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.

Ratan Tata has achieved his dream. This morning the chairman of Tata Sons, one of India’s two largest companies, unveiled his “Peoples’ Car” at a pop star-style media circus staged at the Delhi auto show. He fixed the price of a basic 623cc model at the much vaunted level of one lakh (a hundred thousand) rupees or about $2,500. That makes it the world’s cheapest car, though it may not be very profitable. And he named it Nano – to conjure up high tech and small size images.

“A promise is a promise” he said, announcing the price. When I asked him whether the figure would otherwise have been higher, he said the promise had been a response to what had appeared in the media. This had become “a challenge” that he felt he had to meet. He’s proud that he has launched “a means of transport that does not exist”, enabling families to move up-market faster from motor cycles that frequently carry three young children as well as parents.

The basic model of this handsome elongated bubble of a car will have the dealer price of $2,500 but will cost the consumer about $3,000 with tax and delivery costs when it is launched toward the end of this year. That is about three times the price of an average motorcycle and half that of the Maruti Suzuki 800cc saloon, currently India’s lowest priced car. More luxurious versions, with air conditioning and other features, will be priced higher. The car is unlikely to be exported for three years or more but, when it is, extras such as air conditioning and power brakes and steering would be added.

Rajiv Bajaj, managing director of Bajaj Auto, claimed this week when he launched a concept $3,000-plus car to be developed with Renault and Nissan (NSANY), that Tata (TTM) had never said his one-lakh car would be profitable. Today Tata dodged the question, saying the auto show was “not the platform to talk about breaking even.” Margins would be “spread over several models” and, with variants, the car would be “a profitable proposition for the company.”

Contrary to recent mocking jibes, Nano would meet all emission, pollution and safety norms, though its basic India version would not be sufficient for full European emission and side-crash requirements, nor have an air bag. Its maximum speed will be about 65 miles an hour with regular gas (diesel will follow later) consumption of 50 miles to the gallon.

Tata would not say much about how the low price has been achieved beyond that his Indian designers had “shrunk the package of the car” so that less steel and other materials are used, along with a smaller engine. But it is only 8% smaller than the Maruti 800, though it has, Tata claimed, 21% more inside space. Some savings will come from locating suppliers on the same site as the main Tata Motors factory in West Bengal (which has been hit by rows over use of land). Further savings might be made later by using subcontractors to assemble cars nearer the point of sale.

Overall, Nano is undoubtedly a major achievement for Indian design and manufacturing. It is also a huge personal success for Tata, whose ideas have been met with widespread incredulity since he first broached the idea nearly ten years ago of moving families off dangerously overloaded motor bikes and into the relatively greater safety of a low cost car.

He has said recently that he would like to retire before too long and that it would be a good time to do so when the Nano is fully launched. He is now 70 and is due to go by the time he is 75. “I do not want to go out in a wheelchair,” he recently told Business World, an Indian business weekly. But first he has to find a successor who can provide the widely diversified and growing Tata group (currently bidding for the Jaguar and Land-Rover car businesses) with the type of strong leadership that he has achieved - and that seems to be posing him with a more difficult challenge than designing and unveiling the Nano.

After a string of successes, India’s industrial giant, Tata, has hit a rough patch in the United States. Advances made by Indian Hotels, which runs the Taj brand, to Orient-Express (OEH), the U.S. owner of luxury hotels, trains and cruises, have been firmly rebuffed. And American dealers selling Jaguar cars have objected to Ford selling the British luxury brand to Tata Motors (TTM).

The setbacks are a blow to Ratan Tata, chairman of Tata Sons, the group holding company, and one of the world’s 25 most powerful people in business. Early this year, he scored his biggest triumph when Tata Steel bought Corus, the British steel company, for $12.1 billion, defeating a strong rival bidder, CSN of Brazil, in a dramatic knock-out contest. Now Tata is bidding along with Mahindra & Mahindra (M&M), another leading Indian autos-based company, to buy the Jaguar and Land-Rover brands from Ford (F).

Some analysts question whether Tata Motors can handle Jaguar and Land-Rover, especially their difficult trade unions. Critics also point out that Tata is more focused on smaller cheaper cars – including a low-end model now in development that it plans to sell for around $3,000. That feeds U.S. dealers’ worries that Jaguar would lose its upscale image if it were Indian-owned - whether it’s bought by Tata or M&M. 

Ken Gorin, chairman of the Jaguar Business Operations Council, which represents Jaguar car dealers in the U.S., has said that Ford should sell the two brands to another bidder, One Equity Partners, a private equity arm of J.P.Morgan Chase (JPM). He’s reportedly concerned that the American public won’t accept a luxury-car brand such as Jaguar “out of India.”

