Jaguar Land Rover, a subsidiary of Tata Motors, has been hit by the outbreak of the coronavirus, with its retail sales in China down by 85 per cent year-on-year in February; this is expected to recover only gradually. The spread of the virus to other markets such as South Korea, Japan, and Italy will also impact sales in those markets, Tata Motors said in a statement on Friday.
Even though over 80 per cent of dealers have resumed operations in China — up from 20 per in the first half of the month — they are operating with reduced staff and facilities. JLR expects this to improve over the course of March, it said.
The reduction in China sales resulting from the coronavirus spread is estimated to reduce JLR's full year EBIT margin by about 1 per cent, it said. However, free cashflow in Q4 is still expected to be modestly positive and JLR has £5.8 billion of total liquidity at December 2019, it pointed out.
This is in the backdrop of JLR sales in China having grown on an average at about 25 per cent y-o-y during the six months from July to December 2019. It continued to see “strong growth” for the first three weeks of January, the company added.
Operating below capacity
Suppliers in China are restarted operations but remain below full capacity, it added. Over 95 per cent of its tier-1 and tier-2 suppliers are now open, but at reduced capacity. JLR is engaged with its suppliers on the status of their sub-tier suppliers in China, it said. But JLR’s supply chain is primarily based in Europe and the UK, with a relatively small percentage of direct parts coming from China, it said.
JLR has managed to avoid potential parts shortages by working closely with its suppliers and with some increased use of air freight, it said..
“In the event of specific parts shortages, JLR would ordinarily be able to still build cars and retrofit missing parts when available; however, we cannot rule out the risk that a shortage of a critical component could impact production at some point. The spread of the virus to South Korea, Japan, and Northern Italy is creating similar issues which we are managing in the same way,” the statement added.
As for Tata Motors’ domestic business, the transition out of BS-IV is almost complete. However, materials management to support the ramp up of BS-VI has become a daily affair, and it is seeing improved availability as vendors come on stream in China, it said.
With some flexibility in mix — models and trim levels —- current visibility protects production volumes up to mid-March, it added.
However, there are uncertainties, but Tata Motors expects to mitigate this to a large extent. The situation could lead to limited volume losses in Q4, but the company expects this to be recovered as market demand is likely to gradually improve after the transition to BS-VI.
The Q4 performance was expected to be impacted due to the switchover from BS-IV to BS-VI and the shortage of parts is likely to have some additional impact on specific BS-VI models, it said.
“The timeline for a complete rebalancing of supply and demand is dependent on the further developments in the coming 4-6 weeks. Domestic business is positive to overcome the current challenge with a limited impact on its overall FY21 performance,” the company said. Tata Motors expects to end the quarter with positive free cash flow, it added.
The shares of Tata Motors fell 9.07 per cent to Rs 114.25 on the Bombay Stock Exchange.
The company also said that its first priority has been the health and safety of its employees. “Shanghai-based JLR China and Chery Jaguar Land Rover staff have been working from home since the end of the lunar holiday, and the offices and JV plant reopened in the week of the 24th February. Production will be ramped up as the number of employees returning to work and demand increases,” it said.