If it weren’t enough that Fiat is trying to expand on the North American front via its alliance with Chrysler (see Now Introducing Fiat/Chrysler), it now seems as if Fiat wants to simultaneously expand its empire closer to home (via an acquisition of Opel). According to various media reports, Fiat is likely to make an attempt to acquire Opel, GM’s European arm (see Fiat Turns to Opel or Fiat Aims for Opel Deal). From the Wall Street Journal:

Fiat SpA Chief Executive Sergio Marchionne is stepping up his plan to acquire a majority stake in General Motors Corp.’s German unit Opel, the next phase of his ambitious campaign to forge one of the world’s biggest auto makers by crafting a three-way alliance among Fiat, Chrysler and Opel.

Mr. Marchionne is expected to meet senior German government officials in Berlin on Monday, according to people familiar with the matter, in an attempt to get support for a potential alliance with Opel. Mr. Marchionne signed a partnership with Chrysler LLC in Washington last week.

Fiat’s board of directors met Sunday and authorized Mr. Marchionne to seek a potential merger between Fiat and GM’s European operations, including Opel and its U.K. unit Vauxhall, according to a statement issued by Fiat on Sunday.

My Comment: Are they nuts??? It is hard enough to pull off one integration the size of Chrysler, but now they are going to try to pull off two? And to top it all off, we’re talking about foreign integrations, where economic, political, and cultural differences compound the complexity. Frankly, I am surprised that Fiat’s board would give Marchionne the approval to simultaneously attempt both deals. A prudent board would counsel Marchionne to eat one cookie at a time, lest he get indigestion. So much for corporate governance.

From the Associated Press:

Marchionne’s proposal is part of a Fiat plan to put together the biggest European auto maker and the world’s No. 2.

Marchionne reckons that the only automakers to survive the crisis will need to be able to churn out between 5 and 6 million vehicles a year.

“From an engineering and industrial point of view, this is a marriage made in heaven,” he was quoted as telling the Financial Times on Monday.

My Comment: Or an integration made in hell. I just don’t get it. Why the preoccupation with size? I remain unconvinced that largess is a means to success. Just ask Jurgen Schrempp and the folks at Daimler, who ran around spewing the same nonsense about scale and survival before their acquisition of Chrysler.

Size certainly leads to increased revenues, which helps justify exorbitant managerial pay. But given the organizational complexities that go hand in hand with size, size does not always translate into increased profitability.

In order to truly benefit from size, there must exist extremely large economies of scale and scope. Perhaps such economies (the ability to economize on platforms, dealerships, suppliers, etc.) exist in theory in the auto industry. However, the power of the auto unions, coupled with the structural characteristics of the countries in which Fiat, Chrysler, and Opel operate make capturing synergies very difficult. As reported in the WSJ:

Mr. Marchionne has suggested that closing down plants isn’t a realistic option in Europe, where many workers are shielded by contracts that make it costly for companies to lay off workers.

My comment: This is a microcosm of the problems that Fiat would likely face in any deal with Chrysler (which would be 55% owned by the auto union), and especially with Opel (given European/German labor law).

Good thing Fiat doesn’t intend to put any of its own capital at risk in either deal:

Fiat is also likely to seek government aid from Berlin to prop up the potential alliance while Fiat retools Opel’s operations, according to a person familiar with the matter. Fiat, which is saddled with €6.6 billion, or $8.8 billion, in debt, doesn’t have the money to finance potential partners.

My comment: Great, so let’s take stock. Fiat almost went bankrupt in 2004. It took a massive debt restructuring to rescue them from the brink. Now, after only a few short years of operating as a quasi-healthy automobile manufacturer, they want to take on two near-bankrupt companies that would nearly triple their current size, …and do it simultaneously. They have very little cash available to make capital investments. And to top it all off, they still have nearly $9 Billion worth of debt they need to service on their own.

I am left to conclude that there only are few plausible explanations for such a set of maneuvers:

1. Fiat is trying to acquire assets in a down market, when valuations are cheap. In so doing, they can take advantage of governments that do not want to be in the position of running large automobile manufacturers. They are thereby engaging in a low risk/high reward strategy in which they are trying to acquire access to products/brands/markets for next to nothing in the off-chance that they can magically make the Fiat/Chrysler/Opel combination work. Given that they will put very little capital at risk up front, if the deals fail, so be it.
2. Marchionne is trying to create another automobile firm that is too-big-to-fail, but in the process, too-big-to-succeed.
3. Marchionne, aided by a board of directors that he has in his back pocket, is engaging in a form of empire building whereby his own personal interests in building the world’s second largest automaker are taking precedence over the best interests of Fiat’s long-term health and prosperity.

