On Tuesday, Jaguar Land Rover (JLR) posted a pre-tax loss of £264 million for the quarter ended June. While the company said it expected trading to improve in the rest of the year, it focussed attention on the luxury brand, and whether it would continue to be the golden goose of Tata Motors that it has been.
JLR has long been cautioning the market about the potential impact of Brexit, but it was developments in China that it pointed to when it came to the latest figures. As part of the liberalisation agenda in China, import duties on vehicles were reduced from 25 per cent to 10 per cent on July 1, 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 liberalisation under way in China ought to be a plain vanilla positive for the company (beyond the July 1 date). But like all other global carmakers, JLR is facing a host of challenges surrounding the uncertainty around trading and tariff barriers, particularly between Europe, China and the US (important markets for JLR) kicked off by US President Donald Trump, as well as, of course, Brexit.
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 abroad will follow in its footsteps remains unclear.
CEO Ralf Speth pointed to Brexit on Tuesday, alongside the impact of uncertainty over diesel policy in Europe (and the UK in particular, where new stringent diesel taxes for older vehicles came into force earlier this year ), which has severely dented consumer appetite.
‘Perfect storm’
“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 pressures on carmakers — requiring them to re-test 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 much impacting the is beyond its control, it is on diesel that JLR made one of its fundamental wrong calls, argues Bailey. “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 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.
Many positives
However, there are many positives. The Jaguar I-Pace — the company’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 Fletcher, pointing to the Range Rover Velar and the I-Pace which he said 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 said.
Innovation of course can only do so much 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 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 ₹2,510-crore loss in 2009, only for JLR to bounce back quickly, becoming Britain’s largest carmaker in 2016.
“I think there has been an element of over-optimism within the company,” says 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. 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,” says Bailey.