Jaguar Land Rover is in a hole mostly of its own making

RANGE ROVERS, the pricey range-topping models from Jaguar Land Rover (JLR), flaunt interiors swagged in leather and wood. Such opulence distracts attention from the car’s capability as a rugged off-roader, as adept at driving up a mountainside as gliding around the smartest part of town. JLR’s ability to haul itself out of the mire is also about to undergo a serious test.

After a string of quarterly losses, on February 7th JLR revealed another, of £273m ($351m) in the latest three-month period. On top of that there was a whopping asset write-down, of £3.1bn. In the immediate aftermath, shares in its parent company, Tata Motors, which is the carmaking arm of the Indian conglomerate, collapsed by 18% and have now fallen by 60% in the past year. Tata Motors relies on JLR for about 80% of its sales and all of its profits. Despite the blow, Natarajan Chandrasekaran, chairman of Tata Group as well as the car division, says his company is committed to JLR and determined to turn it around.

It would not be the first turnaround. When Tata acquired JLR from Ford in 2008 it was close to bankruptcy. Since then sales have tripled, to over 600,000 cars a year in 2017. Profits have rolled in. But Ralf Speth, a former BMW executive hired to lead JLR on a route to catch its German rivals, may in recent years have gone too far, too fast. He pushed to sell 1m cars a year to help spread the costs of developing future technology.

JLR hit the brakes in 2018. Sales volumes fell by 5% worldwide in the 12 months to December, after plummeting in China at the end of the year (see chart) as the slowing economy put off buyers and Jaguar’s relationship with its dealers in the country deteriorated. The company now faces an array of problems. Its best market continues to collapse and it is reliant on increasingly unpopular diesel engines (which power the vast majority of its cars in Europe). Add to that the threat of American tariffs and a hard Brexit and the near future looks worrisome.

Brexit and trade wars are out of JLR’s hands. Its huge bet on diesel engines and its poor handling of its Chinese dealers were not. The latter had to sell cars at a loss to meet stiff sales targets or keep them on forecourts—and have since refused to hold ever-growing inventories. JLR’s woes also owe much to its overambition. Mr Speth spent freely and costs have soared.

In going for growth JLR now spends too much making too many models for a carmaker of its size. Range Rovers are popular and the Evoque has been an unexpected success but the new Discovery and Velar have performed poorly. What to do with Jaguar is another conundrum. In the recent past the brand has probably never made an annual profit (Tata Motors does not break out figures). Mr Speth’s decision to invest in upmarket saloon cars, a contracting part of the market where the Germans have a stranglehold, looks a costly mistake. The XE and XF have never sold well. Mr Speth himself “may need to take responsibility for what’s gone wrong” says Robin Zhu of Bernstein, an equity-research firm.

Tata, nevertheless, remains committed to the management that turned JLR from near bankruptcy to become the world’s fourth-largest luxury car brand. It plans to cut costs by £2.5bn over the next 18 months and will axe 4,500 jobs (around a tenth of the workforce) on top of 1,500 job losses announced in 2018. That should turn its cashflow positive by 2020-21, according to Tata.

The Indian group’s judgment that JLR is a good business that will recover, seems sound. Tata may have washed its hands of Corus, another ailing British acquisition, putting the steelmaker into a joint venture with ThyssenKrupp of Germany last year, but it sees JLR as an important bet on new technology and thus the future. Jaguar may need to rethink what sort of cars it makes but Range Rover is among the most profitable brands in the business and updated models arriving in the next few years will give the firm a boost. If it can get through the next year, then concentrate on expensive SUVs, JLR should get back on track.

This post was originally posted at https://www.economist.com/business/2019/02/16/jaguar-land-rover-is-in-a-hole-mostly-of-its-own-making.

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