Ratan Tata, who runs the Tata Group, one of India’s two biggest conglomerates, is buying into a history of trouble with his $2.3 billion cash deal, announced today,  to acquire the Jaguar and Land-Rover companies from Ford (F). Transfer of ownership to Tata Motors is due to be completed by the end of June, and the  question is whether Tata can then break a cycle of decline.

It’s been 40 years since the British government, in a bid to rebuild the country’s automobile industry, cobbled together ailing car brands such as Jaguar, Rover, Austin, Morris and Riley into a giant called British Leyland. BL, as it became known, was a failure, mainly because of endemic labor problems, uninspired products and poor quality. Since 1968, there have been many rescue attempts, but only rare short bursts of success. Several of the once proud names are long forgotten and none is British-owned; the iconic MG brand was bought three years ago by China’s Nanjing Automobile to make sports cars in China and the U.K., and the Morris Mini cult car is with BMW.

So could Tata succeed where others have failed? Market and industry analysts have their doubts, fearing the companies do not fit and that Tata’s optimism about growth could be hit by worsening economic problems in the United States and elsewhere. Tata Motors shares lost 4.4% on the Mumbai stock market today as brokers awaited the announcement.

But there is some reason for optimism. Ratan Tata isn’t expected to treat Jaguar and Land Rover like a traditional takeover: He says he’s not planning to overhaul senior management, close factories in Britain, or cut workers. He said today: “We have enormous respect for the two brands and will endeavour to preserve and build on their heritage and competitiveness, keeping their identities intact. We aim to support their growth, while holding true to our principles of allowing the management and employees to bring their experience and expertise to bear on the growth of the business.” Ford will continue to supply Jaguar and Land Rover with powertrains and other components, in addition to a variety of  environmental and other technology and support services.

Tata also doesn’t seem all that concerned about instant profits – just as he doesn’t expect instant returns from the tiny Nano car he hopes to launch by year’s end. Instead, he is expected to use the brands and their U.K. plants, executives and labor to help build Tata Motors, which had $7.2 billion sales in fiscal 2007, into a global car company. He’s been on this mission for several years, buying Britain’s Tetley Tea in 2000, a Korea-based Daewoo truck plant in 2004 and steel giant Corus (previously British Steel) last year.

Ratan Tata’s hands-off ownership could win him crucial support as he tries to fold the Jaguar and Land Rover brands into Tata. Mark Norbom, the head of General Electric in Japan, wrote recently in the Financial Times about the importance of the “soft side” of a takeover deal. The “look in the eyes that (the buying) company is worthy” has special value, said Norbom, and is something that “does not come naturally to the typical western-trained dealmaker.” Well, it seems to come naturally to Tata and his people. It was evident in the Corus deal, and it seems to be at work again in their Jaguar and Land-Rover plans.

This could, of course, mean that Tata is seen - especially by British trade union leaders - as a soft option who will let workforces carry on as usual. Land Rover has had three years of record sales for Tata to build on. But there’s no telling how long the status quo can last, especially if demand slackens in the United States and elsewhere and Ratan Tata has to institute cutbacks at the luxury car makers.

Tata has said that Land Rover and Jaguar will benefit from India’s low-cost design and IT ability - and boost sales in Asia. His company will “add value in co-operating on engineering and development which are considerably cheaper (in India) than in the West,” he said. Tata Technologies, the group’s advanced industrial design house, is based in Pune and operates in twelve countries, with international headquarters in Singapore. It has been involved in the design of Tata Motors’ cars and vans, but does about 75% of its work for foreign clients, including Chrysler, General Motors (GM), Boeing (BA) and Airbus.

There’s another question hanging over the deal: Tata’s future once its 70-year old patriarch retires. He is not due to step down until he’s 75 - in December 2012 - but has said he would like to go earlier, and there are rumors it could be at the end of this year.

That seems unlikely, if only because there is no clear successor. From inside the Tata family there is a reclusive cousin, Noel Tata, who runs some of Tata’s retail businesses, but there is no sign of him being groomed for the corporate and public life that goes with the top job. One or two top executives from outside the family, and even outside the Tata Group, have also been rumored, but none has been publicly held out as a successor.

