The Indian Economy Blog

March 29, 2008

Opportunities From Big Brand Acquisitions

Filed under: Business — Kiran @ 4:41 pm

When Tata Motors launched the Nano it was probably the most globally high-profile move by an Indian auto company. We examined some implications then. We now look at some implications of another equally high-profile event – the Jaguar-Land Rover takeover.

While the Nano was good for brand Tata, getting it noticed all over the world, the acquisition of Jaguar and Land Rover puts it firmly in the map of the Who’s Who of auto brands. The acquisition of these brands by Tata can work wonders for the brand image of Tata Motors as the company that owns two of the biggest names in luxury automobiles. But how does this fit into the overall strategy for Tata as it does not even have a pretense of a presence in the luxury segment even in its home market? The Tatas’ most expensive vehicles on Indian roads are its commercial trucks.

Here are a few thoughts. Not necessarily echoing the sentiments expressed by Tata in public but our analysis of how this acquisition could be made to fit into Tata’s overall strategy.

Toyota is the gold standard that aspiring auto-makers look to. Synonymous with Japanese quality, Toyota got to its premier position in the world auto stakes by a combination of production efficiency, high quality and delivering unsurpassed value to the customer. Toyota fans call a Honda, “a fake Toyota”, seemingly referring to Honda following in Toyota’s footprints and achieving similar status in terms of quality and value. Similarly while a growing company like Hyundai benchmarks its cars against Toyota competitors, a relatively “old-world” company like Volkswagen re-designed its production process based on inputs from Toyota engineers.

Still Toyota did not move beyond its economy and hence cheap image in the Western world till the introduction of its luxury brand, the Lexus. The strategy was such a success that other Japanese auto makers quickly jumped onto the bandwagon. The Lexus strategy had a curious side-effect on the overall Toyota bouquet of products. Unlike how the European companies built their luxury cars, Toyota continued to use the production line using strict quality control to drive efficiency. As a result the luxury cars did not cost significantly more than the regular line-up. While this revolutionized the luxury car market, it also worked wonders for its non-luxury line-up as the superior styling and finish of the luxury models began to rub-off on the rest of the portfolio.

Still Toyota took 3 decades to move from economy to luxury cars. Tata Motors has only taken baby steps towards becoming a global automaker. But the newly-acquired the availability of true luxury brands within the stable allows the company to learn what it takes to give its cars the aspirational value they need to succeed in the Western markets.

In addition to taking design lessons, Tata Motors can also benefit from the world-class R&D facilities, and an established global marketing network. Also while the Jaguar-Land Rover brand image will work wonders for Tata Motors’ own image, there is a danger that it would dilute the value of the British brands. So if the Tatas make it clear that they will treat the new companies as prized possessions that they will take pains to nourish and grow, while also using them as a huge opportunity to learn, then that should allay fears of brand dilution, while keeping the existing jobs and helping the Tatas as they build up their portfolio of vehicles to fill the gap between the SUVs and the luxury vehicles, in terms of both products and aspirational value.

While this acquisition can fail miserably if the Tatas run the companies and the brands to the ground, the potential benefits are huge. Jaguar and Land Rover will eventually get a prized position atop Tata’s new global portfolio of vehicles, while the Tatas use JLR as an important stepping stone to achieving the position of a truly global automaker.

18 Comments »

  1. good post.. yes if TATAs don’t fill their repertoire with sedans and more SUvs then they will not be able to take complete advantage of JLR.

    check my blog for some interesting verse on TATA :P

    Comment by rahul — March 29, 2008 @ 6:35 pm

  2. So you now have a World-renowned luxury brand. A world-renowned SUV brand. And the capabilities to build the cheapest car in the word (as of now at least). You have a huge domestic distribution network, know-how about small cars, and borderline sedans. Now you get access to a dealer network globally, augmenting your existing network, and the technology used to make (arguably) the most rugged and reliable SUVs in the word, coupled with of course, a luxury brand.

    So what do you do? You eventually challenge Toyota and Honda in the global car market with mid-size sedans, and of course other vehicles which one cannot foresee at this point…

    Comment by TTG — March 30, 2008 @ 12:31 pm

  3. Well said. What’s more – given the ever increasing demand for oil, fuel efficiency will become a major concern for future car makers. Options like biofuels, hybrid drives, fully electric drives etc. are being tried, each with potential drawbacks.

