Jaguar Land Rover gets ready for rough road ahead, to cut 1,000 jobs

The road ahead for Jaguar Land Rover Automotive, the UK subsidiary of Tata Motors, looks uncertain and tougher, as regulatory changes and macro-economic headwinds in Europe, one of the company’s biggest markets, take toll on its volumes.

Analysts expect margins at the firm to remain under pressure as discounts climb and high taxation on diesel cars weigh on volumes at least for another year till clarity on Britain's exit from Europe emerge, and model launches start paying off.

The impact of macro-economic uncertainties  in the UK have been a lot more pronounced for JLR compared to its German rivals Mercedes Benz, BMW and Audi due to the former’s high dependence on the UK, a diesel heavy portfolio and a relatively smaller model line-up.

Sales of diesel cars have hit a road bump in many European countries as regulators and politicians crack down on the segment with plans for bans, levies and additional taxes in many cities. With eight out of 10 cars sold by JLR in the UK and Europe being powered by a diesel engine, the company has been the worst hit.

On Monday, JLR said it will cut 1,000 jobs at its two factories and reduce production at two units owing to falling sales of diesel vehicles and regulatory issues, the Press Trust of India reported. JLR employs around 40,000 workers in the UK and produces over 500,000 vehicles a year. The company’s total volumes dropped 7.8 per cent to 83,732 units in March over a year ago. For 2017-18, it grew 1.7 per cent to 614,309 units against a year ago. Continuing the declining streak, the company’s UK and Europe sales dropped 12 per cent and 5.3 per cent, respectively.

A JLR spokesperson said the company “is well leveraged” in terms of risks.  “China and the US are one of our biggest markets, and the UK and Europe account for 40 per cent of our sales. As you are aware we are investing heavily on electrification and from 2020 onwards every Jaguar and Land Rover model will have an electric variant,” he said.

The two biggest disadvantages which JLR has as compared to its rivals is high concentration on diesel engines and disproportionate sales coming from the UK and Europe, said Martin Benecke, manager, light vehicles forecast, Europe, IHS Markit. He expects Land Rover sales to decline even in 2018 in Europe due to Brexit and diesel gate and see an upswing only from 2019 as new models like next generation Defender, new Range Rover Evoque get added to the line-up.

"The good part is SUVs are still strong in Europe,” said Benecke pointing out that “It’s a transition period,” for most automakers with a presence in UK and Europe.  

I.H.S is not paring its forecast on the premium and luxury car market in Europe as it’s not clear how the trade negotiations will progress after the Brexit.

"We were looking at a double-digit volume growth for the company in FY19 but given the current regulatory environment, it looks tough,” said Nitesh Sharma, analyst at Phillip Capital. Meanwhile, high levels of discounts have concerned analysts. “JLR incentives have been on the uptick: third quarter incentives were Rs 7 per cent of sales. March quarter seems to have seen a further rise in incentives in US and China, particularly on the Land Rover portfolio,” wrote Saurabh Kumar and Deepika Mundra analysts from JP Morgan wrote in a 9 April report.

They however added that JLR’s model cycle should remain exciting given launch pipeline, both product and country mix is positive. They expect profitability improvement at the China JV on higher utilization and foreign exchange moves should help earnings as the hedge book progressively rolls off. Company’s hedge book they wrote would throw up a positive contribution given recent GBP appreciation, but that should be offset on core weakness. Overall, they estimate a 6 per cent operating margin (including China JLR) for Tata Motors for the fourth quarter.