It is Tata who has provided the personal drive and leadership to turn Tata Motors into a business that can produce the Nano and buy two world famous brands - in the same year. There’s a big job waiting for someone – and Tata is not yet saying who. Until it does, the era of uncertainty at Land Rover and Jaguar won’t be over.

Ratan Tata, who runs the Tata Group, one of India’s two biggest conglomerates, is buying into a history of trouble with his $2.3 billion cash deal, announced today,  to acquire the Jaguar and Land-Rover companies from Ford (F). Transfer of ownership is due to be completed by the end of June, and the  question is whether he can then break a cycle of decline.

It’s been 40 years since the British government, in a bid to rebuild the country’s automobile industry, cobbled together ailing car brands such as Jaguar, Rover, Austin, Morris and Riley into a giant called British Leyland. BL, as it became known, was a failure, mainly because of endemic labor problems, uninspired products, and poor quality. Since 1968, there have been many rescue attempts, but only rare short bursts of success. Several of the once proud names are long forgotten and none is British-owned; the iconic MG brand was bought three years ago by China’s Nanjing Automobile to make sports cars in China and the U.K., and the Morris Mini cult car is with BMW.

So could Tata succeed where others have failed? There’s reason for optimism. Ratan Tata isn’t expected to treat Jaguar and Land Rover like a traditional takeover: He says he’s not planning to overhaul senior management, close factories in Britain, or cut workers. And he doesn’t seem all that interested in instant profits – just as he doesn’t expect instant returns from the tiny Nano car he hopes to launch by year’s end. Instead, he is expected to use the brands and their U.K. plants, executives and labor to help build Tata Motors, which had $7.2 billion sales in fiscal 2007, into a global car company. His been on this mission for several years, buying Britain’s Tetley Tea in 2000, a Korea-based Daewoo truck plant in 2004, and steel giant Corus (previously British Steel) last year.

Ratan Tata’s hands-off ownership could win him crucial support as he tries to fold the Jaguar and Land Rover brands into Tata. Mark Norbom, the head of General Electric in Japan, wrote recently in the Financial Times about the importance of the “soft side” of a takeover deal. The “look in the eyes that (the buying) company is worthy” has special value, said Norbom, and is something that “does not come naturally to the typical western-trained dealmaker.” Well, it seems to come naturally to Tata and his people. It was evident in the Corus deal, and it seems to be at work again in their Jaguar and Land-Rover plans.

This could, of course, mean that Tata is seen - especially by British trade union leaders - as a soft option who will let workforces carry on as usual. Land Rover has had three years of record sales for Tata to build on. But there’s no telling how long the status quo can last, especially if demand slackens in the United States and elsewhere and Ratan Tata has to institute cutbacks at the luxury car makers.

Tata has said that Land Rover and Jaguar will benefit from India’s low-cost design and IT ability - and boost sales in Asia. His company will “add value in co-operating on engineering and development which are considerably cheaper (in India) than in the west,” he said. Tata Technologies, the group’s advanced industrial design house, is based in Pune and operates in twelve countries, with international headquarters in Singapore. It has been involved in the design of Tata Motors’ cars and vans, but does about 75% of its work for foreign clients, including Chrysler, General Motors (GM), Boeing (BA) and Airbus.

There’s another question hanging over the deal: Tata’s future once its 70-year old patriarch retires. He is not due to step down until he’s 75 - in December 2012 - but has said he would like to go earlier, and there are rumors it could be at the end of this year. That seems unlikely, if only because there is no clear successor. From inside the Tata family there is a reclusive cousin, Noel Tata, who runs some of Tata’s retail businesses, but there is no sign of him being groomed for the corporate and public life that goes with the job. One or two top executives from outside the family, and even outside the Tata Group, have also been rumored, but none has been publicly held out as a successor.

It is Tata who has provided the personal drive and leadership to turn Tata Motors into a business that can produce the Nano and buy two world famous brands - in the same year. There’s a big job waiting for someone – and Tata is not yet saying who. Until it does, the era uncertainty at Land Rover and Jaguar won’t be over.

At India’s DefExpo defense show this week, Tata announced a string of tie-ups with foreign manufacturers from the United States, Israel and Europe that set it apart from other emerging Indian defense manufacturers like Larsen & Toubro (L&T) and Mahindra & Mahindra.