Fiat’s stock reacted positively to the deal announcement, which suggests that shareholders favor the first explanation. However, Fiat should not underestimate the potential to get bogged down in such a strategy and get stuck with a money pit.

In addition, given the histories of similarly troubled super-sized deals (e.g., DaimlerChrysler, RenaultNissan) and a preponderence of evidence to the contrary, I remain skeptical of what’s behind door #1.

In previous posts (see Chrysler Still Needs a Miracle or Chrysler/Fiat Update) I suggested that the Fiat/Chrysler deal looked increasingly like a longshot. Fiat was asking for deep concessions from both the auto union and Chrysler’s creditors, and it seemed unlikely that Fiat was going to receive those concessions.

But over the past few days, the Obama Administration, the auto union, and Chrysler’s creditors seemed to have come to some sort of understanding (see Treasury Close to Deal with Chrysler Creditors, Chrysler Reaches Agreement with UAW, and UAW Gets 55%).

Hallelujah??

Maybe, but not so fast. Several issues remain:

1. Creditors must agree to the debt cancellation.

According to the NY Times:

Chrysler has about $6.9 billion in secured debt owned by big banks like Citigroup and JPMorgan Chase and a group of hedge funds. Under the proposal, all of the debt would be canceled in exchange for $2 billion in cash…

The Treasury drew up the latest proposal in consultation with Chrysler’s biggest secured creditors, which hold about 70 percent of the company’s secured debt. It requires approval by almost all of the secured lenders. That could be difficult as some lenders, including several hedge funds, may hold their ground and reject it.

2. The issue of pay for union workers must still be resolved. Although Chrysler, the federal government, and the union have come to terms with respect to pension and benefits, my understanding is that they have not yet reached a meaningful agreement to reduce wages. Just how important are wage reductions to Fiat? That remains to be seen. According to the Michigan Messenger:

The new agreement does not cut wages, but it does apparently reduce Chrysler’s commitment to pay into the UAW-run retiree health care fund.

3. According to the latest accord, the auto union will get a 55% equity share in Chrysler. The US government will get a 10% share. Fiat would get a 20% share. Where does the other 15% go? Is this 15% set aside for Fiat depending upon whether it meets performance goals? Will this 15%, or a portion of it, get doled out to Chrysler’s creditors? This was not entirely clear to me.

4. Ultimately, Fiat needs to agree to be party to the alliance. Until that happens, there is no deal. Time will tell if these concessions are enough to convince Fiat that the deal is worthwhile.

Nevertheless, given the concessions that all parties have made to help Chrysler avert bankruptcy, a Fiat alliance seems far more likely today than it did as little as one week ago. Chrysler is no longer looking for a miracle. Perhaps now just a random act of kindness.

But assuming a Fiat/Chrysler deal goes through, the question then becomes: Is this the best outcome for Fiat, Chrysler, and the auto industry? It is not entirely clear. The global auto industry continues to be plagued by massive overcapacity. Keeping a weak competitor around will certainly not resolve systemic overcapacity.

For Fiat, it might be a bit premature to re-enter the U.S. market (the most competitive auto market in the world) and sign on for a complicated global expansion/integration (see Fiasco for Fiat?). Let’s also not forget that Fiat is a firm that, as little as two years ago, was on the verge of bankruptcy itself.

Finally, for Chrysler, it is not clear that its products (even with technology infusions from Fiat) can improve quickly enough for it to once again become a profitable enterprise. For this reason, and as I’ve mentioned before, Chrysler likely needs more than Fiat and an additional $6 Billion infusion from the federal government to survive.

So even if the deal goes through this week, it is entirely possible that Chrysler might end up right back in the same place – on the verge of bankruptcy.

And we wait…

I had been asked to write an Op Ed for the IB Times, an on-line only newspaper with a fairly impressive circulation of about 4 million readers. Honestly, I had never heard of the publication until they reached out to me. But I have to say, I was impressed with what I saw. It even made me hopeful for the future of the on-line only newspaper format.

