JLR Slashes Spending To Restore Profitability
Does Jaguar Range Face The Axe?
Jaguar Land Rover (JLR), British based and Tata Motors of India owned premium vehicle maker, is losing money because of falling sales in China and poor diesel sales in Europe, and might be forced to slash Jaguar’s model range if it is to establish a viable future, according to analysts.
JLR announced it will slash £2.5 billion from costs over the next 18 months.
Analysts wonder if the scale of Jaguar’s product range is too small to ever compete with the main opposition – BMW, Audi, Mercedes and Porsche of Germany.
Tata Motors announced it lost the equivalent of about $142 million in the second quarter ended September 30, compared with a profit of close to $340 million in the same period last year. JLR accounted for about 90 million pounds ($116 million) of the latest loss for a negative profit margin of 1.6 per cent in the second quarter compared with a profit of 6.1 per cent last year. JLR’s loss for the first half, stands at £354 million.
Investment researcher Evercore ISI said JLR’s cost cutting programme might not be enough to restore the bottom line.
“We believe the company needs to consider whether it’s spreading itself too wide and whether trying to compete with the Germans in the tough premium sedan segment is a viable strategy,” Evercore ISI analyst Arndt Ellinghorst said.
Drastically overspending
“It’s obvious that JLR has been drastically overspending in the past. With 17 per cent capex/cash R&D to sales, JLR is outspending every (manufacturer) globally. As a result, JLR’s weakness reflects the “stretch” in the business model related to limited economies of scale,” Ellinghorst 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 per model.
Experts say 30,000 sales per model is too small to compete with the Germans.
JLR has big short-term problems in Europe. It must swiftly switch from diesel to petrol engines as so-called oil-burners fall out of favour 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 close to 40 per cent by the end of 2018 in Germany, Europe’s largest market, compared with 52 per cent in 2015. Last year 90 per cent of JLR sales in Britain, its largest market, were diesel.
JLR has suddenly lost sales momentum in China, despite manufacturing there.
Could have been worse
Bernstein Research analyst Robin Zhu said results could have been worse.
“(The results) were less severe than the worst-case scenarios which we thought were possible. Nonetheless, the details reflected a company in precarious shape, with underlying EBIT margins below breakeven, cash burn remaining material, and net debt continuing to grow,” Zhu said.
Zhu said the decision to cut spending was welcome but belated. Investors thinking that Tata shares looked cheap should wait awhile.
“We’d advise potential buyers (of the shares) to wait for greater clarity on Brexit. JLR CEO Ralf Speth has warned on several occasions on the consequences of a messy exit. We also worry about the possibility of JLR needing additional capital to fund its turnaround,” Zhu said.
Jaguar’s I-Pace electric car goes on sale in the U.S. next month.
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