India drives into premium vehicle market

Published: 6 August 2008

How HSBC helped Ford sell Jaguar and Land Rover to Tata

For decades the model for the global automotive industry was the United States – the world's single largest car producer and car market. In recent years, however, market patterns have shifted and the US now represents less than one quarter of the world's auto industry. The US market presence is expected to shrink further as the industry shifts its attention toward emerging markets, with the spotlight now falling on India, China and Eastern Europe.

The increasing affluence in India and China has changed consumer behaviour patterns, with more people able to buy their own cars (see chart below). As a result, domestic car manufacturers are increasing production, expanding operations and looking to invest in established international brands. As domestic manufacturing capacity increases, the emerging markets will play an increasingly prominent role in the global auto market.

India has a number of established domestic brands including Tata, Maruti, Mahindra & Mahindra and Ambassador. As global industry leaders increase their investments in emerging markets, cross-border partnerships have resulted in the creation of joint venture car makers such as Maruti Suzuki India Limited, Delhi-based Hero Honda Motors Limited, and Ashok Leyland.

Tata Motors Limited (Tata Motors), India's biggest motor manufacturer, recently acquired the Jaguar and Land Rover marques from US car giant Ford. HSBC acted as financial adviser to Ford in the USD2.3 billion all cash transaction and the deal was completed on 2 June 2008.

Source: HSBC Research

Global partnerships built on local knowledge

The sale completed a process that began in 2007, when Ford began exploring options for its Jaguar Land Rover (JLR) business, looking for the best solutions for its business while maintaining the identity of individual marques.

Meanwhile, Tata Motors had been establishing a presence in the global automotive industry through a series of international transactions. In 2002, the company acquired South Korean truck maker Daewoo Commercial Vehicle Company Limited, and the company signed bus and coach manufacturing agreements with Spain's Hispano Carrocera SA in 2005 and Brazil's Marcopolo in 2006, and that same year, the company also formed manufacturing partnerships with Thailand's Thonburi Automative Assembly Plant Company and Italy's Fiat. Tata Motors also distributes cars under its own brand in Africa, Asia and Europe.

When global companies enter cross-border mergers and acquisitions, cultural integration can be critical to a transaction's success. With more than a century of experience in emerging markets, HSBC had the local knowledge needed to help the two global firms connect.

Complex transactions in a volatile market

Oliver Smith, Director M&A, Investment Banking, said HSBC's previous experience in M&A transactions had helped facilitate the transaction. In 2007, HSBC played a key role in India's largest ever M&A transaction, in which Tata acquired Britain's largest steel maker, Corus Group Plc. This deal, Oliver said, provided an excellent base for working with Tata on a transaction of that size, scale and importance.

The Tata-Ford transaction is a good example of HSBC's active involvement with big players in emerging markets. It also illustrates HSBC's ability to execute complex cross-border transactions in volatile market conditions and to complete such deals quickly.

"In this transaction, HSBC played the role of advising Ford with the sale of JLR, and dealt with a number of potential buyers. Despite the fact that there were other buyers from Europe and the US, our experience of working with the Tata group helped make Ford comfortable with the prospect of selling to Tata," said Mr Smith.

The deal also demonstrated the ability of HSBC's Automotive and Investment Banking teams to satisfy the demands of premium clients such as Ford by supplying a wide spectrum of corporate financial services.

Referring to the global aspect of the deal, Mr Smith believes the Jaguar Land Rover acquisition has the potential to open up the Indian auto industry to a much greater degree than had been done in the past. "The JLR transaction is likely to be a giant step, giving Tata a global presence in a premium market and giving JLR the confidence in having moved into an emerging market."