    If Tata Motors invests in the right kind of R&D, it can make it big by making technologically advanced, low-cost, fuel efficient cars.

    Comment by photonman — April 1, 2008 @ 9:44 am

  4. With the acquisition of JLR, the Tata’s game plan is clear. Mark its authority in the automakers map. But all well and done, we should not skitter away from the topic that, acquisitions can certainly bring lots of charisma, glamor and zing to a brand, but it takes a lot more to challenge the top most ‘quality’ auto makers of the world.
    Take a look, how many acquisitions did Toyota make? And how many did Honda make?

    Acquisition can give you an edge but not necessarily the blade to slash away your competitors throats. But yes, what indeed can do wonders is, R&D, huge R&D, big R&D, mammoth R&D. Radical R&D and Irrational R&D.

    Honda is investing a huge amount of its annual profit behind robotics? Why? Does it think, Asimov’s robots can bring a boost in sales? No, they are in ‘that’ proverbial race to give the world the ‘next’ big thing, and create a market for themselves.

    The point is clear, Tatas have to completely renovate any production system glitches, bottlenecks and completely do it away. Thats innovation in the production system. Secondly, Tatas have to come forward with a huge impetus in design R&D.

    Comment by Soham Das — April 1, 2008 @ 1:38 pm

  5. Good analysis. If Tata can manage the brands as British brands for the first few years (like it did with Tetley Tea, though managing tea is quite different from managing cars), people in a few years wouldn’t care who owns the brands. Even if the brands continue to make a loss for a few years (LR is profitable), it will be investment in a very important learning process for Tata on how to become a global auto player before it starts competing against the Japanese mid-size sedans in markets outside India.

    Jalal Alamgir
    http://localandglobal.wordpress.com/

    Comment by Jalal Alamgir — April 2, 2008 @ 9:29 pm

  6. yes the JLRdeal is a very bold move by the tata’s and now they can use technology of rover in upgrading their indian SUV Tata Safari and it would make safari competitor of other costly suv’s in global market

    himanshu

    Comment by himanshu — April 3, 2008 @ 11:59 am

  7. Of course many things could go wrong with this acquisition. But one thing the article and related comments seem to have missed is how deeply aware the Tatas are about the importance of R&D.

    Tata have a long R&D involvement with Warwick University, U.K., where Professor Lord Kumar Bhattacharyya has founded the Warwick Manufacturing Group (WMG). WMG is one of Britain’s leader in manufacturing process R&D. Lord Bhattacharyya and WMG have been associated with Jaguar, LandRover and Tatas for long.

    Second, of late Tata’s seem to have handled integration much better. Not only has it handled Tetley very well both in terms if integration and managing brand-value, there is the experience of both Daewoo Trucks and Corus.

    Daewoo was actually a lot more difficult given cultural issues involved, but they have managed that integration very successfully, overcoming initial internal scepticism at Daewoo. By all accounts the Corus integration seems to be on track.

    Of course, they may still trip up. M&As have more failures than successes and Tata’s early record has been patchy, but they seem to have learned a few things along the way.

    Mritiunjoy Mohanty
    IIM Calcutta

    Comment by Mritiunjoy Mohanty — April 4, 2008 @ 3:38 am

  8. Though they have taken over JLR,the more crucial aspect of this deal will be its financing.Still we havent heard from Tatas how they are planning to finance this deal.With recent Corus deal,already strain exists in Tatas monetary clout.

    Comment by Abhishek Upadhyay — April 5, 2008 @ 1:06 pm

  9. Both are good and valid points, Mritiunjoy, but auto is an entirely different ball game.Matching the culture of a tea distribution company with your existing system doesn’t demand effort, but integrating an auto making company with your existing portfolio calls for some effort. Why? The answer is simple. When you are managing a billion dollar industry with highly visible and high end products, any branding/managerial mistake you make can ricochet faster than a Brett Lee ball.

