It was the summer of 2007 when Ratan Tata and Ravi Kant went on a trip to the US. The entire point of the trip was to understand the kind of response that the two legendary British marquee brands evoked in the hearts of people in the biggest market for the vehicles. The Tata Group had to well justify the acquisition.
When Ford Motors decided to sell its loss incurring JLR brands, it approached Tata Group to discuss a possible sale. Prior to the JLR acquisition, Ratan Tata and Kant, then managing director of Tata Motors, met a number of JLR dealers, and they found it promising to learn that, despite the falling sales, the dealers still believed in the exclusivity of the brands.
But, finally when the $2.3 billion (Rs. 10,258 crore today) deal was signed the next year, it was obvious that Tata Motors had swallowed more than it could chew. The timing of the acquisition seemed bad and the fall of the mortgage market in the US had set off a financial catastrophe and anyone who had cash did not want to lend it.
Two years and a few months down the lane, JLR sales has helped Tata Motors register a high rise in profit in the quarter to 30 September. It is surprising to see that an Indian company that dealt primarily with cheap small cars and trucks succeed where Ford Motors and few others before that had failed so miserably.
The usually reserved top executives at Tata Motors recently opened up for the first time about the JLR story at an exclusive interaction in Bombay House, the Tata group's headquarters. The Tata Motors Group members present at the meeting included Carl-Peter Forster, managing director of Tata Motors group, Speth, chief executive officer of JLR, and a top group executive who was closely associated during the whole JLR thing, but he requested to remain unnamed.
Soon after Tata Motors acquired Jaguar Land Rover in 2008, the company found itself strapped with a whopping debt of Rs. 21,900 crore. The situation got pretty uncomfortable for the Indian car maker as it had a reputation of being virtually debt free.
Another hitch during that period was the ongoing development and the upcoming launch of world's cheapest car, Tata Nano.
The Difficult Days
At JLR, the product line up was not moving and Bombay House was starting to feel stressed. There were also talks of the UK government planning to bailout JLR. The situation was so bad that Tata Motors' market value fell down to Rs 6,503.2 crore, and the stock hit an all time low at Rs 126.45 on 20 November 2008. The market capitalization was less than what it had paid Ford for JLR.
"The global slowdown put the company under tremendous pressure because the management of JLR had just separated from one big organization and was attaching itself to another not-so-big group and they were not yet kind of experienced living independently," said the Tata executive mentioned above. "We were bleeding. Banks were not giving any money, they were not available, and they were closed.
And we needed money."And then the unthinkable happened. Ratan Tata, who had a solid belief in the righteousness of the JLR acquisition, came through for Tata Motors. When the turnaround took place, though it came as a surprise, the Indian company saw it three-four quarters in advance.
But before we get to the good part, in the FY ended March 2009, Tata Motors registered its first annual loss in seven years after sales at the JLR units slumped down during the great recession. As compared to the profit of Rs 2,200 crore in the earlier years, the aggregate net loss in the year ended 31 March was close to Rs 2,500 crore. The JLR unit incurred a pre-tax loss of Rs. 1,800 crore as the US and Europe faced unemployment and the financial crisis.
Cash management became the top priority of Tata Motors as JLR was bleeding money and the company was in desperate need of some outside help. Since JLR did not have any kind of cash management system that it could call its own, Tata Motors sought the help of consultants KPMG.
For the next few months, cash started to be managed on an hour-to-hour basis. And when KPMG declined to be a part of the story, in the spring of 2009, Munich-based Roland Berger Strategy Consultants came forth as an angel of mercy. The mandate given to Roland Berger could not have been simpler: make JLR profitable.
Cash Management at JLR
After Roland Berger took charge of the cash management, a three-tier model was developed, said Wolfgang Bernhart, partner, Automotive Competence Centre, Roland Berger. The first phase included a short-term goal to manage liquidity with the assistance of KPMG.
Soon followed a mid-term target to contain costs at various levels and the formation of 10-11 cross-functional teams, Bernhart said. Management changes, including new heads for the JLR group, were brought in. The final phase, which focuses on introduction of new models and upgrades of the existing ones, included a long-term goal that runs until 2014. The prime goal of all this was cash management and checking costs.
The funds raised were all streamlined into Tata Motors to make JLR more profitable. The result was that Tata Motors could keep the product development plans going, which is now paying off with the global economy back on its feet. Even the workforce at JLR, which stood at 27,000, experienced a sharp cut and was brought down to 16,000.
External factors, too, have helped bring the profitable spell in the JLR's unit. Favourable currency movements, increasing by one percentage point to 16.6%, over the first quarter in the current fiscal. Margins rose by a stunning 1,370 basis points or 13.7% from 2.9% in 30 September 2009-10, as sales rose due to improving market conditions and new product launches. Almost half of the company's turnover is dollar-linked and one-fifth is linked to the euro. Since the Indian currency has gained against the other two currencies this year, the profits are more visible. In our second part of this series, you can learn more about the Tata Motors - JLR story.
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