The Tata group is becoming well known around the world for its low cost car, its bids for the Jaguar and Land-Rover brands, and for taking over Europe’s Corus steel company. Now it is emerging as the Indian market leader in a new area – defense equipment.

The company is transferring India’s proven ability to produce low-cost software and international-quality auto components and cars to the defense and aviation industries, persuading companies like Boeing (BA), European Aeronautic Defense & Space Company and Israel Aerospace Industries that they can benefit by buying from India.

The pairing with IAI is probably the most important announced in the past week. A joint-venture company is planned to develop and manufacture defense and aerospace products such as missiles, unmanned aerial vehicles, radars, and electronic warfare and security systems. With EADS, Tata will be bidding for a long-delayed $1 billion Army communications system, while it is to supply Boeing with aerospace components – including orders for the United States Air Force – totaling $500 million over five to eight years. There is also a helicopter cabin order from Sikorsky Aircraft Corporation.

The main prize that everyone wants is a $10 billion Indian Air Force order for 126 multi-role combat aircraft (MRCA) that is now out to tender. Robert Gates, America’s defense secretary, will push Boeing’s and Lockheed’s bids when he is in Delhi next week to try to revive slow-moving joint defense and security collaboration agreements.

India’s private sector has historically played a very minor role in the country’s $10 billion-plus annual capital expenditure on defense equipment. Up to 70% is spent abroad because the Indian public sector cannot deliver in terms of quality or speed on either research or production. Only about 30% of the orders placed in India (around 10% of the total) goes to firms like Tata, L&T, and Mahindra because the public sector-dominated defense establishment has never allowed the private sector to develop. That is beginning to change, but only slowly.

In June last year, I wrote a post saying India would soon announce names of a small number of Indian private-sector companies - Raksha Udyog Ratnas or, literally translated, “defense industry jewels” - that would be allowed to compete for big research, development and production projects on equal terms with the public sector.

I should have known better, as I wrote last October when it was becoming clear that the policy would be blocked. The names have still not been announced, and it doesn’t appear that they will be, at least until after the general election  next year, because of opposition from Leftist political parties, encouraged by trade unions and the defense establishment.

There is also a new offsets policy which requires foreign defense suppliers to spend 30%-50% of their orders in India. The government has forecast this could generate $12 billion in orders in the next four to five years - among the first will be business from Lockheed (LMT) for six Super Hercules C-130J military transport aircraft costing $1 billion that India ordered earlier this month.

It will be some time however before offsets produce orders that provide economies of scale, so Tata wants to build manufacturing capacity independent of how the Ratnas and offsets develop. Tata Advance Systems has been set up to manage the manufacture and integration of orders, and Tata Industrial Services will match Tata’s and other Indian companies’ capabilities with offset and other requirements from abroad. For large projects, various group companies such as TCS Aerospace (software), Tata Power, Tata Advanced Materials and Tata Motors will pool capital raising and risk management resources.

This will enable Tata, one of the country’s two largest business houses, to build up capacity and scale so that it is ready to manufacture in quantity for the Indian defense forces when it is allowed to do so. It also enables foreign defense companies to get used to working in India at a time when they are about to be forced to use Indian components through the new offsets policy. Other companies are also making similar moves, though none is so wide-ranging as Tata which, so far, is winning.

The American government is rightly pleased about a $1 billion order that has just been agreed with India for six of Lockheed Martin’s Super Hercules C-130J military transport planes that will be used by the Indian army and air force. This is India’s first large order with an American defense company and it comes at a time when its traditional - and massive - defense ties with Russia are under increasing strain.

India has for decades been reluctant to buy defense equipment from America, fearing Congress’s power to block deliveries if it did not approve of Indian military activity or policy at some time in the future. This attitude has been changing in the past couple of years when ties between the two countries have improved dramatically – notably with talks on a nuclear deal, though that is now making little progress.

“With this sale, India is telling us it’s ready to buy top-quality U.S. equipment on its merits,” says James Clad, the Pentagon’s deputy assistant U.S. secretary for South and Southeast Asia. “It positions us to be in the Indian defense market for years to come”. But India’s worries remain, and they will affect how it behaves on other orders, and especially on a $10 billion fighter jet contract where Russian and European companies are bidding against America’s Boeing (BA) and Lockheed (LMT).

