Joe Leahy, Amy Yee, Mure Dickie and Geoff Dyer

BIDDING FOR BRANDS

Hotel managers, particularly those in the luxury business, are generally polite
folk. But last month, when India’s Taj Hotels chain made what it said was a
friendly approach to Orient Express Hotels, Trains & Cruises, the luxury
hospitality group, the ensuing dialogue quickly degenerated into an
uncharacteristically public spat.

Paul White, chief executive of Orient Express, wrote a blunt letter stating
that any association with Taj, the luxury hotel operator owned by the Tata
Group, one of India’s most venerable industrial houses, would damage the New
York-listed company’s premium brand.

The comments provoked an outburst from government and business leaders in
India, culminating in the normally reserved Tata Group taking the unprecedented
step of publicly demanding an apology. “Indian companies . . . will take their
rightful place in the international arena,” R.K. Krishna Kumar, vice-chairman of
the Tata-owned Indian Hotels, wrote in a letter that read like a manifesto on
the new world economic order. “Enterprises and individuals must recognise and
adapt to these fundamental economic changes. We believe that those with a
fossilised frame of mind risk being marginalised.”

Although an extreme example, the row between Taj and Orient Hotels points to
a growing trend. As the economies of emerging markets boom and their biggest
conglomerates grow into multinationals, more and more of the new corporate
giants in countries ranging from India to China, Russia and Brazil are looking
to wring greater profits out of their respective industries.

The quickest way to do that is to buy a global brand, particularly a premium
or luxury one. In the latest and probably most ambitious such move yet, the Tata
group has taken the lead in bidding for Ford’s elite Jaguar and Land Rover
marques. But there are also dissenting voices, who argue that low-cost emerging
market producers such as Tata Motors, which yesterday unveiled the world’s
cheapest passenger car – the Tata “Nano” – do not have the expertise to manage
luxury brands.

Alongside this is the debate between those who believe there is a stigma
attached to being associated with companies from what was once known as the
“Third World”, and others who see proponents of such views as ignorant of the
direction in which global trade is moving in the 21st century. “India and China
might have been on the wrong side of history for the past 200 years but for the
next 200 years they will be on the right side of it,” says Sir Martin Sorrell,
chief executive of advertising agency WPP.

The move towards acquiring brands is the culmination of an overseas
acquisition spree over the past few years by emerging market companies,
particularly cash-rich groups in India and China. As their economies have grown,
so too has their need for resources, technology and access to funds.

The biggest acquisitions so far have been companies in oil and natural
resources, such as Tata Steel’s acquisition of Anglo-Dutch rival Corus, the
owner of the former British Steel, and similar takeovers by other Indian and
Chinese companies.

But increasingly, Indian and Chinese manufacturers are also no longer content
to be the invisible toilers at the bottom of the global economic pyramid. They
want to take the lead – and a greater share of the profits – by acquiring
brands. Mr Kumar, who is also a director of Tata Sons, the group’s parent
company, describes this as the natural “trajectory” for any company. “If you see
the progression of most companies in the world – Japanese or South Korean or
American or British – they will all have started in some form of commodity
industry and over a period of development and evolution have evolved into
[investing in] luxury brands,” Mr Kumar says.

Among the pioneers in China of this move up the value chain is Lenovo, the
computer vendor, which bought IBM’s PC unit for $1.75bn (£900m, €1.2m) in 2005,
making it the country’s first company to take on the tricky task of managing a
global premium brand. IBM’s all-black ThinkPad laptops had long commanded high
prices from business buyers, who saw them as rugged corporate workhorses
produced by one of the most prestigious names in computing.

Sceptics thought ThinkPad’s brand value would quickly decline under the
stewardship of a company from China, a country that has generated few global
brands of its own and which remains less than a by-word for quality. So far,
however, Lenovo has confounded its critics. Under the terms of the 2005 deal,
the Chinese company had the right to retain the IBM brand on its Thinkpads and
desktop Thinkcentres for up to five years. But instead, it decided to stop using
the IBM name after just three.

China’s other major foray in the foreign premium and luxury goods – the
acquisition of parts of the UK’s MG Rover group two years ago by Nanjing Auto
and Shanghai Automotive Industry Corporation (SAIC) – has had a more mixed
record. Although Nanjing Auto re-started modest production of the MG TF sports
car at Longbridge in England last year, the main focus of both companies has
been on the mid-market Rover models that they also acquired. Indeed, both
companies have launched saloon cars in China based on the old Rover 75
model.

In a broad range of industries, Chinese manufacturers are urgently feeling
the need to move up the value chain because of rising wages and intense
competition. Trying to establish some sort of brand name is an important part of
the expansion plans of many textiles companies, for example. But they will first
have to overcome China’s reputation for low-cost manufacturing and fake goods,
which could immediately devalue a luxury brand were the Chinese to take control
of it.

In India, the Tata group, which apart from hotels, automotives and steel has
interests ranging across information technology services, telecommunications and
beverages, has been the undisputed pioneer of the Indian global acquisition of
brands.

