Tata's luxury deal could show China's car makers the way

CHINESE car makers might want to learn from their Indian counterpart on how to carry out international acquisitions after Tata Motors Ltd sealed a deal to buy the Jaguar and Land Rover brands from Ford Motor Co last week.

Although the deal raises questions over how the small-car maker can consolidate the operation and be strong enough to further develop the two renowned luxury car brands, there is no doubt Tata is at the forefront of the emerging markets that have begun to change the global auto picture.

India's third largest car maker is to pay US$2.3 billion to take over the two iconic British marques from Ford, less than half of what Ford paid for them.

Ford's decision to sell came as it sought to focus on reversing money-losing operations in its home United States market with its core brand.

With oil prices reaching record highs, demand for Ford trucks has declined, leaving the company with combined losses of more than US$15 billion over the past two years.

For Tata, the deal helps it to acquire a more complete line-up of vehicles, ranging from the world's cheapest Nano car to the luxury Jaguar and Land Rover brands.

The move also underscore its efforts to build a stronger presence in the international market, which is also being targeted by most Chinese car makers.

"A big part of what Tata has acquired are the brand names, and the exposure given by the deal will push the firm further into the international limelight, which may reflect positively as its auto arm seeks to do greater business outside India," according to a report from auto consultants Global Insight Co Ltd.

China and India, the two fastest expanding auto markets, share many similarities in their efforts to grow their auto industries, including going international.

However, Chinese vehicles focus on the low-end of the market.

"Mergers and acquisitions are the only way to have quick access to the world's luxury car market," said Klaus Paur, of TNS Consulting. "The question is, what are they going to do to explore the market potential?"

Potential markets

Jia Xinguang, former chief analyst with the China National Automotive Industry Consulting and Development Corp, said overseas mergers and acquisitions must be in line with a car maker's overall strategy.

"It relies on valuable assets and engineering capability rather than a brand itself," he said.

Jaguar is said to have never made a full-year profit while Land Rover has become profitable in recent years.

There is potential in Tata's home market and other emerging markets given the economy boom. "If Tata can promote these vehicles in emerging markets, and spread the risk from mature regions it could give itself an easier time," Global Insight said in its report.

"Further down the line, it may also be able to improve the profitability of the brands, giving increased stability to them both by sourcing components from lower-cost regions."

Shanghai Automotive Industry Corp has taken a controlling stake in South Korean's Ssangyong Motor and also bought the rights to the Rover brand. Nanjing Auto paid 53 million pounds (US$105 million) to take over Britain's MG Rover.

"Those acquisitions have yet to be successful in bringing profits for Chinese car makers," said Zhang Xin, an analyst with Guotai Jun'an Securities Co Ltd.

SAIC's Roewe, which was developed from the former Rover cars, has so far achieved monthly sales of 1,600 units on average last year. No models have been exported yet.

Nanjing Auto, which is reviving the MG brand, is also spending considerable sums to target the domestic market.

Meanwhile, some analysts said international mergers and acquisition by Chinese car maker face many more political hurdles. "Compared with China, India car makers are more easily accepted by western governments," said Jia Xinguang.

"They are more familiar with the common labor practices, laws and international management know-how," he told Shanghai Daily.

Ford will continue to supply engines, transmissions and other components to Tata for five to nine years, while providing financing for dealers for up to a year.

The Indian company has promised no significant changes for Jaguar and Land Rover's 16,000 workers, and said it would preserve the heritage of the brands.

In order to help fund the purchase, Tata is to raise US$3 billion in loans.

Tata Group is India's largest conglomerate. It has interests in the steel, information technology and automobile sectors.