Jaguar Land Rover: An Unsustainable Cost Structure

In your view, what are the core drivers of JLR's poor performance over the last 18 months?

I think, if you look at JLR's challenge at the moment, it starts with the fact that, as I've just mentioned, they're spending a disproportionate amount as a percentage of their turnover on product development, technologies, manufacturing. They have publicly stated that they will have 16 individual model lines or 16 nameplates in the marketplace. Now, that brings with it a number of challenges: firstly, you need to have the marketing budget to launch and sustain all those individual model lines; you need to have the scale of sales to get the economies of scale on margins to compete in the marketplace successfully. Irrespective of that, you are going to hit a very large annual increasing depreciation and amortisation bill that hits your accounts, which puts enormous operational pressure on the whole organisation, even designing and manufacturing cars and engineering cars to bring them to marketplace or the commercial function to monetize them. So in a way, the breadth of the portfolio, especially as there is two brands there, the sheer amount of money that is spent on products, as opposed to the competition, has proved to provide a financial burden that they can't cope with. That is then symptomatic in terms of the outputs, quality being a key issue. Of course the J.D. Power results were produced this week, which tell a story, unfortunately for JLR. It puts enormous pressure on the profitability. It put enormous pressure on the fact that in China, the most profitable car market in the world, they are effectively a push strategy there rather than a pull strategy, because they need to monetize the company's offer as soon as they can.

So the portfolio is too broad, you mentioned the spend as being significantly higher than competitors over the last years. They spent all this money on product, both in capex and R&D, a huge write down last quarter. What went wrong?

I think to a certain degree, you have to split the two brands apart from each other. In the case of Land Rover, Land Rover are still a very profitable brand because of Range Rover, Range Rover Sport and alike, achieving premium margins in the marketplace. Of course, in many parts of the world, Range Rover is almost considered a brand in its own right as opposed to Land Rover.

The SUV market globally has expanded significantly over the past 5 to 10 years. The sedan market, which jaguar principally plays in, has gone in the opposite direction. It's a style that tends to be out of fashion. It's a style where the margins tend to be less. And it's a product line which is the Germans' forte. BMW 3 Series and 5 Series, and Mercedes E-Class and C-Class have a much bigger sales footprint, manufacturing footprint, margin availability and a financial services captive. JLR on Jaguar cannot compete with them. If you invest heavily in product lines that cannot compete in the marketplace, you're then faced with effectively a write off of some of the investments that you've made earlier, because from an accounting perspective, you're not going to realise what you put in in the first place. So at the core of this is a flawed strategy really.

Was that unlucky in terms of the market turn? Or was there a fundamental incompetence in design and cost for the Jaguars?

Clearly, some of the external issues, like Dieselgate, affected all car lines, sedans and SUVs and all car brands, so everybody. WLTP legislation coming out of that, which is the new emissions regulations, have hit everybody. So there are a number of external factors. Also China going a bit softer, that hits everybody. But, if it hits everybody equally, why have JLR not been hit equally? Then you look at the fact that there are clearly internal and home-grown issues that have made them less competitive than the competition.

JLR's expenditure is very high but the products still have quality issues. Is this a fundamental issue in the engineering or the project management?