But that is neither here nor there. The matter at hand is the Op Ed piece.

The piece that I penned for them dealt with executive pay, and was loosely based on a blog post (see Revisiting Executive Pay) from several years ago. In the Op Ed (see Executive Pay: The Problem is Systemic) I argued that simple band-aid type solutions such as increasing the proportion of independent directors and allowing shareholders to vote on pay do not address the root cause of the problem. I wrote:

The issue of executive pay has resurfaced again in the wake of questionable AIG bonuses, and exorbitant compensation packages for banking executives. Pundits see the problem largely as a consequence of a lack of independence among boards of directors. They criticize compensation committees for being too cozy with top management – showering them with lavish pay, outsize option packages, and a host of other perquisites. The solution, they argue, is to increase the percentage of independent directors serving on the board, and to provide shareholders the right to vote on executive compensation.

I agree that boards ought to share some of the blame for a system that has seen executive compensation rise from about 30 times the average employee’s salary in the 1970’s to over 100 times the average employee’s salary today…But boards are not wholly to blame.

The reasons for the spectacular rise in executive compensation are complex. The problems are endemic to a market and institutional system which has radically changed over the last half century. Therefore, to arrive at an appropriate solution, we must start by asking ourselves some fundamental questions…

I’ll leave you with that teaser. To read the Op Ed in its entirety, please visit Executive Pay: The Problem is Systemic.

(Disclosure: I was not remunerated for having written the Op Ed, …or for that matter, to drive traffic to the IB Times or speak highly of the publication. I have no relationship with them other than their request for an Op Ed, and my agreement to write it.)

Thomas Oliver recently penned a piece for the Atlanta Journal Constitution in which he referred to my post Notable Bankruptcies of 2008. In The Year of Bankruptcy Mr. Oliver notes:

It has to happen. As painful as it is.

And there is no magic wand or legislative action or Federal Reserve printing press that can make it all right.

The laws of economics are stronger than any policy…

And so the deleveraging, or debt reduction, of the American economy continues…

Twenty years of excess leveraging can’t be worked out of the system in a normal recession…

I could not agree more with Mr. Oliver. As I explained in my post, I fully expect business bankruptcy filings to increase in 2009. Bankruptcies will likely increase to around 55,000. And as I expressed to Mr. Oliver, I would not be surprised to see bankruptcies surprise to the upside.

As with banks and financial institutions, for many firms in the broader economy, it’s not just a liquidity problem. It’s a solvency problem. Firms borrowed excessively, and at rates that were too cheap – not reflective of their inherent risk. All was fine as long as they were able to refinance the debt, and delay the day of reckoning.

But then the party ended.

We can analyze the situation and pretend that the problem affecting many of these firms is the lack of available credit; or, we can recognize the reality that, for many, their business strategies have serious flaws. I look at firms like Sirius XM (see So Long Sirius), Circuit City, Trump Entertainment, and Bearingpoint (among others) and can only conclude that these are not good firms suffering from unfortunate short-term liquidity problems. Rather, they are poorly managed firms in incredibly competitive markets. This makes their overall value propositions, market positions – or both – extremely unattractive.

Those are problems of the more permanent kind.

Today GM and Chrysler provided interim plans to the US Government in hopes of receiving additional aid (see GM and Chrysler Seek More Aid or GM and Chrysler Release Plans). According to reports, Chrysler is seeking an additional $5B in aid, while GM is currently asking for $16.6B.

You can read a copy of their respective plans here:

GM Restructuring Plan

Chrysler Restructuring Plan

I was impressed with GM’s offering. Truthfully, I expected far less. GM’s plan reads as if management believes it has something left to fight for: The plan is detailed, carefully constructed, and thoughtful. Certainly, GM faces significant hurdles in the form of the UAW, and its bondholders. In addition, the jury is out on whether current management deserves to remain in place. But that said, based on this proposal, I would be inclined to support some additional aid package for GM, …but with more strict provisions (see my previous posts Pre-Packaged Bankruptcy and Preventing Moral Hazard for details).

