Tata Targets Jaguar and Land Rover for Long-Term Returns

The world automobile industry is being turned upside down.

Yesterday’s purchase of the luxury brands of Land Rover and Jaguar by the Indian automobile manufacturer Tata Motors (TTM) shows this.

Not only is Tata now a formidable competitor at the bottom end of the market, in India and other emerging markets, but with its new marquee brands and strong manufacturing capabilities it is likely to make substantial inroads at the top end also.

There’s little doubt that in the future Detroit will not be the auto hub of the world. The union contracts make labor far too costly and the environmental restrictions on U.S. domestic autos will make them far too expensive and unattractive to sell outside their home market.

Nor will many cars be made in Wolfsburg, though superb German engineering skills will probably preserve them a niche in the luxury end of the market, making chariots for billionaires. Even in Japan labor has gotten too expensive - and will get more so as the country has a very low birth rate, restricts immigration, and educates its people more and more superbly.

By 2050 automobiles will be made mostly in the two countries with the largest populations. Both countries can provide skilled and cheap labor for the factories and a huge home market of modestly affluent people. Most of those people won’t be rich by our standards, but they will be able to afford a car - at least a cheap one. And they’ll care little about how its emissions play on K Street or Brussels.

The automobile capitals of the world in 2050 will be India and China.

East Asia will be rich by then - with expensive labor. Some of India and China will be rich, too, but both those countries have so many people and such a broad range of incomes that there will still be plenty of people with just enough education to work on a production line - even a highly automated one - as well as huge numbers of automobile consumers, both rich and middle-income.

China’s automobile market is already nearly half the size of the United States’- eight million vehicles in 2007, up from fewer than 3 million in 2002. And its manufacturers are either state-owned or joint ventures with foreign companies. So there’s not much there a U.S. investor can buy.

However, India’s a different matter. For one thing, even though the country will have a larger population than China by 2025, it hasn’t yet seen the growth in automobile sales that China has (total vehicle sales were almost 2 million in 2007, of which 1.4 million were passenger vehicles and 500,000 commercial vehicles). But India is catching up fast, both as a market and as a manufacturing base.

Tata has 17% of the Indian automobile market, the second largest domestic manufacturer, and 60% of the domestic commercial vehicle market. It also has a new product in development that may revolutionize the world’s automobile business - a car 40% cheaper than any other car on the market, the Tata Nano, showcased at the Delhi auto show in January and expected to be available later in 2008.

The Nano has an 800cc engine producing 33 horsepower and a top speed of 50mph. It will be sold in India and in a number of other emerging markets, including Africa. At an announced sale price of $2,500 it is the cheapest automobile in the world by a substantial margin. Tata plans an initial production capacity of 250,000 of its new automobiles, but that may prove too low to meet demand. After all, if your product is 40% cheaper than its competitors, many people who thought they couldn’t afford a car will now be able to buy a Nano.

At the top end of the market, Tata has bought Jaguar and Land Rover for $2.3 billion, less than half the combined $5.2 billion Ford Motor Co. (F) paid for the two brands in 1989 and 2000. In the long run, Tata should be able to save substantially on manufacturing costs, since it has now scaled up production in India to the level needed to be a truly global manufacturer. What is more, the emergence of a new wealthy class in India, which remains strongly Anglophile due to traditional links, should enable Tata to tap a major new market for the traditionally British Jaguar and Land Rover brands domestically, providing it with a solid base of domestic sales that should weather any global downturn.

Tata has borrowed $3 billion to finance the purchase and provide working capital. And Tata Motors is part of the private conglomerate Tata Group, founded in 1907, so resources should remain available to it even if world financial markets tighten.

With the global economy moving in its direction and huge opportunities at both the top and bottom of the market, Tata Motors stock on a price-earnings ratio based on trailing earnings of only 11 looks like a very attractive buy.

Comments

[robert99]

Agreed.

[ratsharp]

hero honda .. the motorcycle manufacturer is a better bet than Tata Motors and a trifle cheaper at 9X. The biggest event of the year will be the Indian Monsoon.. which will define the returns of the indian market for the rest of the year. ANY slippage there will push the market off another cliff , where sum of the part valuation will be forgotten. Hero honda.. though may suffer at the hands of the poor monsoon ..has little to lose ... the upside can be a 20% multiple and a 10% earning ( espcially with a cycle of eventful launches which may help gain some market share). i am wary of recommending anything ..but if anyone who decides to buy tata motor ..shd probably consider HH.

The pay commission money abt 31 bn usd over 3 yrs too may be just sufficient to add up for a small apartment loan mortgage and may not make it to nano.

And I really want to understand the ground clearance of a 4 passenger loaded nano ...thats like a make or break atleast in village areas...

Regarding success of nano ... note that last timearound indica turned out to be a flop show before it was relaunched and today has become a long/medium distance taxi-cab ... nano could easily replace the new fiats in mumbai, new ambassadors in calcutta and the new bajaj 3 wheelers round the country with the right strategy and govt backing. (noting however that the second hand versions of various vehicles running in the country are 1/3rd- /4th the cost of nano)

[Markrt test]

My suspicion was that Tata didn't want Jaguar, but it was part of the deal, so they got it for nothing. Jaguar may bleed for awhile, maybe a lot.

I believe Tata was after:
1. LR technology, specifically, and
2. a fully intact management that could engineer, design, source, manufacture world-market cars

As you noted, Tata bought JLR for what Ford paid for just J or LR alone years ago. But when Ford bought both J&LR they were starving, with models at the ends of their cycles (or past their expiration) and not really much in development.

Jaguar is launching their new S-replacement right now, and the new XK next year -- Ford had to have spent a $1 billion developing these new Jaguar models that Tata will now launch, plus Tata gets LR's model pipeline, whatever that is now. Based on Tata's actually outlay, they should have a relatively low breakeven point for these models (if you want to look at it that way)

Getting to that stage in their life-cycle -- in engineering, and brand development, and experienced management -- would have taken them decades. It took Toyota maybe a decade and billions to launch Lexus. Tata immediately has two luxury brands.

Currently Mercedes dominates the Indian luxury market, but if Tata gets national pride behind their two new brands they could have a big home market for Jaguar AND LR. Maybe they'll fail in autos, it's high risk. But now they can go global if they want. JLR already knows how to make cars that are developed-world-legal and relatively desirable. And like I said, they can perhaps own the home luxury market now.

Looking at Tata, I think the Indian labor aspects are over-played. And Tata makes me wonder whether our world labor assumptions are correct. Tata - the group - employs at least 50,000 engineers, they have a huge consulting business, and yet they effectively outsource production around the world. They outsource watch manufacturing to Switzerland, for example; telecom to the US (I believe); and now cars to the British --a tendency that British unions noticed, endorsing Tata over other bidders.

With this - JLR, their ex-Tyco Global Network acquisition, Tetley Tea - they get instant brands that play into their existing large-but-unbranded businesses.

Anyway, I think you are correct that now is the time to look more closely at the Tata group (and especially Tata's non-auto segments).

[ratsharp]

view change ... my analysis on hero honda has some potential flaws ... changed to negative ...