    Secondly I was pleasantly surprised to know, Warwick Univ has a partnership with Tata, yet has it given anything back. I am curious.
    But again, research can be sometimes a moneysink, but then you have to handle it properly…

    Comment by Soham Das — April 6, 2008 @ 12:05 am

  10. I agree with Soham Das that integrating production companies and distribution companies are very different propositions and success in one does not imply that the learning can necessarily be used in another.

    But Soham, precisely why the Daewoo Truck integration is a more important yardstick. Again Daewoo trucks and Jaguar and Landrover are different in terms of brands, but Daewoo is an auto manufacturing company and its successful integration will stand Tatas in good stead as the begin to integrate Jaguar and Landrover.

    Also the the Daewoo case is an integration of complementary brands, which is important for the Jaguar case.

    About payoffs on R&D investment with Warwick, I have no idea. But at least Tata has access to good advice.

    Mritiunjoy Mohanty
    IIM Calcutta

    Comment by Mritiunjoy Mohanty — April 6, 2008 @ 9:08 pm

  11. When we talk about Toyota, let’s not forget that it started out by COPYING American manufacturers’ car models. When Toyota started out, the technology in Japan was so premitive that they couldn’t even make the dies to cast the doors of the car! Toyota made the dyes in the ground, and made car doors by pouring steel in them!

    Today, Toyota has come a long way, and the American companies are now copying the techniques of Toyota. But ever wondered how many decades it took Toyota to reach this place?

    Mastering and improving technology is not easy. And therefore, it makes perfect strategic sense to acquire cutting-edge technology if it is available.

    Ford has pumped-in billions of R&D dollars into J-LR, and this is bearing fruit now. J-LR have the latest technologies. This is the perfect time to acquire these brands, and by doing this, the Tatas have cut the steep learning curve.

    Amazing strategic thinking….

    Comment by Raag Vamdatt — April 8, 2008 @ 2:18 am

  12. Raag,
    It may come as a surprise to you, that one generation of sinful management can put a company in a perilous situation. Well at least it came to me, when I knew about Ford.

    Ford Sr. left the company in a position which we can only envy. High cash reserves to take on any market change, amazing innovation and designs to stun the pants off any competitors( Ford was the first factory in the world to do the end-to end integration) and a huge tank of high quality talent.

    But Ford-II screwed it up. Ego and bad management destroyed his company. He fired people because they came up with good ideas and effectively stalled any design growth.

    Today, Ford has to sell off its gems to keep itself afloat. the desperation in Ford camps is so high that Ford-III has said, I will relinquish my position of CEO to anyone who believes he can turn around the company.
    And all those pumping of billions in R&D has just started recently, which was not there even 8 years back.So I believe effectively Ford is in a fire fighting mode, which makes sense why Ford is selling it off.

    Mrityunjoy,
    As for the Daewoo case, indeed it was a coup of sorts both from the aspect of acquisition and issue of integration. I am yet to find out if the Hyundai segment has started making a positive contribution to the balance sheet.

    Comment by Soham Das — April 8, 2008 @ 2:30 pm

  13. Hmmm, the argument you make for R&D sounds intuitive at first glance. However, the R&D objectives of a luxury brand versus those of somebody like the Tata group are significantly different. While one is pursuing superior performance, the other is focused on cost optimisation. So without hearing more, I am doubtful how much there is to learn.

    Besides, there are other ways to learn from established luxury carmakers some of which could have included a joint-venture or some sort of partnership to jointly develop a new vehicle (by perhaps funding more of the development). Spending $2.3 billion to buy a brand that has significant competition in the luxury market, is losing money – is a questionable deal. Besides, if Tata cannot bring a rationalisation plan to the table because they are promising that the jobs will be kept, then there is not much hope in terms of turning the band around itself.

    It remains to be seen what the advantage of the brand in itself will be for tata – perhaps they can pull some sort of integration between the luxury brand and tata that Lenovo has been able to pull with ThinkPad.

    Also, there is potentially an argument to be made about whether this is the best timing for a deal when the United States and perhaps some other parts of the world are heading into a consumer led recession.

    Comment by Chaitan kansal — April 16, 2008 @ 7:47 am

  14. I dont think there would be much in common between how Toyota evolved and how Tata Motors would evolve in the future.

