Egan, the Jaguar boss, on the over-valuation. Egan said: ‘When you go to a
fancy restaurant you go for the steak and sizzle. You have paid 300 million
pounds for the steak and 1.3 billion pounds for the sizzle’.
Meanwhile, the original Land Rover ‘Defender’ had long been
iconic and a world-wide hit ever since it was conceived after World War II. Its
up-market stable mates, the profitable Range Rover editions went through several
generations and configurations with varying success over the years. Jac Nasser,
the flamboyant boss of then highly profitable Ford, also bought Land Rover for
1.85 billion pounds in 2000, from BMW, which had owned it for the previous six
years.
On 26th March 2008, Tata bought Jaguar Land Rover
(JLR) for $ 2.3 billion. Ford had invested some $10 billion in Jaguar Land Rover
over the years, but with multiple top management changes, ‘with very little return’
ultimately on its investment.
“The sales figures for 2007 that became available as Tata
was going through due diligence indicated a record year for Land Rover and the
second –highest volume for Jaguar and Land Rover combined: 286,880”. Land Rover
accounted for 226,395 of the total in 2007, of which 89,000 were for the highly
profitable Range Rover and Range Rover Sport. Jaguar however, was in decline.
Ford reckoned a sale of 80,000 Jaguars was break-even, but Jaguar sold only
60,485 units in 2007.
Soon after acquiring JLR, the world economy went into a
tail-spin in 2008 and the first signs of revival came only in 2010-11 when Tata
Motors were able to show a 1.15 billion pounds profit from JLR. In the interim,
Tata neither took UK Government finance with its strings attached, nor sold any
of its three UK plants during the world-wide credit crisis. Tata -JLR had survived its first major test
and fast tracked new Jaguar and Land Rover models such as the reworked XF in 2008 itself, and the light SUV cum
fashion statement the Evoque.
And then, JLR went in for a joint venture with Chery of
China in November 2012. This company will go into production in 2014 with the
smaller four cylinder Land Rover models, and a planned capacity is for 130,000
vehicles a year. Meanwhile, JLR added 7 billion pounds a year in gross value- added to the UK economy and exported 8.2 billion worth of its products in 2011.
In 2011/12 JLR generated two-thirds of Tata Motors’ revenue
and over 70% of its pre-tax profit. By the half year of 2012/13 the profit
percentage from JLR was up to 90%. Bloomberg calculated in 2012 that JLR was
worth $14 billion. Not bad at all for a $2.3 billion acquisition in 2008. The
steak has quite put the sizzle in perspective.
This tremendous success is predicated on Ratan Tata’s vision
to chart a separate path for a premium product and set of marques rather than
try and marry it to mass market car production. Ford had got this conceptually
wrong, and going the same way for Tata Motors would have been worse, with its
tired domestic models and less than international quality.
There are new moves being explored for production in Saudi
Arabia, a possible source of aluminium from its giant plants there, production
in Brazil, and in the ‘second home country’ of JLR in India, where some assembly operations to cut tax burdens on
the Jaguar XF and the Freelander are already underway.
The trick, in the years to come, Hutton implies, will be in
not tripping up the chemistry of the brands in the belt-ways of mass
production. Besides, the competition is soldiering on too, most notably amongst
them is Audi which has made a success
of leveraging its vast hinterland of VW components.
The author, Ray Hutton, a former editor of Autocar, UK, has
written an easy- to-read romp through the JLR story, not delving too deep into
the minutae, nor over- analytical on the whys and wherefores of many top
management decisions.
He has taken the stance that many automobile industry top
executives are really artists and visionaries steeped in the culture of making
cars. The big difference in the muddle of the earlier JLR saga, under early
days of private ownership, later British Government ownership, BMW/Ford, and
finally, the highly successful Tata ownership, is in very few top management
changes. That, and a willingness to plough back profits to give the brands the
investment they need, good strategic management, but an operationally hands-off
approach.
(800 words)
October 19th,
2013
Gautam Mukherjee
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