BOOK REVIEW: The Steak and the Sizzle

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 26^th 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 19^th, 2013

Gautam Mukherjee