Gorin, of course, doesn’t get to decide who buys the brands, and the deal is still open - with Tata being tipped to win in some reports. But he has a point: Indian manufacturing is only starting to gain acceptance internationally. Foreign car companies are increasingly looking to India for supplies of components and even complete cars – Suzuki Motor announced last week that a factory near Delhi will supply its planned A-Star car to Europe and elsewhere. But A-Star is not a luxury model.

Perceptions about the low quality of Indian products are also behind Orient-Express’s rebuttal of Tata’s moves for a closer relationship. Indian Hotels increased its stake in Orient-Express to 11.5 percent recently, prompting Paul White, the CEO of Orient-Express, to say a combination was not in his company’s interests. “Any association of our luxury brands and properties with your brands and properties would result in a reduction in the value of our brands,” he told Indian Hotels, which is expected to respond to the rebuff shortly.

White’s remarks shocked officials at Tata’s Taj hotels, who deem their hotels to be one of Asia’s, and maybe the world’s, best. Taj hotel guests, however, do not always rate them so high: There are frequent complaints about the quality of service and inferior finishes. The group’s award-winning Taj hotel on the waterfront in Mumbai is one of Asia’s most splendid buildings, but service there does not always match the elegance.

 So it is perhaps not surprising that White has serious reservations. What is more curious is that Tata has pursued the company despite the cool reception. Ratan Tata recently said in a television interview that he does not like hostile takeovers.  “We walk in the face of opposition on an acquisition bid,” he said. What’s more, he denied that Indian Hotels is seeking to acquire the Orient-Express. Tata approached Orient-Express management “basically to seek an alliance and were misunderstood,” he said.

Meanwhile, Indian jingoism is on the rise in the media and among the country’s politicians. “Racism can’t halt Indian takeovers,” declared the Economic Times, a leading business daily, slamming “quasi-racist slurs.” Kamal Nath, India’s outspoken commerce minister, said “there cannot be any discrimination against outward investment from India.”

The bluster is unfortunate. A more effective tack for Indian officials would be to accept that their country is just beginning to lose its decades-long reputation for dreadful quality – and to vow to show the world that it can do even better.

India’s auto industry has been gaining favor internationally as a source of components, but no-one has showed as much faith in its completed cars as the Suzuki Motor Corporation, which announced today that India will be the only production centre for its planned small “world car”, currently called the A-Star. Production will start at the company’s Manesar plant near Delhi next October and build up to 150,000 a year - 100,000 for export to Europe and 50,000 for India. A slightly modified model will be marketed in Europe by Nissan under a supply-contract between the two companies.

The A-Star will be unveiled at India’s motor show in Delhi next month. It is to be a five-door hatchback and sales will be spread beyond Europe after the launch. A new one litre aluminium engine and manual transmission will be produced in India by Maruti Suzuki and Suzuki Powertrain, a Suzuki subsidiary.

Osamu Suzuki, the company’s 77-year old chairman, would not put a price on the vehicle when he announced it in Delhi yesterday, nor comment on whether the company might produce what is euphemistically called the “one lakh car” planned by Renault and by India’s Tata Motors – the more likely price is around $3,000 or 1.2 lakhs of rupees (Rs120,000) according to Carlos Ghosn, CEO of Renault, who is talking to India’s Bajaj Auto about co-production.

Suzuki visibly brightened up when I asked him about this car. With eyes twinkling, he queried what sort of car it would be. He didn’t quite go so far as to doubt whether if it would have an engine or wheels, but he did say that ”we don’t know about safety and Co2 norms, nor production norms”. Having just explained that the A-Star would have “world-class environmental compatibility and comfort” with emissions “lower than European competitors” he asked “does it have an air bag or not” – knowing presumably that the answer is probably no. Teasingly, he added: “We don’t even know if $3,000 is the parts’ cost or the retail cost”, so it was “difficult to respond” whether he could produce it or not.

The significance of these remarks is that he does not seem to be worried about the “one-lakh” car eating into the 54% market share enjoyed by Maruti Suzuki, the Indian company that started out 24 years ago as a joint venture with the Indian government and is now 54% Suzuki owned. Maruti was a trailblazer when it began because there were no adequate component suppliers, and the country’s potential manufacturing strengths that had been suffocated by government controls. That has now all changed and auto component and vehicle manufacturers are now leading Indian manufacturing industry in terms of quality and, as I said, world acclaim. Suzuki plans $1.8 billion investment in the country between now and 2009

But Suzuki was shy about why he has no current plans to sell the A-Star in Japan. On that he would only say: “Suzuki already has a mini car on sale in Japan so it is not required”. Surely he can’t be avoiding sullying his Japan sales with a “made in India label?