As for Chrysler, I am inclined to agree with Calculated Risk on this one. Chrysler’s plan is a sham. Chrysler is toast, and Cerberus knows it. Based on this plan, I see the likelihood of the US Government providing additional aid for Chrysler as remote. I would be shocked if the US Government were to continue to put taxpayer money at risk to prop up Cerberus, and its failed enterprise (see Aid for Chrysler? Just say No! and Is the End Nigh for Chrysler? for details).

But now that Chrysler and GM have submitted their plans, the real work for Team Obama begins here…

Several sources are reporting that Sirius XM Radio is on the precipice (see Sirius XM Prepares for Bankruptcy or Satellite Radio a Bad Business Model). This is not surprising news, as both Sirius and XM had been on the ropes predating their merger. As the New York Times reports:

Sirius XM…has hired advisers to prepare for a possible bankruptcy filing, people involved in the process said.

Sirius XM, which never turned a profit when both companies were independent, is laden with $3.25 billion in debt. Its business model has been dependent, in part, on the ability to roll over its enormous debts…at low rates for the foreseeable future until it could turn a profit.

MY COMMENT: Excessive debt was not unique to Sirius XM. It is an economy-wide epidemic. Expect to see many more bankruptcy stories with a similar plot as the year goes on (see my posts Notable Bankruptcies or Corporate Defaults).

Sirius XM hired Joseph A. Bondi of Alvarez & Marsal and Mark J. Thompson, a bankruptcy lawyer with Simpson, Thacher & Bartlett, to help prepare a Chapter 11 filing, these people said.

Documents and analysis are close to completion and a filing could come in days, according to a person familiar with the matter.

According to MarketWatch:

Sirius XM Radio, which reportedly is on the verge of declaring bankruptcy, has problems that go far beyond the dismal state of the economy.

The idea of charging consumers a modest fee in return for superior programming and sterling reception quality may not be viable. Perhaps the industry’s entire business model was flawed from the start and the nation had to experience this devastating recession before people reached that conclusion.

The Wall Street Journal reported on Wednesday that satellite mogul Charles Ergen of Dish Network Corp. has offered to restructure Sirius’ debt and inject several hundreds of millions of funding into the company if it will yield control to him.

I’ve blogged about Sirius Satellite Radio on several occasions (see Sirius-XM Merger, Sirius-XM Merger Update, or Lessons for Sirius for background). It was my opinion that the deal made a great deal of strategic sense. I wrote:

…there are some real cost saving opportunities to this merger. The synergies are real and tangible. Not only do the firms have the ability to economize on administrative costs (e.g., why do we need two sets of management to run these firms), but there are some obvious synergies in production (e.g., why do we need two sets of alternative rock stations when one will suffice).

…it [also] adds value for customers. Exclusivity contracts negotiated by these separate firms locked-in consumers. For example, fans of Major League Baseball were forced to choose XM while fans of Howard Stern only had Sirius as an option. Combining the firms allows fans of both to resolve issues of which service to choose…consumers who have chosen to wait for the uncertainty to resolve over which service would become the standard because they did not like having to choose between two options that are second-best (e.g., I want both Howard Stern and MLB, but I won’t choose until things get resolved) will no longer have to agonize over the decision of which service to select. With Sirius and XM merged…more consumers will likely opt for satellite radio.

Irrespective of today’s news, I still believe the deal makes sense, for as independent entities, Sirius and XM would be far worse off.

In addition, I argued at the time that the DOJ and the FCC were barking up the wrong tree by trying to prevent their union on the grounds that the deal was anti-competitive.

…they [Sirius/XM] do face substantial competition, not in the form of competitors in their existing space, but in the form of substitutes. They face threats from HD radio, traditional radio, iPod connectivity, internet streaming, etc. So this…will put a ceiling on their pricing power.

The initial DOJ and FCC objections now seem misguided, as Sirius XM certainly was not able to flex its pricing muscle, especially in a market in which consumers have a bevy of alternatives, in an economy mired in recession, and in an environment in which auto sales have fallen off a cliff.

Despite all its difficulties, I still believe that Sirius XM has a fighting chance. But the road ahead will not be an easy one, even with a debt reset. Sirius XM still faces the daunting task of convincing consumers that it offers a fairly priced service that provides value vis-a-vis its competitors. And as the MarketWatch article aptly concludes:

Hopefully Ergen — or someone else — can find a miracle cure for an industry that threatens to vanish right before our eyes.

