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TATA Motors has paid a penalty for Jaguar Land Rovers’(JLR) inability to buy the agreed quantum of engine components and certain key raw material from the USbased Ford Motors. The sub-optimal offtake had caused a breach in the suppliers agreement. According to an industry source, the penalty, paid last year, was around Rs 250-300 crore. A similar amount may have to be paid this year too.

JLR sources raw materials, engines and engine upgradation materials from Ford to meet new emission standards at competitive rates. Global recessionary trends and a falling luxury car market has forced JLR to cut down on its contracted commitments with Ford Motors. “JLR may have given a volume guarantee to Ford and then may have slipped up in its offtake, with demand of premium cars falling,” said a person close to the development.

A Tata Motor spokesperson declined to comment on bilateral contract terms. However, senior management of the company is understood to have recently admitted to fund managers on the penalty paid in 2008 and it is felt that the company would have to pay a penalty in the current year too.

"We are worried about JLR’s earnings given its over dependence on Ford Motors for raw material sourcing,” said Mahantesh Sabarad of Centrum Broking in a recent report.

In June 2008, when Tata Motors acquired JLR for $2.3 billion, it said in a statement that, “Ford would continue to supply Jaguar Land Rover for differing periods with powertrains, stampings and other vehicle components, in addition to a variety of technologies, such as environmental technologies. Ford is also committed to providing engineering support, including research and development, plus information technology, accounting and other services. The duration and detail of these agreements is commercially confidential,” the statement said.

The deepening recession in the US and UK has hit the demand for luxury vehicles, forcing Tata Motors to cut jobs and consider plant closures. It announced a loss of Rs 1,777 crore for fiscal year 08-09.

Meanwhile owing to the continuing slump in the middle East and in Russia, JLR is offering discounts to push its products. “Jaguar Land Rover’s pricing and marketing support would be monitored as per market realities and in line with competitive trends,” said a company official. However, with the recession easing in developed markets, the new launches of Jaguar will help improve margins for JLR, say industry sources.

The auto major recently said that new product development and R&D would not be affected, it would further tighten its cost control measures which includes further job cuts at its UK operations. Recently, JLR got approval for a loan from the European Investment Bank, but it is still in negotiation with the UK government and private banks for a counter guarantee. The company intends to raise £700 million through debt to fund JLRs R&D needs.

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