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For those of you who read my blog, you know that I’ve had an interest in Tata’s (NYSE:TTM) acquisition of Jaguar and Rover. When it was announced, I failed to see the value proposition in the combination of Tata and JLR, and I remain somewhat skeptical of JLR’s ability to provide value to Tata (for background see Jaguar/Rover Revisited, Jaguar/Rover Update, and Buyer’s Remorse).

Irrespective of my opinion, it was with great interest that I read this week’s Economist, which contained an article on Tata’s progress with those previously beleaguered brands:

After a torrid couple of years in which demand for JLR’s pricey models evaporated…2010 has seen at least a partial recovery in sales and profits…

After the success of the mid-size XF and with heavily revised Range Rovers and the radical new XJ saloon just launched, JLR’s product line-up has never looked in better shape.

MY COMMENT: I will give that to them. Tata Motors is performing better now than in 2009. The company is profitable again, with net income of around $550 million. However, a look under the hood suggests that profitability was not bolstered much by results at JLR (Jaguar Land Rover). A good chunk of Tata Motors’ profitability came from a gain booked on the partial sale of Tata’s stake in Telco Construction Equipment. JLR’s net profit was reported at around $20 million. That’s very small (less than 5% of total profit for a brand that represents greater than 50% of Tata’s entire automobile enterprise), …but it’s admittedly greater than zero.

Another thing that I will say about Jaguar and Land Rover: Their new models are stylish. They are good looking cars. And boy have they been marketing the heck out of them in the US. Everywhere I turn I feel like I see/hear another JLR advertisement – on TV, radio, billboards, and even through the internet (e.g., pandora radio). This is more than I ever remember Ford (NYSE:F) promoting those brands.

So Tata Motors is definitely making the investment. The question remains: Will the pricey advertising campaigns pay off, or are the brands already too far gone??

Nevertheless, I will admit there are definitely some things for the optimists to get excited about.

Back to the article:

One of the biggest puzzles Mr Forster [the Chief of Tata Motors] has to solve is how to replace the legendary Land Rover Defender…The new vehicle will have to be cheaper to make (and sell) than the current “Landie” to make it competitive with Japanese rivals in developing-country markets…[and] come up with a product capable of finding at least 80,000 buyers a year—four times as many as the current Defender. There is a good chance that, to keep costs down, the new model will be made in India.

MY COMMENT: Um wait. From what I remember of the original deal, Tata agreed not to shift production out of the UK, and made pledges not to cut staff or close plants. It’s unclear to me therefore how many of those 80,000 cars the company will be able to assemble in India.

The new-model blitz is in impressive contrast with the sluggish pace of development under JLR’s cash-strapped previous owner, Ford (F).

MY COMMENT: Yes, I agree the new models (especially the Jaguar XF/XJ and the Land Rover Evoque) are impressive. However, lest we forget, these models were designed and developed under the previous owner, Ford. What matters most is what comes next, …in the generation of models that follow. We’re still several years away from seeing the fruits of any design efforts under Tata Motors.

And one of the big takeaways from the article:

Apart from economic uncertainty in its traditional markets, there is, however, one big cloud on the company’s horizon: ever-tightening fuel-efficiency and emissions rules.

MY COMMENT: Really?? That’s it? Fuel-efficiency and emissions rules? That’s the best you can come up with?

C’mon, JLR’s downside risks are far greater than that. For example:

  1. How will JLR compete with the Japanese (Acura (NYSE:HMC), Infiniti (OTCPK:NSANY), Lexus (NYSE:TM)) on price or the Germans (BMW (OTCPK:BAMXY), Audi (OTCQX:VLKAY), Mercedes (DAI)) on perceived quality? My view is that JLR’s models are too expensive to effectively compete with the Japanese manufacturers. They just don’t have the volume. And they are not as highly regarded as the German brands. They just don’t have the prestige, and as a result must settle for lower margins. In this sense then, JLR is stuck in the middle.
  2. The auto industry continues to be saddled by mass overcapacity. Coupled with what I suggested in point #1, it’s not entirely clear to me how Jaguar and Land Rover can survive the inevitable industry shakeout.
  3. What happens if / when the global economy slows again (especially in Europe and the US) and sales of durable goods decline? JLR is already teetering on the verge. Even a modest economic slowdown could spell the end to the brands.
  4. JLR still carries a hefty debt burden that Tata Motors is working through. Even with a restructuring of that debt, a turnaround of JLR is a tall order, and $3 billion in debt is not chump change. It’s reasonable to ask whether Tata will ever earn enough (even if JLR remains profitable) to provide a reasonable return on investment.
  5. As in my previous posts, I still wonder about Tata’s ability to derive synergies from JLR, to rationalize JLR’s operations, and right two long-uncompetitive brands.

But who knows. Tata Motors might just prove me wrong. After all, JLR is marginally profitable (for now). And Tata Motors certainly picked a qualified leader in Carl-Peter Forster to lead the group.

Only time will tell…

Disclosure: No positions

Source: Progress Report: Tata Motors and JLR