Jaguar Land Rover’s June quarter pre-tax loss of £264 million that dragged parent Tata Motors’ earnings into the red has focussed attention on the luxury brand and raised questions over its continuance as the golden goose for the automaker.
While JLR has long been cautioning the market about the potential impact of Brexit, it was developments in China that it cited as a major contributor to the latest loss. As part of the liberalisation agenda in China, import duties on vehicles were cut on July 1, from 25% to 10%, which led to consumers there delaying new purchases ahead of that change. “It was a big hit for them but it was a temporary hit,” says Professor David Bailey, professor of industry at Aston University.
In any other world, the duty reduction in China ought to be a plain vanilla positive for the company (beyond the July 1 date), but like other global car makers, JLR is facing a host of challenges surrounding the uncertainty around trading and tariff barriers particularly between Europe, China and the U.S. (important markets for JLR) kicked off by U.S. President Donald Trump, as well as, Brexit.
‘Perfect storm’
In early July, JLR issued its starkest warning — timed to be just ahead of the Prime Minister’s high profile Chequers summit — that a no-deal Brexit could cost the company more than £1.2 billion in profit each year, putting £80 billion of further investment and jobs at risk. The company is already set to expand production beyond Britain with its new plant in Slovakia, where the Land Rover Discovery is set to be produced. How much more production will move abroad remains unclear. CEO Ralf Speth pointed to Brexit on Tuesday, alongside the impact of uncertainty over diesel policy in Europe (and the U.K. in particular where new stringent diesel taxes for older vehicles came into force earlier this year), which has severely dented consumer appetite.
“It was a perfect storm,” says Ian Fletcher, principal analyst at IHS Automotive, of the conditions facing JLR in the quarter. He also pointed to the introduction of Europe’s new emissions testing procedure WLTP, which will come into force in September, and which has put additional pressure on car makers — requiring them to retest all vehicles to meet the new standards, as well as sell off stock that doesn’t meet the standards (potentially at a discounted rate).
While a lot of what is impacting JLR is beyond its control, it is on diesel that Mr. Bailey argues that JLR made one of its fundamental wrong calls.
“Certainly the government has made a mess of diesel policy, which has been all over the place, but JLR have been very slow in developing hybrids,” he says, explaining that the company instead put its focus on developing lighter vehicles (through the use of aluminium), and “ignored” the shift into electrification and hybrids, which had left the company among the “most exposed’ in Europe to the vagaries of increasingly punitive diesel policies. “They were far too slow to respond and they are taking a hit,” he says, recalling a conversation two years ago with a senior member of JLR management who had insisted that the focus on lighter vehicles was the right one.
“The shift away from diesel across Europe has been relatively sharp,” says Mr. Fletcher, pointing to the Volkswagen emissions scandal as the turning point that accelerated the push for change from policy makers. While the industry had begun to respond and change it was rather like “turning around a super tanker” and likely to take several years.
However, there are many positives: the Jaguar I-Pace — JLR’s first fully electric vehicle — has been welcomed by auto experts and the automotive media. “The products they have been producing are very strong,” says Mr. Fletcher, pointing to the Range Rover Velar and the I-Pace which he says was set to be a “great marketing tool” for the company, particularly as it had been brought to market ahead of similar products by competitors. “It’s the first proper electric premium vehicle beyond the Tesla,” he says.
Innovation of course can only do so much a in a challenging global environment. “They have good management but it’s a small company, a quarter of the size of BMW and with limited resources,” says Mr. Bailey.
Of course, it’s easy to forget that Tata Motors faced very challenging circumstances when it first took JLR off Ford’s hands in 2008 for $2.3 billion. After facing scepticism about its ability to manage the iconic luxury brand, the financial crisis struck, sales at JLR plunged and Tata Motors reported a ₹25.1 billion loss in 2009, only for JLR to bounced back quickly, becoming Britain’s largest car maker in 2016.
“I think there has been an element of over-optimism within the company,” says Mr. Fletcher. “They have ridden the tide as the markets were rising and there was strong demand for a premium demand. Now we are seeing them hit by headwinds and having to think about things like operational costs a bit harder, how the business is run and making choices. Now it’s going to be about directing investment appropriately and being clever about it.” On this count, JLR had shown positive signs, including focussing on sharing between platforms and architecture which helped ensure plants were more flexible and helped cut costs, he says.
“Back in the financial crisis things were a lot worse — the crisis was terminal for some companies,” says Mr. Bailey. “The situation isn’t as bad as that now but what we are seeing is a need for massive investment in new technologies combined with the ability to deal with market shocks, and of course huge uncertainty.”