The significance of the C-130 order as a breakthrough in defense sales should not be over-stated because there was no rival aircraft on the market. India urgently needs the four-engine C-130 because it does not have a medium-sized transport aircraft that can land on short airstrips. Currently it relies on large and cumbersome Russian IL-76 transport planes and smaller AN32s, whose limitations were demonstrated during the mountainous border conflict with Pakistan in 1999 at Kargil. So it decided to negotiate a government-to-government deal without going out to international tender for the C-130s, which will be delivered from 2011, subject to final price negotiations.

For Lockheed, the deal is important, not only because it brings in $1 billion of business, but because the company will be able to demonstrate to the Indian government and air force how it handles orders. This will include meeting Indian government offset arrangements, which require a supplier to spend 30% of a contract’s value in India. There could also be further orders for two or more aircraft.

Boeing hopes to be in a similar position soon if it can clinch an order for its P-8 maritime reconnaissance aircraft. Other American companies such as Honeywell (HON), GE (GE), Raytheon (RTN), Northrop Grumman (NOC), Pratt & Whitney, United Technologies (UTX), Bell Helicopter Textron, and General Dynamics (GD) are actively chasing orders and tie-ups with Indian defense companies.

The C-130 order has upset Russia, which wanted to offer an upgraded - but not comparable - AN-32 if there had been an open tender. The complaint marks the current strained relationship between India and Russia, which have been traditional allies since India’s independence.

With over $14 billion orders currently in progress for military aircraft, ships, rockets launchers, helicopters and other equipment, Russia is India’s largest defense supplier (followed by Israel), and India is its biggest customer. But the easy days, when Russia saw India as an essential customer and was prepared to meet the county’s demands for specialized equipment and knock-down prices, are over. Late last year it infuriated India by saying that it was doubling the price of an old aircraft carrier, the Gorshkov, that it is refurbishing for the Indian navy.

Russia now has other significant defense customers and wants market prices. But it is not offering India competitive back-up services on quality, training, and spare parts, and this is seriously affecting the operational efficiency of the Indian armed forces. “The Russians now want to sell arms not at ‘friendship’ but commercial prices, without providing ‘commercial’ quality of after-sales service,” Kanwal Sibal, a former Indian foreign secretary and ambassador to Russia, wrote in the Indian Express newspaper yesterday.

This leaves the door open for American companies – led by Lockheed - to show what they can do. But they will have to overcome the problem that there is no history of trust between the two countries. As Sibal put it in his article: “Russia is a trusted partner and trust in defence matters has to pass the test of time and of difficult circumstances”.

India’s political crisis over its proposed nuclear deal with America appears to have gone away, at least for the time being - and with it any prospect of the deal being put into action in the foreseeable future.

This unexpected turn of events emerged this morning at a conference in Delhi where Manmohan Singh, the prime minister and primary promoter of the deal, said that “we are not a one issue government.” He said it was an ‘honorable deal” that had widespread benefits, then added: “But we are in the realm of politics and in our coalition there are divergent points of view” – and there were economic and social policies that the government wanted to pursue before holding an election.

“We are not in favor of an early election,” Sonia Gandhi, leader of Singh’s Congress Party and of the coalition, said later at the same conference that was organized by the Hindustan Times. “We are going to do all we can to go on to 2009,” she added – 2009 is when the next election is due. The Congress Party was “committed to the people to work for a full term” so there was a need to “work towards a consensus with the Left,” which had been opposing the deal. The government had to “take notice of their views.”

I was at the conference and the delegates – businessmen, journalists, and diplomats - were amazed, not least America’s diplomats who didn’t seem to have been warned in advance. It remains to be seen how Washington formally responds (after the weekend), but the administration will be far from happy that a deal struck by the two governments - after being promoted by President George W. Bush and Secretary of State Condoleezza Rice - is being unceremoniously shelved. American companies will also be upset that the prospect of rich nuclear and other contracts are fading into the distance.