Yesterday, the Wall Street Journal reported that Fiat will take a stake in Chrysler (see Fiat Nears Stake in Chrysler). The WSJ is reporting that Fiat will receive a 35% stake in Chrysler, without having to commit any capital to the deal. Instead, Fiat has agreed to retool an existing Chrysler plant to be able to manufacture Fiat vehicles for sale in the U.S. In addition, Chrysler will receive engine, transmission, and small-car platform technology from Fiat.

Prima facie, the deal looks like it makes some sense – Fiat gets access to U.S. markets (a market it exited in failure years ago) without having to incur the investment of starting up an operation from scratch, and Chrysler gets better access to European markets (which it lost after its failed deal with Daimler). Moreover, Chrysler gets access to small-car, and fuel efficient engine technology while Fiat gains access to Chrysler’s Jeep and Minivan brands.

As a Chrysler creditor (a U.S. taxpayer), anything that increases the likelihood, even infinitesimally, of receiving a return on my investment makes me happy. The U.S. taxpayer (and by corollary, the U.S. government) should therefore be positively predisposed toward this deal, taking comfort in the fact that, at the very least, in exchange for a 35% ownership stake in Chrysler, Fiat should be commensurately responsible for 35% of the liabilities. This should come as welcome news, assuming Fiat can keep Chrysler viable long enough to repay the U.S. government.

So that’s my take on the deal from a U.S. taxpayer perspective, …although I am awaiting more details to be able to better evaluate the terms of the deal.

As an organizational scholar however, I can’t help but wonder if the deal improves either, or both, firms in the long run. As I have mentioned before, I am generally not a fan of deals that combine two weak firms. And this is exactly what you would have in this instance (see GM + Chrysler = Ugh! and Near an Agreement for background). For this reason, the ex ante probability of success is low.

While on the surface there seem to be some synergies, you are effectively wedding a firm that as little as two years ago seemed to be on the brink of extinction (Fiat) with one that is now on life support (Chrysler). Although Fiat has produced some interesting products over the past few years, it is still in too fragile a state to tackle another entry into the U.S. market (the most competitive auto market in the world). Moreover, Fiat is not prepared for what it is about to get into by acquiring a stake in Chrysler.

Personally, I can’t believe that signing up for 35% of the liabilities of Chrysler would not be enough to scare off Fiat, …or any other potential investor for that matter.

But who am I to object. Caveat Emptor.

Happy New Year! I hope 2009 brings you health, happiness, and prosperity, …accompanied by decreased volatility.

It’s been two weeks since I’ve updated my blog. I apologize for the absence. It has not been for a lack of desire or a dearth of newsworthy events. Rather, I have been traveling for the better part of the last few weeks – first on business, and then for pleasure.

My travels took me to Israel, where I attended the Israel Strategy Conference. The conference was fantastic! It was sponsored by a consortium of the top Israeli universities – Tel Aviv University, Technion University, and Hebrew University. It attracted top-notch strategy scholars from around the world who presented a bevy of interesting research papers. I’ll certainly look forward to attending the conference again in the years to come.

This was my first trip to Israel, though certainly not my last. I am ashamed to admit that I was not able to travel outside of Tel Aviv. Unfortunately, I was only able to stay for the duration of the conference before heading back home. I feel horribly about that as I very much would have liked to have visited Jerusalem, Nazareth, Bethlehem, and Caesarea (among others).

From Israel I traveled to New Hampshire to meet my family. They had been up there skiing while I was away. I feel very lucky to have been able to spend a few days skiing with them. And it’s especially exciting to watch my kids learn how to ski at a young age. At this rate they’re certain to become better skiers than I by next winter.

Anyhow, I am back now, and looking forward to posting on a more regular basis.

Apparently more than just the lines in the sports book, …at least so says the CEO of MGM Mirage (see Casino CEO Encourages Newspapers to Change).

You see, according to Terry Lanni, the CEO of MGM Mirage Casinos, newspapers stand to learn a fair amount about change from Las Vegas.

The chief executive of the world’s second-largest casino company told newspaper editors Monday that he wished them the best in embracing change in the journalism industry, and said Las Vegas casinos have required reinvention to remain profitable.

