Jaguar Land Rover needs a tow from China

Doubling down on China should have been higher on JLR’s agenda
For Jaguar Land Rover, the only way out of its deep pothole may be to get a tow from China.

The luxury unit of Tata Motors Ltd posted dismal fiscal first-quarter results Tuesday, recording an unexpected pretax loss of £264 million  ($346 million) after running into trouble in many of its main markets. JLR, usually the profit engine for Tata, effectively wiped out a sharp turnaround at the rest of the Indian company’s business.

About half the loss was because of China, where lower margins and declining prices weighed on performance. China’s import tariff cut earlier this year ironically added to the pressure, pushing prices across the market lower and causing buyers to delay purchases. Elsewhere, JLR struggled with high sales incentives in the US market, the loss of love for its predominantly diesel cars in Europe, and the impact of Brexit in the UK. 

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.

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