How Jaguar Land Rover was caught out by car industry woes
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Jaguar Land Rover has revealed a record loss - falling a staggering £3.6bn into the red this week (Monday) after writedowns of £3.3bn as sales went into reverse, slipping 5.8pc to 579,000 cars globally.
It’s a far cry from the highs Britain’s biggest carmaker was hitting a few years ago. At its peak in 2015, JLR made a profit of £2.6bn after selling 462,000 cars. So what is going wrong?
China’s car market went on a two-decade tear until last year, when it fell 6pc to 22.7m cars. In that growth period Chinese motorists were keen to buy into premium products, especially the stylishly marketed JLR brand.
China’s expanding middle class bought into the “British cool” offered by JLR as the country overtook the US as the world’s biggest car market. But things started to go wrong a few years ago.
JLR blamed a sales slowdown on the easing of China’s economy, which affected consumer confidence.
As Donald Trump has ramped up his trade war with China, cars have been subjected to swingeing import tariffs and sales have plummeted.
JLR’s latest figures show that sales in China collapsed by 43pc to just 28,451 cars in the first four months of 2019, making China the smallest of the company’s five regions.
Not all of JLR’s rivals have been hit so hard by the Chinese slowdown, leading some to question whether the company is masking its own problems with economic excuses.
Vague rumours about an issue with the JLR’s dealer network in China have circulated, although these have never been clarified. JLR has said it is still setting up the network, and observers point out that it can be difficult to integrate sales and distribution systems for a mixture of domestically built and imported cars. One factor in the decline could be the company’s reliability record. It regularly lags behind premium rivals in global surveys on the subject.
JLR is heavily invested in diesel, with the vast majority of the company’s cars in the UK and Europe powered by it.
Worried by the prospect of fresh taxes on diesel cars, drivers have held off buying new diesel cars since the Volkswagen emissions scandal rocked the automotive industry in late 2015.
Latest market share figures from the UK’s Society of Motor Manufacturers and Traders showed 28.9pc of new cars sold last month were diesel, down from 50pc before “dieselgate” erupted.
With the UK and Europe making up about 40pc of JLR sales, such buyer reticence is a major issue for the company, whose large cars are ideally suited for the power and efficiency diesel offers.
JLR does have petrol engines, and almost all of its sales outside of the UK and Europe are petrol. The share of JLR’s petrol-driven vehicles has risen by six percentage points to 54pc of the global total over the past three years.
It’s likely that JLR is now counting the cost of its investment in diesel. In its third-quarter results, JLR warned of a £3.1bn exceptional impairment charge. It has never been explained what exactly this covered but it’s a fair bet that investment in diesel forms a chunk of it.
Jaguar came late to the SUV party - the fastest-growing segment of the car market. The F-Pace, Jaguar’s first SUV, only went on sale in 2016 - years after other manufacturers had already latched on to the trend. A second SUV, the smaller E-Pace, went on sale just last year. The latest figures for Jaguar show that these two cars alone already account for 55pc of the marque’s sales, rising to 65pc when the electric I-Pace is added in.
By contrast, the large saloons that Jaguar is famed for now make up only 30pc, with sales dropping fast. The F-Type sports car makes up the remainder and demand for that is easing. The company also spent heavily building the XE, a smaller car intended to take on the all-conquering BMW 3 Series. While its ambition was admirable, questions were raised about the ability of a marque a tenth of the size of BMW taking on such a force.
Land Rover only makes SUVs. But critics claim the range is becoming so large and confused that there is a danger of the company cannibalising its own sales. JLR’s rush to introduce more models complicates its industrial base, adding cost. It uses a variety of basic floorplans for its cars, resulting in a multitude of designs and parts.
Contrast this with Volvo - a company about the same size as JLR. It has focused its range on just two floorplans that can be scaled up or down, keeping things simple and costs lower.
While the global car industry was growing, JLR was hailed as a success story and the poster-child of the British car industry’s renaissance.
Heavy investment in new models, facilities and technology were fine when sales were rising. However, the company’s rush to expand looks foolhardy now that the car industry has been hit by headwinds.
JLR developed the first truly premium electric car with its much praised I-Pace, but this will have put a strain on the company’s resources.
New technology such as electric drivetrains aren’t cheap and whether the company can sustain such levels of investment is in doubt - even giants of the industry such as Ford and VW are teaming up to ease the burden.
With self-driving technology getting closer, along with demand for even more efficient and less polluting engines, it’s hard to see how JLR can keep spending as much as it is and survive.
- The Daily Telegraph