The move abroad was kicked off by Tata Tea, the group’s beverage arm. Once an
anonymous grower of tea for sale on world markets to the highest bidder, Tata
Tea realised it needed to acquire a brand name if it was to escape the
boom-and-bust commodity cycles that periodically crush producers’ margins. It
bought Britain’s Tetley Group in 2000, instantly placing it on the map of the
world’s consumer brands. It has continued to evolve since, becoming the world’s
second-largest global branded tea company.

The group’s other most progressive arm on expanding into the overseas luxury
market has been Taj Hotels, which bought the Ritz-Carlton in Boston in 2005 and
is aiming eventually to have half its properties overseas, compared with a
quarter now. David Gibbons, general manager of what is now called Taj Boston
recalls: “People were unsure of who we were. Travel professionals know the Taj
brand but the consumer doesn’t necessarily if they haven’t travelled abroad.” Mr
Gibbons admits that the shock remained for months after the changeover and he
had to reassure people. “I said: ‘We manage maharajas’ palaces in India. Trust
us and watch us.’”

The group also recently bought Campton Place in Union Square in San Francisco
and assumed management of the landmark The Pierre on 5th Avenue in New York from
the Four Seasons.

Tata’s push into overseas luxury brands is beginning to be emulated by other
Indian groups. DLF, India’s largest property developer, was little known
overseas until late last year, when it bought Aman Resorts, an ultra-luxury
hotel chain with properties in some of the world’s most exotic and remote
locations.

Rajeev Talwar, executive director at DLF, says such high-profile
international acquisitions boost a company’s corporate profile overseas, making
it easier to raise financing and find partners for future acquisitions. “For a
company, that first major foreign acquisition is what an MBA is like for a good
student – it takes you to a higher plane,” Mr Talwar says.

But most analysts agree the real test of how emerging markets companies will
fare when buying premium or high-end brands is Tata Motors’ proposed acquisition
of Jaguar and Land Rover. So far, the proposed takeover – the first attempted
acquisition of a top-end luxury consumer product by an Indian or Chinese company
– has left many analysts puzzled.

Moody’s and Standard & Poor’s, the credit rating agencies, have both
warned that Tata risks stretching its management and finances too thinly by
taking on the marques, especially lossmaking Jaguar. Others ask what Tata can do
for Jaguar that Ford, one of the world’s oldest and most experienced carmakers,
could not. “You may be one of the world’s best managers but you are still
managing something different that you haven’t had any experience with before,”
says Alok Aggarwal chairman of Evalueserve, a research firm.

Critics say Tata could learn from some of the mistakes they say Ford made
with Jaguar. This includes not doing enough to ensure that, in terms of its
style and design, Jaguar kept up with its competitors while retaining its
heritage as an elite brand – although Ford seems to now be addressing this with
its newest models.

“Although Jaguar is historically a very strong brand, I think what they
[Ford] tried to do was keep the old look of Jaguar instead of modernising it and
making it more relevant,” says Ray Ally, executive director at Landor
Associates, the global brand consultancy, in Beijing.

Mr Ally says it is crucial for Tata to ensure that it keeps the Jaguar brand
completely ring-fenced from the rest of the group, like Toyota did when it first
launched Lexus, its luxury car. For example, there should be no Tata badge on
the car or anything associated with the Indian group, to avoid diluting the
Jaguar brand in the eyes of consumers, he said.

Indeed, Ratan Tata, Tata group chairman, has already indicated that this is
what he plans to do. “A lot of people have been making an issue of whether a car
manufacturer that’s in the low end can also integrate with an upper end luxury
car enterprise . . . [but] that assumes that one is going to integrate the
enterprise," Mr Tata told the FT this week.

“If you take Unilever, they may make a soap in Africa for the masses and they
may make a high-class cosmetic product in the UK and that high-end cosmetic
product has its own brand equity . . . Unilever is able to handle both ends of
the spectrum.”

For Tata, the full rewards of buying the brand will only be realised when and
if it manages to turn Jaguar around financially, an outcome that would by
association lift the image of the Indian group as a whole and improve its global
branding power.

In the meantime, Tata and other emerging companies will still have to battle
the stigma attached to companies from developing countries, particularly when
acquiring luxury brand names such as Jaguar and Land Rover. The group already
faced this from Jaguar dealers in the US, whose representative body recently
said US buyers might not be ready for “ownership out of India for a luxury car
brand such as Jaguar”.

Landor’s Mr Ally says part of the problem for Tata is that “Brand India”
remains relatively weak overseas, coloured by people’s perceptions of the
country as strong on call centres and software engineers but not on creating and
managing sexy consumer products.

Indians bridle at such perceptions, pointing to the large number of Indian
managers at the top of global corporations, such as Citigroup and Pepsi. Suhel
Seth, managing partner at brand consultancy Counselage, says notions of India as
a poor country entirely unused to premium goods and luxury lifestyles ignore the
country’s lavish past during the pre-independence era of the maharajas. Some of
this culture carries on today.

“Most Indians who are economically well off lead a life that is far more
luxurious than their counterparts would have in the west,” says Mr Seth.

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