MGM Mirage Inc. chief executive Terry Lanni…offer[ed] insights on responding to change and connect[ed] journalism’s current challenges with the transformation of Las Vegas — from a gambling-only town to a resort destination with many other amenities.

That’s what happens when an innovation (in this case, the internet) poses a fundamental challenge to your entire business model. Your options are to stick to your knitting and risk going the way of the dodo, or to change, and maybe still meet the same fate.

The problem with change in the face of such a crisis is that it is extremely costly for management to undertake, and even if they do, there’s no guarantee of success. Changing to a new business model or diversifying into new businesses is not only costly, but often stretches the firm beyond its capabilities. It’s really a double-edged sword.

But this dilemma is not unique to the casino industry or the newspaper industry. It is universal, part of a normal pattern of industry evolution. Every so often, industries experience upheaval. This is referred to as a punctuated equilibrium model of innovation (industry evolution) in the management literature. Industries experience long periods in which technologies do not change all that much, and competition is relatively stable. Then some radical innovation appears (either coming from within the industry itself, or from a complementary industry – such as the internet in this case) that upsets the apple cart.

In the aggregate, this is generally a good thing for economies. It is called progress. But at the micro level, for individual firms, industry upheavals of this sort can cause a lot of pain.

Lanni recognizes that and expressed it eloquently in his comments:

“Suffering through the turmoil of change is never easy. But as (then) U.S. Army chief of staff Gen. Eric Shinseki said, ‘If you don’t like change, you’re going to like irrelevance even less,’”

Now it might have been a bit of a stretch for Lanni to compare the type of change currently being experienced by the newspaper industry to that experienced by casinos in Vegas (in my opinion the latter experienced a much less radical challenge to its business model/value proposition). But I have to admit, it was nice of Terry to let what happened in Vegas get out of Vegas for once.

Back in March I expressed concern about Tata’s deal for Jagaur/Rover (see Buyers Remorse).

I think that this deal is destined to fail.

…For Tata, while bold, the deal just doesn’t make much sense. Aside from several luxury brands, an increased global presence, and some notoriety, I’m not sure what Tata gains. For example:

1. Where’s the synergy? Can Tata and Jaguar/LR share components, design, production, dealerships, or management? On its face, the synergies are just not there. But perhaps the investment was made for learning purposes, with Tata hoping to use Jaguar/LR capabilities to improve the quality and/or image of their existing automobiles. Possibly.
2. Can Tata rationalize Jaguar/LR’s production to make them more profitable? Actually, they cannot. They made pledges not to cut staff or close plants. And it’s unlikely that they would be able to reduce costs substantially by sourcing parts and supplies from India.
3. Can Tata right a ship that larger, more experienced, more formidable competitors had been unable to? In Jaguar and Land Rover, Tata is inheriting pieces of the old British Leyland Motors (Jaguar, Rover, Austin, Morris, etc.) that all tolled experienced (and continues to experience) more than 40 years of uncompetitiveness and underperformance. Quite simply, they are inheriting a lot of baggage (see Riding the Elephant for more background on British Leyland). It will be difficult for Tata to overcome this tremendous inertia.

Some analysts have argued that Jaguar and Land Rover were purchased on the cheap (at $2.3B minus $600M that Ford is throwing in to offset pension liabilities), and at the right time – when both Jaguar and Land Rover have a stable of new models about to hit the market (e.g., the Jaguar XF and the Land Rover LRX). These analysts point out that if these new models hit it big, it will make Tata’s acquisition look like a steal. However, this assumes that Tata can revive flagging sales at Jaguar and Land Rover in the middle of a downturn. Likewise, it assumes that Tata, by simply owning the brands, will not dilute their image. Finally, it assumes that the Jaguar and/or Land Rover brands can be revived after years of neglect and consumer dissatisfaction, and that consumers will once again be interested in buying relatively expensive, gas-guzzling cars and SUV’s (especially in the case of LR).

For all these reasons, I remain skeptical.

A recent article in The Economist echoes some of these concerns, but expresses some hope (see Now it’s Personal).

In the first quarter of this year JLR [Jaguar Land Rover] rang up profits of $421m.

But life has since become much harder for makers of large, powerful cars. In America, where petrol at $4 per gallon means big sport-utility vehicles have suddenly fallen from favour, Land Rover’s sales fell by 31% in the year to July.

