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As JLR Stumbles, Should Some Jaguar Models Face The Axe?

As JLR Stumbles, Should Some Jaguar Models Face The Axe?

“That is not a good business model. They need more sales per model or they have to scrap models. You cannot compete with BMW or Mercedes with just 30,000 sales per model”

Jaguar Land Rover (JLR), Indian owned and British-based luxury vehicle maker, needs to take urgent action to modernize its business plan as burgeoning costs undermine profits.

Jaguar has too many models for it to compete effectively with the Germans and JLR needs to find a partner to share development costs. 

That was the verdict of experts after its parent company Tata Motors announced JLR’s results for the first quarter ended June 30.

JLR racked up a 264 million pound ($343 million) loss, compared with a profit of 571 million pounds ($742 million) in the same period last year. Sales fell 6.7% to 5.2 billion pounds ($6.8 billion) 

European car makers are faced with tough problems.

In the short-term, they must swiftly switch from diesel to gasoline engines as so-called oil-burners fall out of favor with the buying public, big-time. Politicians across Europe have focussed attention on the danger older diesels pose to public health. Diesel’s market share is expected to dive to 42% by the end of 2018 in Germany, Europe’s largest market, compared with 52% in 2015. Last year 90% of JLR sales in Britain, its largest market, were diesel.

Then there is the turmoil in China over tariffs, and Britain leaves the European Union (E.U.) on March 30. If there isn’t an agreement between Britain and the E.U. on frictionless trade, that could blast a big hole in JLR’s manufacturing regime. Currently parts criss-cross borders currently without hindrance across Europe.

If that’s not enough, next month Europe’s car makers must conform to new regulations on fuel economy designed to outlaw current practice which allows companies to use computers in perfect world scenarios to declare fuel efficiency. That often leads to exaggerations of more than 30%. The falling share of fuel-sipping diesels will also make this harder to achieve.

Marginal manufacturer
As the marginal manufacturer in the premium world led by BMW, Mercedes, Audi and Porsche, JLR is in the eye of the storm. And Jaguar has too many models, according to Professor Ferdinand Dudenhoeffer from the Center for Automotive Research (CAR) at the University of Duisberg-Essen in Germany.

Dudenhoeffer said Jaguar has 6 models (excluding the very latest i-Pace electric vehicle) – the XE, XF, XJ sedans – which compete against the BMW 3, 5 and 7 series – two SUVs – the F and E-Pace and the two-seat F-Type. Jaguar sold 180,000 vehicles last year, the equivalent of an average 30,000.

“That is not a good business model. They need more sales per model or they have to scrap models. You cannot compete with BMW or Mercedes with just 30,000 sales per model,” Dudenhoeffer said.

He said JLR is too weak in China, despite manufacturing there, and has invested too much in diesel and not enough in hybrids, gasoline engines and electric vehicles

Autopolis analyst John Wormald agrees Jaguar can’t really compete with the Germans, although the Land Rover operation has more profit potential.

“Jaguar, despite its lovely products, is simply too small to compete with BMW, Mercedes and Audi, with which it is roughly in the same pricing class, as measured by the ability to charge a premium over an equivalent-sized volume car. Yes, there’s the diesel problem but they all face that. Jaguar has simply never got very far in the continental European market, which is a large part of the world market for these kinds of cars,” Wormald said.

Unique Land Rover
“Conversely, Land Rover is quite unique. Not in the traditional farm/military vehicle – the real rugged off-roaders – where it hasn’t the scale of the Japanese or the Americans. But in its SUVs, in which it is the only real premium producer, with little competition other than from Jeep, and that’s not all that strong, so it can really price up, with BMW’s and Mercedes’ offerings not as distinctive as their cars. “Mouth wateringly expensive”, the New York Times called one of its products,” Wormald said.

Bernstein Research analyst Robin Zhu agrees urgent action needs to be taken, starting with cost-cutting targets.

“We believe JLR would benefit from the discipline imposed by publicly-state cost targets, and the empowerment of a senior “hatchet man”,” Zhu said.

“JLR’s fixed costs continue to rise faster than sales. JLR looks uniquely exposed to several key challenges in the coming years, and will need to make some tough decisions on product, costs, and capital spending, in our view,” Zhu said.

CAR’s Dudenhoeffer said JLR needs to set up some deals to share design, engineering, production and components sourcing with other car makers, like Volvo has with Geely of China.   

“They have to focus on China, they have to look at cost positions, They have to focus on Jaguar. In the past, strong growth made its business successful. Now growth has slowed. Electric vehicles need a broad platform. JLR has to think about a modified business model,” Dudenhoeffer said. 


 

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