Fear of global slowdown won’t derail Tata’s expansion plan

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Byline: ERIC BELLMAN AND STEPHEN POWER; Tariq Engineer in Mumbai contributed to this article

Tata Group is set to place more multibillion-dollar bets in its bid to become one of the first globally recognized Indian brands. But as concerns increase about the health of the global economy, so do the risks for a conglomerate that already is India’s most prolific purchaser of international companies.

Early in the new year, the group’s auto-making arm, Tata Motors Ltd., is likely to win its bid for Ford Motor Co.’s premium Jaguar and Land Rover brands at a cost of more than $2-billion (U.S.). Next month, at the other end of the automobile market, Tata Motors is scheduled to unveil what the company is touting as the world’s least-expensive mass-produced passenger car, with a sticker price potentially as low as $2,500. The group also is courting Orient-Express Hotels Ltd., a luxury-hotels operator based in Bermuda.

The Tata Group’s expansion campaign is designed to increase the company’s profile at home and abroad. An increasing number of Indian companies are expected to widen their scope in coming years.

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Previously, a limited number of Indian companies, mostly in the information-technology, outsourcing, textile and pharmaceutical industries, ventured outside of India. Today, Tata Group – which already owns several international brands, including Tetley Tea, of the U.K. – and others are looking for ways to use their new economic might to buy companies and target markets abroad.

“Companies involved in branded businesses cannot remain restricted to India,” R.K. Krishna Kumar, director at Tata Sons Ltd., the holding company for the group, said in an interview. “The only survivors will be those that have a dominant brand they have built or acquired, and building it can be a high-risk proposition.”

Indeed, Tata is making these big bets at a risky time. There is increasing concern that a significant slowdown could occur in the developed countries that are the main markets for Jaguar and Land Rover vehicles.

Tata Motors will need to use its sales network in India and other developing economies to offset any slowdown, said Vaishali Jajoo, senior research analyst at Angel Broking in Mumbai. “Overall demand is going down in developed countries” for Jaguars and Land Rovers, she said, “but it is expected to grow in developing countries.”

Emerging markets are the main target for the new small car Tata has spent years developing. Tata Group chairman Ratan Tata is scheduled to unveil the car at an auto show in New Delhi Jan. 10. Tata plans to sell the car for about 100,000 rupees, or $2,500. Little is known about the car, other than it will have four seats, good gas mileage and a modern look.

While the car is expected to transform driving in India, allowing a new generation of drivers to graduate from motorcycles to automobiles, it carries risks for Tata Motors. India’s economy is roaring ahead, with annual growth averaging about 8.6 per cent in the past four years, but a global slowdown could dent consumer spending.

Tata Motors plans to start production of the car later in 2008. Analysts warn that even with a vibrant Indian economy and a successful introduction, it could take more than four years for the project to break even because of high development costs.

“There are a lot of concerns” about how long it will take to earn money, Ms. Jajoo said. “Nobody is expecting it to be a profitable venture initially because they are being ambitious and creating a new segment altogether.”

Shares of Tata Motors have shed about 20 per cent so far this year because of a slowdown in the sales of the company’s commercial and passenger vehicles. During the same period, the benchmark Bombay Stock Exchange Sensitive Index, or Sensex, has risen about 46 per cent. Tata Motors shares closed yesterday at 752.10 rupees, up 3.3 per cent.

Tata Motors has been the front-runner in the bidding for Jaguar and Range Rover since their unions last month chose the Indian auto maker as their preferred bidder. The competing bidders are One Equity Partners, a private-equity firm that is a unit of JPMorgan Chase & Co., and Indian auto maker Mahindra & Mahindra Ltd., which is bidding jointly with private-equity firm Apollo Management LP. The acquisition would give Tata Group the technology to build better cars. It also would give Tata Motors the sales network it needs to boost its international profile.

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Some are uncomfortable with India’s rising profile in the world. A group of Jaguar dealers in the U.S. recently sent a letter to Ford suggesting it not sell Jaguar to an Indian buyer, as Indian ownership could hurt the perception of the brand. The directors of Orient-Express recently sent a letter to Tata Group suggesting Tata ownership would hurt the hotel chain’s image. Tata already owns 11 per cent of Orient-Express and is interested in a friendly acquisition.

Tata officials assert the group will have no trouble managing luxury brands. Its Taj Hotels Resorts and Palaces, a hotel chain, includes five-star hotels. “To say the Taj is not a luxury brand is ridiculous,” said Mr. Kumar, the Tata Sons director. He added that the group is looking at other acquisitions in the hospitality industry, as well as the beverage industry in the U.S.