Jaguar, Land Rover sale to Indians will add spice to luxury car market
Business Day: January3,2008
WITHIN a fortnight, the world is almost certain to see one of the world's top luxury car brands acquired by an Indian company that is about to unleash the world's cheapest car.
And, if that isn't mad enough, what about one of the world's smallest car makers grabbing effective control of one of the world's largest?
It was another fascinating year in the world car industry, which continues to reel under the pressure of soaring fuel prices, stringent emissions regulations and, in the US and Europe, the emergence of more low-cost exporters.
Soaring fuel prices directly affected Ford and Chrysler, as did their heavy dependence on big trucks with big engines. Both were brought to their knees financially and both found their way to the auction block. In Ford's case, it went there to sell three of its most prized assets — Aston Martin, Jaguar and Land Rover.
The Aston deal raised £475 million ($A1.16 billion) and the beleaguered US group hopes to raise twice as much with the sale of the much larger Jaguar and Land Rover combine.
While Jaguar's poor earnings since Ford acquired it in 1989 may explain the relatively low expected sale price, the proceeds are not the pending deal's most unusual aspect.
A lot of interest centres on the fact that one of India's biggest groups, Tata, has been the frontrunner for the past few months, ahead of a pack of private equity consortiums.
The Indian company's position should have strengthened recently because of volatility on financial markets. Bankers are in no mood now to lend large swags of cheap money to private equity investors.
What is intriguing is that Tata also has a big home-grown project on its hands — production of the world's cheapest car.
Tata will unveil its "one lakh" car — a lakh is 100,000 rupees, or about $A2960 — next week in an attempt to seize control of the Indian market by building "the people's car".
The tiny four-door sedan will have a small 660cc, 22 kilowatt petrol engine, or a 700cc diesel, in the back driving through a continuously variable transmission. It will be built in at least three places in India.
Chief executive Rata Tata believes the car will appeal to a broad mass of young Indian families but has said nothing about export potential.
The launch of the car would create a new paradigm in low-cost personal transport, carve out a new market segment and reach a broader base of the pyramid, he told Tata Motors shareholders.
The purchase of Jaguar would be Tata's first venture outside the Indian subcontinent, and would put it in a unique position, spanning as large a price range as Volkswagen or Toyota.
Tata has already built up several manufacturing joint ventures with small-car specialist Fiat and is expected to deliver on its promises.
Analysts believe Ford will name Tata as the preferred bidder in a few days and the sale should be completed by March.
In Chrysler's case, it was dragged to the auctioneer's block by its disenchanted marriage partner: Germany's Daimler is another industry leader that has been forced to undo the results of its acquisitive excesses.
In 2004, when it was still DaimlerChrysler, the group triggered a big restructuring of Mitsubishi Motors Corporation when it refused to participate in a capital raising and backed away from its controlling stake in the struggling Japanese company.
That allowed DaimlerChrysler to concentrate on getting the most out of its takeover of Detroit-based Chrysler Corporation.
But last year it decided to throw in the towel there, too, and in a most painful way.
Despite being given the SL sports car platform, on which to base the Crossfire sports car, and the E Class sedan platform, on which to base the Chrysler 300C, Chrysler refused to show Daimler any return for the $US20 billion it had invested to create the $US35 billion group.
The lack of returns reflected Chrysler's heavy dependence on large trucks and sport utility vehicles when the oil price went through the roof three years ago. With production, revenue and earnings all heading south at Chrysler, and quality problems starting to appear in its vaunted Mercedes-Benz vehicles, DaimlerChrysler decided to stop the rot and sell Chrysler.
It appears, however, the use of the word "sell" is advisory. In fact, after all the deals were worked out, DaimlerChrysler actually paid a net $US650 million to get rid of Chrysler to a private equity fund, Cerberus Capital Management.
That was on top of the $US20 billion of shares Daimler issued to acquire Chrysler in 1998.
The crucial part of the deal with Cerberus was that the equity fund manager would take responsibility for Chrysler's long-term liabilities, the same health fund and pension responsibilities that have dragged down General Motors and Ford in recent years.
The Detroit companies are struggling as they try to compete with manufacturers from Asia and Europe where such costs are either shared with the government or where legislation limits liability and keeps costs reasonable.
While the giants on the world stage were shedding assets they could no longer afford to retain, one of the industry's minnows, sports car maker Porsche, succeeded in an audacious bid to seize control of one of the world's biggest car makers, Volkswagen.
The scope of this achievement is hard to overstate.
Porsche makes about 100,000 cars a year and Volkswagen more than 5 million. That's 50 times more, yet when Porsche bought its first tranche of VW shares in 2005, the companies both reported profits of about €1 billion.
Porsche chief executive Wendelin Wiedeking, who saved Porsche in the early 1990s after US sales dived and production costs were too high, could see an obvious opportunity to streamline the giant and reap big rewards for all shareholders.
But there was a problem. Under German law, no VW shareholder was allowed to vote more than 20% of VW's capital. Although at the beginning of last year Porsche held 27% of VW, it had only the same voting rights as the state of Lower Saxony, which held 20%. VW is based in Lower Saxony, in Wolfsburg.
Wiedeking said the consideration of political issues, especially when restructuring was discussed, caused much delay at supervisory board level when matters should have been discussed only on a business basis.
Porsche launched a legal challenge to the German voting law in the European Union courts and the decision was finally handed down during the Tokyo Motor Show.
The law was struck out and Porsche has now moved to 31% of VW and effective control. It also holds options over further VW shares.
The Porsche move on VW looks like a classic case of an overconfident suitor biting off more than it can chew, but there were crucial business reasons forcing Porsche's hand.
VW is Porsche's biggest supplier and when VW's share price was at its low point in 2005 and there was talk of a private equity takeover and break-up, a large part of Porsche's business was under a cloud.
The two companies have worked extensively together over the years, most recently on developing the large off-roader model that is sold as a Porsche Cayenne, a VW Touareg and an Audi Q7.
Porsche would never have been able to fund the development of that vehicle on its own, yet the Cayenne has proved to be a company-maker for Porsche, doubling its annual sales to 100,000 cars and transforming earnings.
Wiedeking believes there is a lot of fat or inefficiency to be cut out of VW's extensive production facilities and believes VW can post profits exceeding €5 billion ($A8.3 billion) this year.
Astonishingly, Porsche managed a similar figure for the year to July, although the bulk of it flowed out of its investment in VW.
Wiedeking said earlier last month that earnings on car production reached a record €1.04 billion.
This was multiplied several times by "the very positive effect of stock option transactions" on VW shares that added €3.59 billion.
There was also a €521 million revaluation of Porsche's stake in VW and an equity share of €702 million in VW's earnings.
It might have looked like a risky move when Porsche first moved to protect a faltering VW, but it appears to be paying off handsomely.
