10:00AM New York – Ford and Tata Group agree on sales deal terms of Jaguar and Land Rover brands.

After eight months of negotiations Ford Motor Company and Tata Group have agreed on the sale of Jaguar and Land Rover brands.

Deal terms

Tata will pay $2.3 billion to Ford and Ford will contribute $600 million to the pension fund for the employees of Jaguar and Land Rover. However, Ford will not have any equity stake in the deal. Moreover, several private equity funds in partnerships with various auto makers have attempted to purchase these brands but none was willing to keep the U.K. labor force intact.

Much of the deal is funded with short term debt of $3 billion from Citigroup, JP Morgan, and a consortium of other banks. Unsurprisingly, Tata will have to quickly identify cost savings or increase sales in Europe and the U.S., which looks increasingly difficult.

Supply agreements

Ford and Tata will work together for years to come. Tata needs Ford’s support for parts and technologies; moreover, Ford will provide financing for car sales at lease for a year.

Ford in a press release said, “As part of the transaction, Ford will continue to supply Jaguar Land Rover for differing periods with power trains, stampings and other vehicle components, in addition to a variety of technologies, such as environmental and platform technologies. Ford also has committed to provide engineering support, including research and development, plus information technology, accounting and other services. In addition, Ford Motor Credit Company will provide financing for Jaguar and Land Rover dealers and customers during a transitional period, which can vary by market, of up to 12 months.”

Tata appears to have secured technologies that it needs to improve its product line up in India. Hopefully, these technologies will help Tata to prepare its Indian operation as a global hub to sell cars to Europe, Africa, the Middle East, and then later expand it to the U.S.

High employee costs

UK wages at Jaguar and Land Rover are one of the highest in the world, topping annual wages of more than $100,000 on the factory floor. Apparently, Tata, in a bid to acquire luxury brands, has agreed to keep the current employees and wages.

Naturally, Unite, the union representing factory workers in the U.K., was pleased to work with Tata and not with any other private equity fund controlled group. On this point Roger Maddison said, “Unite has secured written guarantees for all five UK plants on staffing levels, employee terms and conditions, including pensions, and sourcing agreements. The sale ensures our members futures and we look forward to working with Tata.”

Does Tata know what is the root cause of lack of profits at Jaguar and does it have financial wherewithal to fund a string of losses is a question that should be asked. Interestingly, Tata has either to lower operating cost by 30% to 40% or increase sales by 50% to 70% to turn Jaguar around. Since neither goal is achievable in the next three years, how is Tata going to make Jaguar work? This question needs serious pondering.

The high labor, operating cost, and persistent quality lag have been key reasons why Ford has done poorly in the last ten years. Moreover, Tata may find that keeping most of the production in U.K. difficult in a weakening economic environment. More important, the luxury market is competitive, volatile, and driven by new products; however, Tata lacks experience and financial wherewithal in designing new products.

Long term challenges

If Tata fails to improve productivity in the long term within the U.K., which significantly lags to workers in Japan and Germany, the consequences may be dire. For instance, global markets for luxury cars are already crowded because of the current slowdown in international economic growth, and this will strain that already difficult situation further.

Tata Group has recently launched its plan to sell world’s cheapest car for $2,500 in India; moreover, Tata has been producing trucks in India for decades but its track record with cars has been spotty. Unfortunately, Tata is known for its mediocre trucks and came close to near bankruptcy in the early nineties. These quality problems have dodged Tata and the company is perceived in the local market as bureaucratic. More troubling, Tata has failed to use its India hub to challenge Japanese or Korean companies in the global markets. This has resulted in the company trailing its Chinese competitors in technology and automotive knowhow.

Tata expects that Jaguar and Land Rover brand purchases will help to catapult it on the technology curve and gain prestige in the marketplace that it lacks. However, a debt-funded purchase and high labor costs may take decades for the deal to work, which Ford previously learned painfully.

Ford sale provides a cushion

Ford Motor Company has declared a string of losses in recent years and the financial situation has become precarious. Now, Ford has targeted to become profitable in its North American division in 2009 and expects to lower costs by $5 billion in that division in 2008. Ford, after losing market share in the face of stiff competition from Asian and European manufacturers, is forced to lower its operating cost and sell assets.