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JLR Cranks Up German Assault, But CO2 Could Wreck Plan

“if only Ford had launched the X-Type first, then sold the Mondeo as a Jaguar in disguise”

BARCELONA, Spain – The new F-Type coupe might well raise Jaguar Land Rover’s (JLR) profile as it tries to assault luxury markets dominated by the Germans, but it won’t do anything to help the company solve its most pressing problem; coping with ever-tightening fuel consumption rules around the world.

The new Jaguar F-Type coupe, launched in Spain in March for global sale in April and May, brings a touch of excitement to JLR’s range of sports sedans and big SUVs. Some analysts believe Tata of India-owned and British based JLR can challenge the German superiority in luxury vehicles. There’s only one cloud on the horizon. Can its fleet of gas-guzzlers be reformed to meet tough new fuel efficiency laws which get even harsher after 2020.

The European Union (E.U.) measures the amount of carbon dioxide (CO2) produced by a range of vehicles to gauge fuel consumption. Fuel consumption is measured across car ranges, allowing manufacturers to sell a relatively small number of big, gas-guzzlers as long as they make and sell lots of smaller cars. Fines are imposed on violators.

News from China that the government has proposed tighter new fuel consumption rules, implying a yearly improvement of 6.2 per cent a year between 2016 and 2020 will have shocked Audi, BMW and Mercedes of Germany which have grown fat on easy profits in that country. JLR, a late-comer to China success, is perceived as being even more exposed.

The answer to JLR’s CO2 question seems to be “yes”, with copious re-engineering, less V8s and more four cylinder engines using turbo-chargers to wring out the maximum amount of power. Expect much use of light-weight materials like aluminum, and the embrace of petrol or diesel-electric hybrids. If this fails, perhaps a deal with another company like Fiat Chrysler might be on the cards. Some kind of alliance would allow JLR to meet new fuel rules by averaging down its fuel consumption by including them with a manufacturer of small cars like Fiat. In extremis, JLR theoretically could be forced into a merger if there was no other way to meet CO2 rules. More likely would be a pricing policy to raise prices a little to take care of any fines.

Amazing progress
Some observers might be surprised that JLR is actually still around, and it has made amazing progress since Tata bought the company from Ford Motor in 2008.

Jaguar had been a serial value destroyer for Ford, losing close to $10 billion including the $2.5 billion purchase price over nearly 20 years. Land Rover, which cost Ford $2.75 billion in 2000, wasn’t quite so profligate with money, but when Tata paid around a reported $2 billion for the two companies, many experts thought that Ford had done well to rid itself of what appeared to be a couple of long-term losers. Some said Tata would break up the company, sell the property and move what remained to India.

Ford bought Jaguar in 1989 inspired by its racing pedigree and history of making glamorous and technically advanced machines like the storied E-Type two-seater. During Ford’s tenure Jaguar was plagued by derivative design, a failure to develop new markets and quality problems. Even when big sedans like the XJ were flaunting the latest aluminum technology, body designs were dull. The key product charged with ending German leadership was the X-Type, designed to match the BMW 3-Series. When launched in 2001, Jaguar talked about sales reaching 150,000 to 200,000, perhaps even 300,000.

That plan crashed and burned and by 2008 overall Jaguar sales only reached just over 60,000. The X-Type was ridiculed for being a ringer for the Ford Mondeo, a big-selling family sedan. The Mondeo did share much of the engineering work for the X-Type; if only Ford had launched the X-Type first, then sold the Mondeo as a Jaguar in disguise.

One expert who had faith when Tata bought JLR was Dr Peter Wells of the Centre of Automotive Industry Research at the Cardiff Business School. Wells said the company has made tremendous progress, particularly in the last 12 months or so.

“Things could still go horribly wrong, but I have a gut feeling looking at the business they can make a success of it. I’m concerned about CO2 rules, and some other measures from governments designed to curb vehicle use,” Wells said.

