labels: Interviews, M&A, Ford Motors, Tata Group, Cars
Ford, Tatas need to iron out issues: Frost & Sullivan news
04 January 2008

Sarwant Singh, automotive and transportation practice director, Frost & Sullivan, says the premium Jaguar and Land Rover brands can help position Tata Motors' Rs1-lakh car in the future. CNBC-TV18 shares with domain-b its exclusive interview with Singh:

CNBCComplexities are something that both companies have stressed on. What do you think some of the stumbling blocks or major hurdles are likely to be as Tatas try to close this transaction?
I think it would be interesting in the next couple of months to see how this deal pans out. Some of the complexities we might see is how Ford and Tata agree on certain things like sharing of engines, certain platforms and components and also on pensions and things like that.

Personally, I think it will be good for Ford to maintain a little stake for these agreements to go on not just in the short-term but for the long-term for two - three years and that is the kind of period Tata needs to be able to become the standalone owner of these two brands.

What is the pension regulatory situation in the UK? Are there any other regulatory challenges that you foresee, that could trouble this deal?
One of the recently talked about regulatory issues relates to the EU legislation on CO2 emission levels. It is a bit harsh on companies like Jaguar and BMW, because it penalises them if they have CO2 emissions above certain limits.

I think that could be one of the indirect challenges coming in. What Tata will have to do is ensure that the cars by 2012 meet these regulations. There is a severe penalty if they don't, which means that they will have to invest a lot on environment friendly technologies.

How much would this cost the Tatas?
There will be two types of costs, one is development cost that they will need to incur, which could be up to £200-£300 million. They also need to see as to whether they need to, perhaps, pay a fine. It all depends on if they are able to meet these regulation or not.

But this could be a significant cost, close to £100-£200 million. 

I imagine the biggest challenge is going to be the turning demand situation for automobiles across the world. From everything I have been reading of analyst's reports, 2007 is going to be a particularly  bad year for the US, when it came to auto sales, with oil topping off at $100 / barrel.

It is not a good sign for gas guzzling cars that Land Rover produces. If the economy is going to slow-down in the US, which is a big market for Jaguar, that is not a good sign for that brand either. What is your assessment for the global auto demand and what that means for these two brands?
Globally the automotive industry is expected to grow significantly. We expect the industry to build more than 80 million cars by 2012. Now, US is expected to remain more or less flat. But we expect Eastern Europe and Russia to provide growth within Europe. Russia is expected to sell something like 30 million cars in the next ten years and China and India put together are expected to sell more than 10 million cars by 2010. 

So, there is a market for premium cars. It might not be so much growing in North America, but there is a demand for Jaguar. Jaguar is very strong in North America. But the strategy that Tata needs is to go into these new emerging markets.
Land Rover is doing very well in Russia and they need to replicate that success with Jaguar. I think there is a growing market and it is just a matter of how well Tata can execute a strategy for growth. 

What is the model line up looking at both these brands? The XF has got a great response. What is the kind of investments that Tata will have to make in boosting the model line up over the next few years?
The model line up looks great. Land Rover already has had some good releases, Jaguar is coming out with a couple of new models being launched this year and next year. So, it is possible that this new model line up, if it is well positioned with the customers, could help business grow.

It is very much possible but it is going to be a challenge. I think Tata should benchmark Audi a bit. If you go back to the '80s-'90s, Audi was called the 'people's car', just like what Tata is called now and over the years, they come up with innovative models, put features and technologies in cars which consumers like.

Today, they are one of the three top premiums challenging BMW for the premium car manufacturer spot.

 So, Tata needs to benchmark them, come up with new models and have much more frequency of new models. This is something which has changed the automotive industry and you need much quicker turnaround of new models. If they can do it and position it well and take it to growing emerging markets, they might be able to turn it around

Where do you see the fit because you have Rs1-lakh car for emerging markets like India? If they do manage to acquire these two brands on the top-end, you will have and one company holding all these brands and trying to gain a global footprint. Is it going to work?
This would be a serious challenge. I think one of the things why Ford was unsuccessful was they tried to share too many components and it sort of diluted the brand. The Ford Mondeo Chassis was said to be the same as the Jaguar Chassis.

If these things get out to the public and people start viewing them negatively, what Tata has to do is have Chinese walls between these two brands and really position them separately and invest in the brand.

Jaguar and Land Rover are premium brands. You need to invest on it. That brand can help the people's car position in the future and perhaps dwell more premium cars in the small low segment. But they have to separate these two brands out and invest separately in them and try and not to dilute these two brands. 

The deal size is estimated at $2 billion. Do you think there could be a lot more money because they will have to make investments in Jaguar and well as Land Rover?
I think they have to differentiate between the capital cost of buying the company, the operating and the running cost. So they could have higher operating and running cost, as needed to invest in development.

Would you like to put in a number to it?
I think the price at which they will buy will be between $ 2 and $2.5 billion. This is a very good price because Ford paid £3 billion for both these cars. I think this year Jaguar and Land Rover might break even. 

Sources close to this deal said there could be some separation of assets. So, what is the assets separation going to be like at the Halewood Plant especially since the manufacturing has been rather integrated for Ford till now? How complex is this going to be?
I don't think those issues are really complex. This year, the most complex things are going to be European legislation on two emissions that is coming in. They are probably going to be the most complex.

Ford is going to develop most of that technology for Jaguar-Land Rover, because they are the ones putting all the R&D into the engines, which are the biggest cause of CO2 emissions.

There is obviously the weight of their vehicles as well as the design aspect. I don't think a company like Tata can go this far without knowing what they are doing. I don't think a company that knows what they are doing will get into something to find anything that they are not expecting. They know exactly what to expect. They know exactly what they are buying into. Ford wants this money quickly for their own reasons. Hopefully, Tata can put a formal bid together and let the company move on to a new chapter in its life.

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Ford, Tatas need to iron out issues: Frost & Sullivan