Traffic lights turning red in most of its markets shouldn’t be a surprise to the company. There’s no doubt Jaguar Land Rover’s woes resonate with those of the global auto industry, but its solutions look ill-placed to deal with the challenges.
The unit, commendably, has been focused on new products and technologies like higher-end electric and hybrid vehicles. JLR
in total invested more than 1 billion pounds in the first quarter, part of a plan to spend £4.5 billion this year. As a result, free cash flow has turned negative and, at this rate, is likely to stay there. Yet the unit expects electric vehicles to contribute only about 5 per cent in the “near” term and 20 per cent in the “medium” term.
Doubling down on China
should have been higher on JLR’s agenda. Not only is it the world’s biggest car market, but Chinese buyers love large luxury vehicles. So far, JLR
hasn’t been able to get the market right: Quarterly results have been volatile and higher incentives have dragged down profit. Meanwhile, the company can’t seem to hit the pricing sweet spot.
Investing to meet China’s demand for a wider variety of models would be one way to make sure margins don’t shrink further. Churning out vehicles in a more cost-effective way is another. Sure, production facilities don’t just pop up and start building cars — but most automakers, especially European ones, have managed to scale up while reaping fat margins. Tata Motors could have, too.
It could learn from past follies. On Tuesday, Tata Motors announced it was shutting down its decade-old manufacturing operations in Thailand because the company’s pickup trucks weren’t competitive there. Restructuring costs will hit next quarter. Meanwhile, other automakers are investing in the high-growth Southeast Asian region.
While putting capital into the future is important, it isn’t the only consideration. JLR continues to grapple with unhappy bond investors, as we wrote before rating agencies downgraded the company’s debt this month. Debt costs rose sharply in the first quarter, while leverage as measured by the debt to Ebitda ratio has climbed to almost 4 times from 2.5 times, according to Moody’s Investors Service.
It may be time for management to rethink its bold capital spending plans. JLR needs to put money where the nearer-term growth and opportunity are — or risk getting stuck in a deeper pothole.