Wells expects JLR to be able to meet government CO2 rules without having to do a deal with other companies like Fiat. He sees scope for what he calls “customer pass through”, which would allow companies like JLR to pass on excess CO2 penalties to buyers as part of the selling price.

“JLR could smuggle through a lot of the costs without customers noticing. After all, JLR made a 15 per cent pre-tax margin in the last quarter of 2013,” Wells said.

Wells expects more turbo-charged four-cylinder engines and use of aluminum to save weight and therefore fuel. He points to recent successes with new cars like the Land Rover compact SUV the Evoque, and the upcoming XE, which will bring Jaguar down, again, into the BMW 3-Series segment.

Thanks to the Germans
Professor Ferdinand Dudenhoeffer of the Center for Automotive Research (CAR) at Germany’s University of Duisberg-Essen describes JLR as one of the most important premium car makers, thanks in part to some German top management.

JLR sold a record 425,000 vehicles globally in 2013, and Dudenhoeffer expects this to rise to 600,000 in five years, while in 10 years, the company will probably overtake Toyota of Japan’s Lexus premium subsidiary. Lexus sold over 520,000 vehicles in 2013. XE sales could reach between 150,000 and up to 200,000. The range might increase to include a smaller car like the BMW 1-Series.

“At the moment there are the big three premium car makers BMW, (VW’s) Audi and Mercedes. In 10 years there will be a big four, and we will add Jaguar Land Rover to the list,” Dudenhoeffer said.

Dudenhoeffer also worries about the CO2 problem, and speculated that owner Tata’s huge production of small cars might be mobilized to average down JLR’s gas guzzlers. It could seek outside partnerships.

“It might pool with some other car manufacturers to get some credits. I don’t think it will be forced to merge, but might form an alliance. Fiat, for instance; (CEO) Marchionne is always on the lookout for solutions which help him. If he has CO2 credits and not using them, he might want to sell,” Dudenhoeffer said.

Meanwhile in Spain, Jaguar was launching the two-seater F-Type sports coupe, which is definitely not for the shy and retiring buyer. If its handsome lines don’t grab your attention, the shriek and roar of the howling engines will.

Enough at 186 mph
The top of the range R Coupe has a 543 hp 5.0 liter V8 supercharged engine catapulting the car from rest to 60 mph in 4.0 seconds. More affordable versions (prices start at $65,000) are the base-model with a supercharged V6 335 hp engine, or a more powerful V6 “S” producing 375 hp. The R Coupe will reach 186 mph on unlimited German highways before the computer steps in to say “enough”. All models have an eight-speed “Quickshift” automatic gearbox. The F-Type boasts an all-aluminum body offering more strength with less weight.

The coupe, and the convertible version of the same car launched last year, won’t sell in huge numbers. According to Jonathon Poskitt of LMC Automotive, Jaguar will sell around 16,000 F-Type coupes and convertibles globally a year, split 60:40 in favour of the coupe.

IHS Automotive’s Paul Newton sees sales peaking at 18,000 a year in 2015, with just under 5,000 a year going to the U.S., and slightly under 3,000 going to China.

Jaguar sold about 75,000 cars last year, and Newton sees this rising to just short of 100,000 by 2015, which should nearly double to 200,000 by 2018 as new models like the XE compact sedan and the Jaguar SUV reach dealerships.

Customer weariness
Wells said German hegemony in the premium sector might be ready for toppling because of what he called “customer weariness” with the leading brands.

“There might be space there for a company like JLR. It could be pushing against an open door,” Wells said.

Longer term, JLR volume needs to pass one million, with perhaps a factory in the U.S., in addition to mooted plants in China, Saudi Arabia, Brazil or Russia.

“Broadly speaking, I’ve got a lot of faith (JLR) management will come close to doing what they need to achieve with the model mix and volume required and penetration against the established contenders,” Wells said.

CAR’s Dudenhoeffer agrees.

“JLR will be the most interesting premium car company in the next 10 years,” he said.

Mind you, if those Chinese emissions proposals are adopted, it still all could go horribly wrong.

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