Losses at Jaguar Land Rover Weigh Down Tata Motors

India's Tata Motors is doing well with its own vehicles, but those profits aren't enough to offset the current losses from Jaguar Land Rover

By Mehul Srivastava

Until this past month, India's Tata Motors (TTM) faced criticism from investors and ratings agencies about whether it could pay off a $3 billion debt it took on to buy Jaguar and Land Rover from Ford Motor (F) last year. Now people are asking another question: Can Tata actually run Jaguar and Land Rover profitably? In June, after 10 months under Indian ownership, the losses at the British-made luxury brands pushed an otherwise profitable Tata Motors to $468 million in losses.

Then, on Aug. 31, Tata announced its results for the first time after consolidating Jaguar and Land Rover with its India operations. The news was not good: Tata Motors posted a loss of $67 million for the quarter ended June 30, compared with a profit of $147 million for the same period in 2008, before Tata had bought Jaguar and Land Rover.

Jaguar and Land Rover are the main culprits, losing a combined $100 million in that quarter. The company's Tata-branded vehicles were profitable, but they weren't strong enough to offset the losses at the two British-based automakers, which saw sales in the first half of the year fall to just under 72,000 vehicles from a little more than 112,000 cars in the same period last year, according to data maintained by J.D. Power & Associates. Jaguar and Land Rover's workforce is still about 80% of what it was before the slump began.

Pouring Cash into R&D

But now, as the global economy warms up, Tata is hopeful sales will pick up and it can squeeze a profit out of Jaguar and Land Rover. Tata has paid debt down so aggressively that it now owes less than $850 million of the original $3 billion in loans it took to finance the acquisitions, even though the company has more than $6 billion in other outstanding debt. Since September, Tata has sunk another $2 billion into running Jaguar and Land Rover—and their expensive research and development programs—and Vice-Chairman Ravi Kant said that for the next five years Tata will likely spend $1.1 billion a year on R&D plans alone. "Tata seems to have taken the view that it has to spend their way out of this deal," says Ramnath S., a Mumbai-based analyst with Indian Development & Finance. "It may work—especially if the excitement over the new XJ means it can steal market share from BMW."

The new Jaguar XJ, unveiled in June, is symbolic of the problems Tata is facing. A muscular and beautiful car, the new XJ is perhaps the best reviewed of Jaguar releases in more than a decade. But the car is far from perfect for Tata. To get it ready for new European emission standards, Tata will have to spend hundreds of millions in R&&D putting more aluminum into the car—up to half the car's weight, the company estimates. Then, to make the gas-guzzling and powerful XJ ready for environmentally conscious buyers, Tata will have to invest in hybrid engines and other green technology, none of which Tata owns right now. "We've always said that we will continue to invest in R&D," says Kant. "This was decided long before, and we don't see any reason why we should change that."

Even if the new Jaguar XJ is a hit, Land Rover might have to be completely redesigned as a brand, especially if American and European markets shun SUVs in favor of greener cars. "Land Rover needs to tweak its entire image, use lighter materials, even try to go hybrid," says Paul Newton, a London-based analyst with Global Insight , a forecasting firm. "But the complication is the huge amounts of money that will take."

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