It’s a good idea that has gone wrong and, so far, it has created more problems than it has solved. India’s latest attempt to introduce a network of China-style Special Economic Zones (SEZs) has led to a crisis over the use of rural land for industrial development, and government efforts to solve the problem have failed to stem the opposition.

In an attempt to boost industrial investment, India’s parliament passed legislation in February of last year that offered companies dramatically enhanced tax breaks to encourage them to develop zones. A flood of applications for over 400 zones followed, of which over 230 quickly received initial approval and over 60 were formally notified, though only a handful have successfully started.

Protests quickly built up, mainly over the use of rural agricultural land. In the state of West Bengal politically-backed opposition escalated to such an extent that 14 people were shot and killed by police during a demonstration in March. By that time, sensing loss of essential rural support in state-level elections, Sonia Gandhi - leader of India’s coalition government - had said agricultural land should not normally be used for SEZs – a difficult objective to fulfill – and the government had frozen all new SEZ approvals.

That pleased the protestors, but would-be investors objected to the delay, and persuaded the government to lift the freeze in early April. Concessions were proposed, including limiting the maximum land area allowed for each zone to 5,000 hectares (12,500 acres), and requiring that at least half of an SEZ should be used for manufacturing and other core activities.

This looked fairly impressive when it was announced, but there is still opposition from people who risk being displaced – illustrating that Gandhi’s Congress Party needs to devise policies that protect the poor while enabling India’s surging economy to continue to grow. As a first step, a new rehabilitation policy is being finalized this week which will probably cover people displaced by all major industrial projects, not just SEZs.

The lesson for investors is to be wary of plans that depend on state governments delivering sensitive land. The new SEZ rules say that the developer should do the land acquisition, but that is being criticized because it will make helpless rural people vulnerable to big business pressures. Land transfer in India is never as easy as it looks, especially now that the gaps between India’s well off and the desperately poor are becoming rapidly wider. This means that changes of land use will become even more controversial, especially when those to be displaced believe that local politicians, officials and businessmen plan to make big personal profits at their expense.

The main issue is the plight of farmers and landless laborers, plus tribal people who live in remote areas, many of whom have had their land for generations. The authorities claim that they will be fully compensated, and the April announcement said an SEZ should provide one job for every family displaced.

But that scarcely begins to tackle the scale of the problem, especially for those who have never had proper legal ownership documents. The landless and those without ownership rights fear they will be shunted out and forgotten, while those with some paperwork fear they will be cheated by local officials and their henchman, as often happens in rural India.

As plans developed late last year, there was special concern about some large projects, including two mammoth schemes planned in Mumbai and Haryana (just outside Delhi) by Reliance Industries, one of India’s two biggest groups, where farmers are still protesting.

In West Bengal, the state government led by the Communist Party of India-Marxist (CPIM), ran into trouble with two projects. One was a 10,000-acre SEZ at Nandigram for Indonesia’s Salim group to build a chemicals complex, and the other was a Tata Motors factory at Singur (not in an SEZ) for a planned “one lakh ($2,300) car”.

Then West Bengal opposition politicians moved in. First, Mamata Banerjee, a former central government minister and leader of an anti-communist party called the Nationalist Trinamool Congress, realized she could use the growing dispute to rebuild her faltering career as a regional leader. Other opponents of the CPIM united to fight the Nandigram plans, culminating in the shooting.

The Tata dispute has now cooled down, and the project is going ahead, but Nandigram has been shelved. Protests have also built up over the use of rural land elsewhere. Steel projects planned for example by Posco of Korea and by Arcelor Mittal - the world’s biggest steel group, controlled by Lakshmi Mittal, a London-based, Indian-born entrepreneur - are facing serious delays.

Last year, the applications for SEZs were eagerly promoted by state governments and by Kamal Nath, the minister for commerce and industry, who unrealistically hoped that they would account for $5-6 billion of foreign direct investment by the end of this year. But the finance ministry was never happy because it felt that excessive tax concessions were being offered for little return. Other critics said there would be little additional investment because companies would switch factories planned for other areas into the tax havens.

Looking back, it is clear that Nath rushed out a headline grabbing policy that excited developers of all sorts - not just industrial and service sector companies. Neither he nor the companies took enough time to care about people who would be displaced.

The result is a classic example of how India’s democracy, usually touted as a key attraction for investors, can slow down policy development and investment plans. As any company trying to do business in this ultimately rewarding but continually frustrating country quickly discovers, Indian democracy doesn’t just mean that decisions are taken by elected bodies from parliament downwards. Everyone in vocal India wants a say, and those with political and financial muscle usually get more of a say than others. In this case, politicians sided with the poor who were getting a raw deal.