Basically though, Singh and Gandhi have taken a sensible decision. The nuclear deal was going to split their coalition because of staunch opposition from Leftist parties and was likely to cause a general election – and for what? On the table was a deal that could boost nuclear power generation years ahead and might ease India’s access to sensitive technologies in the future – but which, however, might not be liked much by the next American administration. From India’s point of view, it can wait - and the government can stay in power

It is not yet clear how all this will be implemented as policy. Possibly, the government will just go slow on talks with the International Atomic Energy Agency. I said three days ago in my last post, “India’s Nuclear-induced political brinkmanship,” that it was not clear how long India would be prepared to go slow. Now it looks as if it could be indefinitely – maybe till there are new governments in both America and India.

So, unless there is another change of tack by the Indian government, I was wrong three days ago to forecast a general election early next year. But politics move fast – and chaotically in coalitions – so watch this space.

India’s politicians, media, and political analysts are in a frenzy. One day the country seems to be on the brink of an imminent general election, and the next day it is not; at least not yet and maybe not till well into next year.

There are frequent bust-ups – accidental, simulated or real - between the Congress-led government and the block of Left parties that support it in parliament. It’s real election fever stuff – maybe though not so feverish as in Britain last week before Gordon Brown chickened out of holding a general election. And, unlike Britain, the decision on having an election here is not down to one man but is dependent on the political swings of people who are fairly new to such brinkmanship politics – Manmohan Singh, the prime minister, Sonia Gandhi, the leader of the coalition, and the Left parties.

The subject that’s causing all the fuss is the proposed nuclear deal which would give India access to nuclear fuel and technology for its electric power program from America and elsewhere, and build a strong diplomatic as well as economic bond between the two countries. There would also be other benefits for Indian industry, which would gain international access to sensitive technologies as well as potential orders in the space and defense fields – all of which have been progressively denied to India since its nuclear tests in 1974 and 1998.

These are substantial benefits and they have led to the deal being generally supported by a considerable majority of politicians, bureaucrats, scientists and opinion formers in India. But the deal is firmly opposed by the Left which (not surprisingly) distrusts and opposes such a close and dependent relationship with America. The Left also fears (justifiably) that America could and would cut off the nuclear supplies and other advantages if a future government in Washington opposed something India did, despite safeguards negotiated as part of the proposed deal. Washington says that such a cut-off is unlikely because there would be a large number of powerful US companies such as Boeing, GE, Raytheon, and Lockheed Martin that would lobby against losing business - but that does not satisfy the critics. There are also questions (though, sadly, little real debate) about whether potentially expensive nuclear power is the right way to tackle the country’s power shortages, and about whether the main beneficiaries would perhaps be American contractors.

Two determined men are facing each other over the deal – and thus the future of the government. One is the prime minister who, supported by Gandhi, sees the deal as significant historically as the seminal economic reforms that he introduced as finance minister in 1991. He has even talked about resigning if the deal does not to go through. The other is Prakash Karat, the hard-line leader of the CPI-M, India’s biggest communist party that leads the block of 60 Left party MPs. Karat seems determined to withdraw support from the coalition if the deal proceeds, even though he knows that such an action would remove the government’s parliamentary majority and could lead to a general election before the due date in 2009.

The first option that I outlined in a post on August 23, 2007 - “India’s government risks being nuked” – is therefore now in play. The government is buying time with the Left by going slow on operationalising the deal through talks with international nuclear authorities. The current on-off crisis stems from uncertainty about how slow the government is prepared to go and how rigidly the Left will eventually block the deal. Specifically, in line with America’s wishes, the government wants to start talks soon on nuclear safeguards with the International Atomic Energy Authority (IAEA), the UN’s nuclear watchdog, and the Left says it will withdraw parliamentary support if and when that happens. (Mohamed El Baradei, the head of the IAEA, is in India this week on a long-scheduled visit that includes a speech on Friday at a conference dealing with India’s role in the world). The next steps would be to seek agreement from the multi-national Nuclear Suppliers’ Group, which meets in Vienna next month, and then to put a completed package to the US Congress in the New Year.

The next stage, as I outlined in August, would be for the Left to withdraw support from the government, which would then continue to operate as a minority administration till it is defeated in parliament, or until Congress decides to call for a general election. It is hard to guess when that withdrawal might take place because the Left does not want to precipitate an election. Congress on the other hand, while weak in grass roots organization, would face an election confidently because the main opposition party, the Bharatiya Janata Party (BJP) is in disarray, with no clear leader to take over from the ailing Atal Behari Vajpayee, the former prime minister. Recent opinion polls have indicated that Congress would return to power leading another coalition, and Congress activists have been energized by the recent appointment of Rahul Gandhi, Sonia Gandhi’s 37-year old son, as a general secretary of the party as her heir-apparent.