    Jaguar – Land Rover combined is a big brand, but our records shouldnot just stop at this. Lamborghini was sometime back owned by someone from south east Asia. Did it dilute the brand for you?

    The automobile industry is now at a phase where its depicting signs of maturity yet it is changing very fast. Latest technologies are transcending car segments at an exponential pace. ABS was till sometime ago meant only for luxury cars, today a small car in India has an ABS option.
    Given the ambitions of Tata Motors, its technological prowesses are a big constraints on its future plans. Very broadly Tata Motors plays in 2 segments…costlier SUVs and cheap cars.

    Its small and mid size car business is well strategized that way. It has very intelligently formed a JV with Fiat (( considered to be the best small car manufacturer)) for its car business. Ratan Tata is on the board of Fiat too. And of couse Tata has an advantage in this front in terms of its ability to make cars cheap.

    The SUV segment or the higher car segment(which it needs to enter…in India even Honda City is considered a luxury car)is the one where Tata needed something like an acquisition to latch on to todays latest technologies. The Jaguar – LR deal more than anything else gives Tata great R&D skills. Tata may now have the potential to do a Nano in the higher car segment for emerging countries with these acquired technology skills. And this is important, if you see the car segments which are growing the most year on year in India, these would be increasingly the more upmarket segments.

    At the same time, I would assume Tata will make a deliberate attempt to keep away as far as possible from Jag -LR brands….so as to not diminish their appeal, but at the same time arouse that confidence in a Tata customer that somewhere deep inside his/her tata car is Jag-LR technology.

    Comment by Raj Rohit — April 27, 2008 @ 11:20 pm

  15. And staying on it bit further….I dont think Jag_LR is a typical M&A deal that’d need that high an integration effort from Tata Motors. Why do both need to be integrated?…Can’t TM manage the Jag-LR operations like a private equity would? And there is some history to it. If I am correct the owners of the Lotus brand of sports cars is a rich prince …so was the case with Lambo till sometime back.

    What TM would do well is perhaps bring an outside perspective to cut the operational and material costs at Jag and LR . while it may sound stupid, this could be done in many ways. Did u know that Mercedes cars till recently were painted in the same complex where Indica’s get done up?…..

    And perhaps cut material costs by leveraging group synergies. Corus’s product portfolio at the time of acquisition consisted of steel that is used up by aircrafts and high end cars.

    Comment by Raj Rohit — April 27, 2008 @ 11:39 pm

  16. [...] Mritiunjoy Mohanty, Assistant Professor at IIM, Calcutta and a visiting scholar at Institut D’études Internationales De Montréal (IEIM) of the Université du Québec à Montréal (UQAM) sends us this guest post, in response to the debate raised by Kiran’s post on the Tata’s LandRover/ Jaguar acquisition. [...]

    Pingback by The Indian Economy Blog » Guest Post: Big Brand Acquisitions And The Tata Group’s Strategy — May 26, 2008 @ 2:33 am

  17. Dear Rohit,

    Specifically to your comments about managing this acquisition as a private equity would. First of all, extremely bad timing to try to pull off a private equity approach. The idea of buying the company, leveraging it with debt, paying the new owners handsome dividends and then letting the management of the acquired company faced with running it with extreme discipline (because of all the debt and hence the interest payments that required) ARE OVER. PERIOD.

    Second of all, cutting costs in a business model which is heavily dependent on commodity prices will be an extremely challenging if not impossible endeavor at least in the current environment. Of course, I have the benefit of hindsight which probably the management at Tata group did not. But just wanted to add my two cents about the potential approaches that you outlined.

    Just to clarify, there is potentially nothing wrong with your ideas but since your last post, the market reality has changed quite significantly.

    Comment by Chaitan Kansal — August 22, 2008 @ 2:36 am

  18. Tatas try to do their homework before taking up anything.However, They are a little confused regarding placement of cars. there is no cear cut demarkation. How many of you can recall all the models of Indica tll date? I think they change with th weather. Look at any other car manufacturer. Honda, Toyota… You will immediately know what are the segments and models available. They beter not mess up with the new acquisitions as well…

    Raj
    http://sainiks.com/

    Comment by Raj — October 18, 2008 @ 12:38 pm

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