Indian Auto Industry – A New Era

In the second half of 2007, Ford put on block two iconic British brands Jaguar and Land Rover for sale. Cash-strapped Ford, which lost about $12 billion in 2006, had been looking to sell the British luxury marques. Jaguar and Land Rover have been hit by unfavourable exchange rates and high production costs in Britain.

Two leading Indian conglomerates, Tata Motors and Mahindra & Mahindra (M&M) as well as U.S. private equity firm One Equity Partners led by former Ford CEO Jacques Nasser emerged as leading contenders.

As per industry sources M&M have pulled out the race citing complexities in the way the deal was structured. M&M decided against pursuing the deal as there were concerns related to Intellectual Property Rights (IPR) associated with the two brands. Crucial IPRs relating to the brands are locked in with the US auto major, making it difficult for the eventual winner to derive full benefits unhindered.

This development is expected to strengthen the case for Tata Motors. Tatas have emerged as the strongest contender in the race due to the group size as well as existing operations in the UK — especially after the acquisition of Corus — that helped tilt things in its favour. Unions at Jaguar and Land Rover are also backing Tata Motors' offer for the brands, according to published reports.

However the company faces potential trouble in the United States. The Jaguar’s US dealer association has expressed concerns that an Indian owner would devalue the luxury marque. Back home in India, Tata Motors is currently in the process of launching its ‘People’s Car’ with a price tag of about $3,000, which is about one-twentieth of the cost for least expensive Jaguar model.

Ford is on track to announce the sale early next year.

Sovereign Wealth Fund

Saudi Arabia is planning to establish what could be the world’s biggest sovereign wealth fund, worth more than $900 billion. Current title holder Abu Dhabi controls more than $850 billion in assets.

Of late government-owned investment funds in the Middle East and Asia are playing an increasingly active role in channelling capital to western companies. Gulf investors have spent about $70 billion on overseas acquisitions this year. With oil hovering around $90 a barrel, Gulf producers including Saudi Arabia and U.A.E. earn more than $1.2 billion a day from their energy sales.

Abu Dhabi -

1. Citigroup Inc., the biggest U.S. bank by assets, received a $7.5 billion cash infusion from Abu Dhabi Investment Authority (ADIA) to replenish capital after record mortage losses wiped out half its market value in November. With the purchase of a 4.9% stake, ADIA would rank as Citigroup's largest shareholder.
2. Another state-backed firm, Mubadala Development Co. bought a 7.5% stake in buyout firm Carlyle Group.

Dubai -

1. Dubai World invested as much as $5.1 billion in MGM Mirage, to try to tap into the Las Vegas based company's U.S. gaming and real estate earnings in August.
2. Dubai International Financial Center bought a 2.2% of Deutsche Bank AG in May

Saudi Arabia -

1. SABIC, the biggest chemicals company by market value, bought General Electric Co.'s plastics unit for $11.6 billion in a record acquisition for the Gulf.

China -

1. Bear Stearns, the fifth-biggest U.S. securities firm, sold a 6% stake to government-controlled Citic Securities Co. for about $1 billion.
2. Earlier this May, China Investment Corp., the nation's $200 billion sovereign wealth fund paid $3 billion for a stake in private equity firm Blackstone Group LP.
3. Barclays Plc, the U.K.'s third-biggest lender, sold a 6.7% stake to China Development Bank in July.

Singapore -

1. UBS, the world's largest wealth manager sold a roughly 9% stake to the Government of Singapore Investment Corporation this month to stop a fresh round of subprime writedowns.

Merrill Lynch predicts the value of assets controlled by the funds will quadruple to $8 trillion by 2011, and that they could soon exceed the entire hedge fund industry in terms of market influence.

Rising EPC Costs

EPC (engineering, procurement, construction) costs have surged rapidly in the GCC.

Costs on the Qatalum Project in Qatar were recently revised upwards to $5.6 billion from an original $4.8 billion estimate mainly because of rising EPC prices.

Other major projects that have experienced cost inflation include -

1. Pearl GTL Project (Royal Dutch Shell), Qatar
2. Ras Tanura Petrochemical Complex (Dow Chemical & Saudi Aramco), KSA
3. PETRORabigh Complex (Saudi Aramco & Sumitomo Chemical), KSA
4. Qatar Petroleum and ExxonMobil scrapped plans earlier this year to build a large GTL plant.

The EPC costs, which include factor inputs, contractor’s margins and systematic pricing of project risk by the contractor, make up as much as 70% of the total project cost. The following make up the factor inputs -

1. Materials - Costs for materials such as steel, copper and concrete have increased dramatically in the last three years.
2. Manpower - Shortage of skilled workers has pushed up the cost of hiring or contracting qualified personnel.
3. Services/equipment - Costs for energy-related services, such as contracts for offshore drilling rigs, have nearly doubled within the last year in some locations due to the sharp rise in industry activity.

Pearl GTL Project

In July 2006, Qatar Petroleum (QP) and Royal Dutch Shell announced the launch of the Pearl Gas to Liquids (GTL) project in Ras Laffan Industrial City, Qatar. The project will accelerate the strategy of diversifying natural gas usage and will serve to promote Qatar's ambition of being the GTL capital of the world.

Facts & Figures -

1. The Pearl GTL project comprises the development of upstream gas production facilities as well as an onshore GTL plant that will produce 140,000 barrels per day (bpd) of GTL products as well as approximately 120,000 bpd of associated condensate and liquefied petroleum gas. The project includes the development of a block within Qatar's vast North Field gas reserves (the largest single non-associated gas field in the world).
2. The plot size of 1.6 x 1.4 kilometres is more than 450 football fields.
3. The project will require 3000 items of equipment including - pumps, compressors, columns, and vessels.
4. The project will cost anything between $14bn and $18bn before its 2010 opening. Costs have skyrocketed since the project was first initialed (original estimate - approx $6bn). With inflation now at the highest levels, the prices of every resource (material, manpower, equipment) that goes into the construction of what promises to be a modern day marvel have shot up multifold.
5. During the construction phase, the project will employ around 35,000 staff.

Oil at $100/barrel?

The price of oil has surged since the start of 2007 (approx $55/barrel). The rise can be attributed to the following factors -

1. Political instability in the Middle East i.e US-Iran relations, Iraq
2. Supply disruptions in key producers such as Nigeria
3. Strong demand from emerging nations such as China and India
4. Weaker dollar (makes oil cheaper for holders of other currencies)
5. US crude inventories