But a quick election is not in the cards. The government is being urged by America to finalize the nuclear deal as quickly as possible, ahead of the American presidential elections next November, so Gandhi and Singh would want to do that before going to the polls. In the meantime, it should be quite possible for the government to continue operating with a minority in parliament, supported by the Left on non-controversial issues – unless the Left becomes so enraged with the finalizing of the deal that it provokes an election-inducing crisis. Nothing is therefore definite - but best to bet for now on an election around March or April next year.

The Indian government will soon make defense production history by naming a small number of leading Indian private sector companies as raksha udyog ratnas – literally defense industry jewels - that will be allowed to compete for big research, development and production projects on equal terms with the public sector.

A Ministry of Defence (MoD) committee headed by Prabir Sengupta, a former secretary for defense production, yesterday (June 6) presented its report on the subject to A.K. Antony, the minister of defense. The names will be published soon, when they have been cleared by a co-ordination committee. They will include parts of the Tata group, Larsen & Toubro (L&T), Godrej, and Mahindra & Mahindra, plus a handful of others. A few are already involved in very limited sub-assembly work ranging from parts for rockets to a nuclear submarine hull.

The ratnas will be allowed to design and manufacture major weapons platforms and systems including equipment developed by the DRDO, the country’s leading but unproductive research establishment which has previously worked with the public sector. They will also be allowed to manufacture foreign defense systems and to carry out government-funded research and development. This is a big step forward, though it remains to be seen how quickly and effectively India’s massive and powerful public sector defense establishment mobilizes to obstruct progress and protect its jobs and booty.

The country has a huge defense budget, including an allocation of $10.5 billion this year for capital expenditure on military equipment - $4 billion for the air force, $2.8 billion for the army and $2.5 billion for the navy. About 70% of the budget is spent abroad because the Indian public sector cannot deliver in terms of quality or speed on either research or production. And only about 30% of the orders placed in India - or 9% of the total - goes to the private sector. Indian companies have consequently been wary of undertaking large-scale investment programs because they have been uncertain about what the MoD would actually let them do.

Only two primary contracts have been awarded so far. They went last year to Tata Power and L&T, when each company won a $20 million rocket launcher order for the army’s Pinaka defense missile system. Till then, primary integration work had been done by the public sector with some components supplied by the private sector. Russia is India’s biggest foreign supplier followed by Israel, then other European countries, with the U.S. having only a tiny role because of restrictions on what it can sell. A major effort is now being mounted by the U.S. to replace Russia as the lead supplier, especially if current talks between the U.S. and India on a nuclear pact lead to restrictions being relaxed. More than 20 U.S. companies exhibited four months ago at the biennial Aero India air show in Bangalore. Names such as Boeing (BA), Lockheed (LMT), Honeywell (HON), General Electric (GE), Raytheon (RTN), Northrop Grumman (NOC), Pratt & Whitney, United Technologies, Bell Helicopter Textron, and General Dynamics are among the most active. Some have already tied up with Indian companies such as Tata and L&T, or are talking about doing so - and the new ratnas will be prime targets, because of their privileged roles.

India’s defense private sector has been left behind by the wave of liberalization and deregulation that has affected virtually every other area of manufacturing in the past 15 years. Moves to change that began in 2002, when it was announced that the private sector would be allowed to do more work, and that foreign investment stakes of up to 26% would be allowed in joint ventures.

But only about 30 private-sector manufacturing licenses have been issued to around 20 companies and little work has been awarded. And only a handful of small foreign joint ventures have been signed. Foreign companies are not prepared to hand over new technology when they are only allowed 26% stakes - though one joint venture for aero engine components, between Snecma of France and government-owned Hindustan Aeronautics (HAL), has been allowed as a 50-50 split. The MoD now has a chance to introduce real reforms, though opposition from trade unions and leftist political parties is beginning to appear. Whatever happens, those vested interests will have to be appeased, and that will slow the pace of reform – as always.