Who gets Jaguar?
Today is the deadline set by the Ford Motor Company for preliminary bids to purchase its Jaguar/Land Rover unit. According to rumor, it expects as many as six bids, three from private equity firms and three from automakers. Among the rumored bidders are Cerebus, the company that bought Chrysler, and Hyundai, a company which has repeatedly denied any interest in purchasing the unit.
So, what’s in it for the buyer?
Land Rover manufactures SUVs. The future of such vehicles is cloudy, to say the least. Proposed fuel economy standards have the potential of crippling the American market for these vehicles. To meet those standards for SUVs is going to require a huge investment, one that is going to be very hard to make profitably if it cannot be spread over a large number of units sold. Land Rover is a niche brand.
Divorcing it from Ford means that it either has to buy the technology needed to meet those standards or must develop it on its own, presumably at the same cost that larger automakers will be paying to meet the standards for a much broader product line. Indeed, if larger manufacturers can offset poor mileage on large vehicles with better than average mileage on small ones, Land Rover’s cost of meeting the new standards could be prohibitive because it would not have higher mileage vehicles in its product mix.
Jaguar, on the other hand, currently competes poorly with BMW, Mercedes-Benz, Audi, and Lexus. Unlike Land Rover, which is generally though to be profitable, Jaguar is a cash hemophiliac. Worse, even though Ford has pumped money into it, it requires even more investment. If Jaguar is too remain a player in its market, it is will have to produce a competitor to the new Porsche Panamera and the four door on Aston-Martin’s drawing board. Moreover, though Ford eliminated the reliability problems which plagued Jaguar for two decades, Ford did nothing to make Jaguar an aspirational brand. To the contrary, Ford created an S-type that looked remarkably like a rental Taurus. Jaguar is not currently a prestige brand.
So here’s the morning line on the buyers for Jaguar/Land Rover.
Cerebus – no chance. Reportedly, Ford wants $7 billion for these brands. Cerebus isn’t going to cough up that kind of money because it can’t. Cerebus is currently trying to borrow over $30 billion to fund the acquisition of Chrysler. Its boss, John Snow, has bluntly said that adoption of the currently proposed federal fuel economy standards will require it to inject more money into Chrysler than planned. In the meantime, it’s getting tougher to borrow money to fund buyouts. Even were Cerebus to create a plan to integrate Chrysler and the Jaguar/Land Rover lines, the equity loan market isn’t prepared to double its bets by loaning Cerebus the money needed to buy another money losing car company. Cerebus is just testing the water, in case everyone else drops out. Otherwise, it’s not a serious buyer.
The other two equity groups rumored to be in the mix, Ripplewood Holdings and One Equity Partners, the latter an adjunct of J. P. Morgan, aren’t serious players, either. Since the depression, no car company has been able to exist by producing solely high-priced cars, with the exception of Porsche. BMW, Mercedes-Benz, and Audi all have mass-market cars, such as the 3 series and the C Class, which support the balance of the line and accustom buyers to the product. Indeed, it is those companies that have best implemented the formula which Alfred Sloan developed for GM, the capture of the buyer young at a lower price, after which the buyer is progressively moved upward through the company’s product line. It is exactly this reality which explains those low-priced Toyotas which were given a Lexus badge.
Jaguar cannot compete with that. It is too late for Jaguar to establish itself in that market. Ford tried, and failed. There is no reason to believe that a buyer who will be required to milk enough money out of the company to pay the interest on the loans taken to purchase it will have the funds necessary to become competitive in that market.
That leaves the automakers.
Two of the firms reportedly interested in Jaguar/Land Rover are based in India. The other is Hyundai.
The Indian firms cannot be dismissed. After all, it was money from the Middle East that bought Aston-Martin. India, second only to China, is the most rapidly growing automobile market in the world. But, though investment capital is flowing into that country, neither those who are investing it nor those who are creating the Indian automobile market are stupid. Given the head start in the world market which its competitors enjoy, there is absolutely no reason to believe that Jaguar can become profitable by concentrating on emerging markets.
That leaves Hyundai.
Hyundai has spent the last five years developing a new car to compete in the lower priced luxury market, against the C Class, the 3 Series, and the rest of the brands competing in that market. Hyundai has spared no expense and no effort in creating this new car. From spy photos and grounded rumors, it is clear that they will be producing a car that they can sell on its merits. They contemplate taking over the market which Lexus never quite bothered to fill, the market Lexus delegated to warmed over Toyotas with leather upholstery and gold emblems.
So, why would Hyundai want Jaguar, or Land Rover?
Because they could complement the Hyundai product line.
Jaguar and Land Rover represent segments of the automotive market in which Hyundai does not compete and, if properly handled,
create very large profits. Rather than trying to create a brand from scratch for that market, as did Toyota with Lexus, starting with the Jaguar and Land Rover brands allows Hyundai instant access to markets from which it is currently excluded. Further, even though Jaguar is a money loser, the price which Ford is likely to accept essentially gives the buyer all of the investment which Ford has made in the Jaguar plant and equipment for free. With the cash flow from its lower priced brands, Hyundai can afford to take the necessary steps, long-term, to establish Jaguar as a premium brand world-wide.
So, when the deal is ultimately done, my bet is on Hyundai.
But don’t bet on them meeting Ford’s price.