So far, booming demand in Russia (up by 106%) and China (up by 151%) have more or less plugged the gap. Land Rover’s overall sales are only 2.7% lower year-on-year than in 2007. But JLR’s new boss, David Smith, acknowledges that the second half of the year will be much tougher. Land Rover’s production is being scaled back by 25-40%, depending on the vehicle model.

MY COMMENT: And it looks like things will be even tougher with global demand (even in places like China and Russia) slowing quite a bit.

A further worry for JLR is tightening environmental rules in most of its big markets. In Europe carmakers with fleets averaging more than 130 grams of CO2 per kilometre (g/km) are likely to face financial penalties by 2012. JLR is particularly exposed. Its best CO2 performer is the diesel Jaguar X-Type, which emits 154 g/km. Its worst is the Range Rover Sport which, in supercharged V8 form, chucks out 374 g/km.

MY COMMENT: JLR has a long way to go on emissions. It is not clear to me that Rover (given its portfolio of offerings) is anywhere near competitive.

One of the nice things about this article, however, is that it begins to detail JLR’s strategic plan for the next several years.

Mr Smith claims that JLR has a new nimbleness which allows it to exploit its smaller size. Strategy is set by a board consisting only of Mr Smith, Mr Tata and Ravi Kant, the head of Tata’s automotive business. Tata is committed to supporting the business plan until 2011, but the intention is that JLR should operate as a more or less independent, self-funding entity.

MY COMMENT: I’m not sure operating as an independent, self-funding entity should be Tata’s purpose with this acquisition. The best use of JLR is not to treat it as if it were a portfolio holding of Tata’s, but for Tata to exploit synergies with JLR – either reducing overall cost structure by sharing operations, parts, components, etc. AND/OR by using JLR as a means to learn – to help Tata develop up-market vehicles and learn about selling/manufacturing cars in developed markets.

Mr Smith’s strategy consists of three main elements. The first is improving customer service. Jaguar is already rated highly in America by J.D. Power, a consumer-research firm, but Land Rover “is not there yet” says Mr Smith.

The second is to recognise that, although JLR cannot compete across the board with the likes of BMW, Mercedes and Audi, it can be the best in its chosen segments. Land Rover, he says, has “benchmark products” in all its segments, and the XF, rated by several car magazines as superior to equivalent German cars, has shown what Jaguar can do. A new small Land Rover, based on the LRX concept-car displayed at car shows this year, seems certain to get the go-ahead, and Jaguar’s big saloon, the XJ, will be replaced next year with something sportier and more modern-looking. Mr Smith sees both Jaguar and Land Rover going even further upmarket, pushing into territory occupied by the cheaper Bentleys and Aston Martins.

MY COMMENT: This will be difficult for JLR to accomplish. One of the reasons JLR has a tough time competing effectively with the likes of BMW, Audi, and Mercedes is precisely because they don’t offer “across the board” models. They specialize in up-market saloons and SUV’s. BMW, Audi, and to a lesser extent Mercedes have a distinct advantage over JLR in their ability to spread development costs across models by using a single platform across multiple offerings (cars and SUV’s). This makes it difficult for LR to compete on cost with the likes of BMW, Audi, and Mercedes. Moreover, does JLR really believe it is in a league with Bentley and Aston Martin??

The third element is to reduce emissions. Jaguar is already a leader in lightweight aluminium construction and Mr Smith expects a 25% improvement in fuel efficiency over the next few years just by refining existing engines. But JLR is also investing $1.5 billion in new hybrids which will come on stream from 2012. Land Rover’s “e-terrain” technology, a diesel-electric hybrid powertrain with an electric rear-axle drive system, should give future Land Rovers even greater off-road ability while cutting emissions by 30%.

MY COMMENT: That is not enough. JLR does not currently manufacture one car that meets the European environmental standards that take effect in 2012.

And if all that were not enough, on top of all the strategic issues that JLR faces, for Tata there is the added difficulty of managing/coordinating operations across borders and cultures – i.e., an Indian firm managing a largely British operation. In cross-border deals, corporate culture needs to be integrated in a context complicated by differences in national culture. That is no easy task.

For JLR and Tata’s sake, I hope JLR survives to see 2012. But even if it does, there is no guarantee that it will turn into a profitable investment.

So I remain unswayed. I still think this is a bad deal for Tata.