Purchasing entire companies rather than JV’s and buying used production lines signals a more mature approach

By Chris Devonshire-Ellis in Mumbai

Last weeks heralded purchase of the Land Rover and Jaguar marquees by India’s Tata Group from Ford for USD2.3 billion represents a major shift in the way Indian companies are able to obtain technological growth, in a manner that possibly outstrips the latent capabilities of China’s auto sector.

Although the deal, it has raised eyebrows internationally considering that premium global brands are being purchased by a country usually associated with cheap products, signifies different approaches to modernization between India and China, and may well prove to be a turning point when considering the future development of both nations. There are some fundamental differences in the way in which China’s auto manufacturers have chosen international partners, and have the capability to compete globally when compared to their Indian counterparts.State vs. Private Sector
When one examines exactly who is behind China’s auto industry; it’s not hard to see. Massive, state owned enterprises such as FAW dominate the market, all cars manufactured in China today, and every single foreign joint venture with them, are state owned, state controlled. The Indian Tata Motors deal was private sector money. That presents a significant challenge to China; time and time again it has been proven that domestic auto industries, when run with government involvement, end up being labor heavy, inefficient beasts with limited innovative design capabilities, usually ending up incurring massive losses. Once auto is freed from the shackles of state involvement, companies either die, or they prosper. Tata are a privately owned company, out of government involvement, diversified, big in IT, finance and telecommunications, and hugely profitable.

Purchasing Production Lines
The British MG Rover debacle of two years ago ended up with the company going bankrupt, and the production line facilities being sold to Nanjing auto. MG Rover lives on, produced as a Chinese brand. However, although a short term solution to auto manufacturing, it isn’t a long term investment in technology. Auto is a fast changing industry. In any event - India has been here investing in this sector for many years. The ubiquitous Ambassadors one finds around the country and used extensively in Delhi as taxis is the old British Austin production line, shipped to India. Likewise the small, but tough Fiat taxis that inhabit Mumbai, a production line purchased from the Italians. While it’s good to see these vehicles live on, and they represent a cheap way to get cars on the road, the reality is that in a short space of time, they are outdated and unsuitable for the earnings of export driven currency or income, and are destined for domestic use and market only.

Foreign JV’s vs. Acquisition
China has heavily invested in foreign JV’s in its auto sector, and India has done likewise. However, for the US and Europe, having such ventures in place assist with deliberately inhibiting the ability for their partners to develop their own technology and compete globally. The local Chinese or Indian partner is beholden to the foreign partner for technology transfer; which arrives in these countries several years out of date, keeping the global markets strategically in the hands of the major US, European and Japanese brands.

These reasons are why it is significant that Tata have acquired the going concern of Land Rover and Jaguar rather than a cast off production line or investing in a foreign JV. Buying Land Rover and Jaguar gives Tata the ongoing technology development that can be used to both enhance it’s domestic models (and then possibly start to export them) as well as alarm how to manage premium brands in a global market. When one looks at Indian IT capabilities, the world acknowledges a quality product. With cars becoming ever more sophisticated, and the mechanisms of fueling them changing, Tata have acquired more than two brands, they’ve acquired a passport to the auto industries global markets. This is additionally supported in areas where internationally, India excels, and not just in IT. Taxis and other vehicles one sees in Delhi and Mumbai are not petrol driven. They are gas powered, and the infrastructure exists in service stations to support them. With gas 30% cheaper than the price of oil, that is going to be an important step for other manufacturers to take, while India is part way down that road already.

So while China is limited to technology transfer restrictions from their JV partners, and reliant on the purchase of old production lines, India has gone a step further and acquired a working, globally recognized business with it’s own R&D, design and support infrastructure. That, coupled with India’s proven IT skills and move towards gas powered vehicles may yet prove to be the shrewdest piece of business conducted in the modern global auto industry sector for some time to come.

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