Thursday, 27 March 2008

Company Focus – TATA J-LR – Pledges, Pressures & Potential

Today, given the recent deal completion, we return to the conjecture of where next for Jaguar and Land-Rover? Ratan Tata and Ravi Kant recognised the need to assuage the concerns of car production unions as a key element in gaining favour throughout the deal pitch, bid-win and recent hammering-out of operational details with Ford and the unions to finalise the $2.3bn price and off-load pension responsibilities to Ford.

Early stages of M&A interest were simply about making the right noises to stay on-side of the critical stakeholder group, and although the detail of big picture has become clearer and clearer, analysts are questioning as to how much of ‘drag’ J-LR could be on TATA Motors in the short and medium term? The markets clearly concerned with shares down 9% since the deal interest announcement in July 07 and recently down 4% at the deal finalisation and close.

Whilst brokerages and research teams are focused on the near-term impact - specifically the heavily increased debt-burden of $3bn in bridge loans and expected additional share creation to capture $1bn - Tata and Kant are obviously keen to demonstrate the broadened automotive scope that TATA now enjoys – fully fledged, globally respected auto-maker.

Beyond the debt servicing headwind, many (including ourselves) are eager to appreciate the detail of the (pre-existing Ford) J-LR business plan that runs up to 2011 and has been essentially ratified by TATA with its pledge to maintain current production and development personnel and facilities commitment affecting Halewood, Solihull, Castle Bromwich and Whitley and Gaydon respectively.

Observers say that TATA will probably provide J-LR with ongoing autonomy to carry on as originally planned, and so echo the Corus Steel take-over that inflicted little disruption. But the Corus vs J-LR contexts were/are undoubtedly experiencing very different market dynamics (tailwinds vs headwinds) and shareholders will want to see TATA setting out plans to turnaround the 2007 $550m loss at Jaguar and have it stand on its own two feet instead of leaning upon (and degrading) its’ siblings positive earnings.

2011 is less than 36 months away and in that time we would hope to see a plan of action outlined by Kant and his management that demonstrates commitment at radically enhancing the profitability of both marques. The next few years will obviously see TATA leverage its lower cost steel procurement via its own UK plants and seek cost-down in low to mid value chassis, engine and electrical parts, nurturing Indian suppliers to raise their quality standards and parts supply range. Asia sourcing and combating increasingly high cost raw materials such as steel, will theoretically put both companies on far surer financial footing and we would expect to see Jaguar’s direct (internal) operational costs greatly reduced by 2011, with an increased revenue from XF, XK, (new) XJ and variants contributing greatly to put the company in ‘the black’ for the first time in over 20 years.

With our focus on LR, the interim should see Kant et al, seek to radically alter the development and production cost-base of the firm looking beyond 2011. Obviously Indian sourced design and development project-work will slash Whitley’s and Gaydon’s relatively high engineering costs, but it will be the future of Jaguar production strategy that should see the greatest change. Drivers for change are the need to develop advanced vehicle platforms that will meet the challenges of tomorrow, including:

1. Reduce vehicle mass for dynamic improvement and to meet European, US and global emissions/CO2 regulations.
2. Reduced dependency on highly capital intensive tooling – moving away from high volume Ford provisioned BIW solutions – to evaluate alternative build types.
3. The integration of alternative powertrain technologies as ‘bolt-ons’ and all new.

Critical to all luxury automakers is the need to seek new architecture solutions and, for those with modest volumes such as Jaguar, seek technology and possibly production partners to share expense and add IPR. FIAT’s Marchionne has mentioned his hopes for a possible Jaguar-Maserati-Alfa Romeo agreement that would plug the weaknesses of UK and Italian companies, critically proving the basis for a new hi-tech generation of advanced platforms for the brands, main focus on a large RWD aluminium hi-content architecture that could be adapted as required.

This thesis offers great potential, essentially creating a mid-volume niche vehicle production capability that could service: Jaguar, Maserati and Alfa, but also provide the potential to create feasible business cases to release Daimler as a luxury limousine brand unto itself. With Gaydon based Aston Martin looking forward to possible IPR and technology contracts for others, the basis of Jaguar aluminium structure know-how, plus Aston’s advanced composites could provide the technology basis for a new mid-volume (50-150K units pa) hi-tech facility that could be utilised by Jaguar, Daimler, Maserati, Alfa (large car)/Lancia (large car), Aston-Martin and a resurrected Lagonda.

This could provide an alliance basis for these brands to cost-efficiently build very distinct vehicles in the £50-£100-£120 price ranges, essentially competing more ably against the Germans and providing a set of eclectic ‘re-born’ and unique mid-size limousines that sit under new Baby Rolls-Royce and Baby Bentley Saloon…seen as ’off the peg’ offerings from Bespoke Tailors if you will?

If Jaguar could create such an entity, it would provide a sound footing for itself as an advanced performance and luxury semi-niche auto-maker, but also have developed the ability to act as a 0.5 tier complete car provider for others. That opens the doors to licensing and royalty possibilities, taking Jaguar well beyond the limitations it experiences today.