Tata Motors has put in place an aggressive cost reduction strategy for its luxury brands Jaguar Land Rover, which it acquired from Ford in 2008, involving a substantial increase in sourcing vehicle parts from low-cost countries.
As part of the plan, a third of JLR's component requirements will be sourced from countries such as India, China and eastern Europe within the next 12 months.
"A year and a half ago, the company sourced 14 to 15 per cent of its components from low-cost countries. Over the last couple of quarters, it rose to about 20 per cent and we hope to take it to 30 per cent," Tata Motors CFO C Ramakrishnan said at an analysts' call a few days ago.
To this end, the company plans to introduce some of its long-term suppliers to a team of executives from JLR visiting India in search of partners.
The low cost of skilled labour and cheaper raw material costs give these countries a 30 to 40 per cent cost advantage on component prices, which is key to JLR's new drive to reduce manufacturing costs. Tata Motors was dependent on Ford for a bulk of supplies of components after it was sold in early 2008.
Tata Motors, which was recently sanctioned an expensive European Investment Bank loan of £340 million at Libor plus 6 per cent, is working towards making the two brands as cost competitive as possible in the long run.
"Tata Motors needs to tighten costs in order to be competitive while not being complacent on quality and technology," an analyst with a leading brokerage house said.
"The companies does not have deep pockets like BMW or Daimler, but the expertise of working in a low-cost environment like India will aid JLR operations greatly," he added.
Aggressive cost reduction initiatives over the last six months plus a rationalisation exercise advised by KMPG and Roland Berger helped the company post its first post-takeover quarterly net profit in the October-December quarter at £55 million.
Apart from the component sourcing plan, Tata Motors is also working on reducing costs on every front such as in areas like pension restructuring, employment costs for new recruits, a plant closure and improved focus on IT infrastructure.
The company has already reduced the employee headcount to 14,000 from 16,000 since the takeover. Although there are chances the company will revisit job cuts again, Tata Motors officials say that redundancies from now on will be minimal.
