Losses at Jaguar Land Rover Weigh Down Tata Motors

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The costs weighed on investors, who pushed Ratan Tata, the chairman of the $14 billion Tata Motors and the leader of India's sprawling Tata Group, during the company's annual meeting on Aug. 26 for a date when the British brands could break even. Tata, 71, defended the acquisition as "very much worthwhile," adding that "one or two years is not anything in the life of a corporation." Defending the company's decision to buy Jaguar and Land Rover from Ford, Tata said "what you see is not because of acquisition, but [the global economic crisis] that followed it."

Cost-Cutting Help

Tata is not wasting time. Cash reserves at the company were down to $235 million on Mar. 31, and it had already sold much of its stakes in other Tata Group companies to pay off the loans it racked up buying Jaguar and Land Rover. Last week it said it would accept deposits from investors at 9.5% interest to raise just over $800 million. In July it hired KPMG and Roland Berger to help cut costs and manage cash flow. It has already lowered its inventory from 70 days to 50 days, saving $250 million. Tata has also reduced work at the three British production sites to single shifts, cutting about 2,500 jobs since September—including 300 at a northern England site where it stopped production of Jaguar X-types as demand fell 32% in 2008.

Utilizing a model of managing supplier payments that has worked well in India, Tata has extended supplier payment terms from 45 days to 60 days. "They've recognized the skills and competencies of the workforce and seem to have long-term vision," says Dave Osborne, the lead auto negotiator for Unite, the British union that represents 9,500 Jaguar and Land Rover factory workers, which agreed to $110 million in cuts such as pay freezes and shorter work hours. Still, it could be 2011 before Jaguar and Land Rover break even, estimate IDFC-SSKI, the Indian brokerage, and Credit Suisse (CS).

Tata's task would be easier if it could improve its relationship with the British government. The $64 billion Tata Group, the parent company of Tata Motors, has 19 separate operations in Britain and employs 45,000 people, making it the country's largest industrial employer. Jaguar and Land Rover itself employ 14,500 and, even in the worst downturn for automobile companies since World War II, produced $2 billion in foreign exchange for Britain and spent $2.5 billion on supplier payments. But negotiations with the British government to provide guarantees for loans, including $485 million from the European Investment Bank, went nowhere for six months, when a frustrated Tata secured guarantees from private banks instead. Tata said on Aug. 31 that an improvement in the credit climate means loan guarantees from the British government won't be necessary in the future. The U.K., for its part, maintains that the negotiations stalled because of provisions it needed to protect public money. "We have an obligation to ensure that taxpayer funds are adequately protected, and we needed to ensure that if the government was providing funding, that JLR's plans were robust enough to protect taxpayer funds," says a spokesperson for Britain's Business, Innovation & Skills Dept.

This July, after waiting for six months for the British government to guarantee a $486 million loan the company had negotiated with the European Investment Bank, Tata gave up and went to private lenders instead. The negotiations rattled Tata, say two company executives briefed on the subject who asked not to be named. First, the government asked for a seat on JLR's board, then it asked for the right to dismiss JLR's chairman, according to company officials. "We learned our lesson," says one Tata executive. "None of us—not Jaguar Land Rover, not the unions, not the British worker—is going to get any help here. We are on our own."

Until then, the British government is sitting on $3.7 billion of assistance for carmakers, a pool of money that both Tata and the unions think Jaguar and Land Rover should be able to tap. "It's been nearly nine months since the program was announced," says Osborne, "and nobody has received a single penny."

Srivastava reports for BusinessWeek from New Delhi.

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