Tuesday, 18 December 2007

New Business Opportunities - From Detroit to Mumbai via Coventry & Solihull

Amongst the 3 remaining Jaguar-Land Rover bidders, reports indicate that the deal sentiment within Ford sides with TATA, as opposed to Mahindra-Apollo and One Equity. Given Ford's need for broad strategic considerations such a probable expected outcome isn't surprising.

This deal was always far more than one based purely on financial rationale of best and last price offered (including proposals to plug the Jaguar-LR pension gap). Alan Mulally et al recognise that the ideals of such a sale should also enable the opening of industry and market doors, in management consulting parlance "to ratchet value-chain efficiency levers". And it is TATA that appears to offer the best basket of ideals.

Although led by ex Ford CEO Jacques Nasser, the One Equity offering will have had major political ramifications given the recognised present financial squeeze on PE to produce results and returns as soon as realistically possible. In this climate that could all too easily result in a marginalised labour-force, harking back to the 'bad old days' of PE behavoir. And beyond pay, concessions and hours, exactly how much fat is actually left in Jaguar-LR in its present form given that the 2 have been on effective operational slim-downs to date? The obvious jewel in the crown for a PE firm is the real estate value of Land Rover's Solihull plant, situated in what is considered an upmarket area of the West Midlands, and one day ripe for brown-field redevelopment given the UK's housing shortage and 'density housing' needs. But that presently invisible but possible temptation - and its subsequent ramifications - as part and parcel of the One Equity offer looks like a step too in the direction of unabated capitalism given Detroit's remit to act as a responsible corporate citizen. But by far the greatest element is a lack of additional synergies between the PE firm and Ford operational ambitions.

One would have thought that the Mahindra-Apollo partnership would have the required elements for success given manufacturing/market expansion corrolaries and direct access to cashflow enhancing capital. (As opposed to what are often complex A or B share cross-holding deal offers from trade buyers). Thus making for, what on the surface, would be a well balanced, simply structured powerful offer. Of immediate interest to Mahindra is LR's Global Defence Market order book, and the Indian firm's product/service expansion into the credible 'dark-green' (warfare) applications that Defender model variants have been heavily re-engineered for. Thereby creating a far more plausable 4x4 military fleet than the present 'lightweight' 60 year old Jeep CJ derived range. More importantly in the medium-long term was the opportunity of 4x4 technology transfer to markedly update what is realistically a very basic (ie globally backward) civil/consumer market range. Conversly, Jaguar however has no counterpart within Mahindra; the renowned 3-wheeled Tuk Tuk the very antithesis. Hence Jaguar would have undoubtedly been immediately sold-on to another trade or PE buyer to offset the initial Jaguar-LR purchase expenditure. The time lag to do so however (with only tick-over funding made available to Jaguar) would have reduced the marketability and entity value of the company - let alone calculating the real NPV cost-benefit of undertaking the process.

Neither of these scenarios compare to Ratan Tata's & Ravi Kant's undoubted rounded and matured proposal that provides mutual synergies between the US and Indian automakers. Both he and Mulally recognise the partnership benefits of maintaining a loose formal alliance (via engine/component supply etc) with the prospect of scratching eachother's backs in the years to come with possible:
a) shared R&D projects
b) high-value engineering work undertaken in the US
c) low-value engineering work undertaken in India
d) political/distribution allies for Ford of India and potentially TATA Americas
e) the ideal of small car platform sharing between Ka/Ikon and Indeca/Indego.
But perhaps the greatest immediate attraction for Mulally is lower cost, alternative sourcing of materials and components from TATA's impressively wide and deep value chain.

Theoretically TATA ownership should provide Jaguar-LR with much needed business capital and liquidity, the Indian owners looking to exploit the prestige brands and maximise sales opportunities from the aspiring middle-classes now evident throughout the robust Asia-Pacific economies. But history tells that such capital is only ultimately be made available if both brands are able to convey technology and commercial benefit directly back to Mumbai aswell as developing their own brand equity. (investment-auto-motives can offer case study examples highlighting the destructive friction that can emerge within middle management; resulting in the expectations of leaders and their investors heavily soured). Thus commercial and technical strategies will need to have been properly outlined before the full sale transaction is complete, so that there is a clear stage by stage roadmap for all incumbent parties to follow and demonstrate mutual value from the word 'go'.

We would expect this to be the case, since TATA Motors has risen pheonix-like since its 2001 major financial setback (losing $110m / 5 billion Rupee). This was the result of a collapse in sales of domestic HGVs, aggrevated by the need for ongoing heavy capital expenditure in passenger cars. A 3-phase, 6-year turn-around plan was formulated.

1. Cost & break-even reduction
2. Domestic consolidation
3. Overseas Expansion

Behind first-step efforts of major cost-cutting (inc. early adoption of e-purchasing) and second step product quality improvement was the need to expand TATA Motor's activities to a point that it could overcome and negate cyclical local truck market trends. Hence management broadened it's global truck to off-set regional cycles, grew the less erratic bus business order-book, developed parts & maintainance sales and importantly refreshed efforts to build and sweat car-based assets. Both organically with domestic 'home-grown' small cars aswell as looking-outwards for joint venture and acquisitional opportunities - hence the desire for Jaguar-Land Rover.

Finally and for the moment, from a structural (re-alignment) perspective a Ford - TATA outcome looks very promising indeed for both parties.