Range Rover: Challenges in China

In the past I think it was 50% of EBIT of JLR has been driven from China and specifically imported Range Rovers into the Chinese market. This has taken a turn for the worse over the last 12 months. What's your view more broadly on the issues in China?

The market in China has become a bit softer than it was. Albeit the premium market is still quite strong, and premium brands are still performing very well in China. But if you are over-reliant on China, and you tend to push too much product in China, and you've not got your reliability sorted, you're in for a problem. We need to remember that up to March of last year, JLR had its record every year in China, 147,000 vehicles. I know that because I was in the market every single month, 31 times actually. You had to have a closer finger on the pulse with regards to what the market wanted, but the JV in China has produced good quality cars.

But the over-reliance on China and the need to push means if you make a mistake on quality, you alienate both the consumers and the retailers. The retailers in China have options to invest in other brands in their portfolio and that is what they've done. Until you get the retailers profitable in China again, you'll not really get breakthrough. Now, that’s balancing supply and demand to a certain degree, but we’re talking about a 26 million car market and you are only trying to sell 150,000 cars out there. The premium market is also moving towards 3 million year. The solutions in China involve strong product quality, profitable retailing and spending enough money in the marketplace to create breakthrough with advertising and marketing assets that appeal specifically to Chinese taste, to Chinese consumers, with Chinese actors in those ads, not Europeans. It is a different marketplace.

In JLR’s recent quarterly presentation, they do highlight a lot on the Chinese dealer network. They also highlight a point that you mentioned a while back on the profitability of the dealers selling JLR products. What was the issue there, why were dealers not earning as much profit and incentives from JLR as their competitors?

To start with, if you’re pushing heavily that means that the retailer suffers from a margin perspective. This has happened to other brands before, starting with BMW and then luckily Audi, in both those situations the support network profitability, that the manufacturer provided certain non-trading support for the retailers. I think in the case of BMW, it was like €800 million, in the case of Audi effectively guaranteeing 3% on sales. And they were then, before they did that, they were in the same position that JLR are now. So you have to make the retailers profitable. Why are they not profitable?

They just backstopped the profits, saying “I’m going to guarantee you 3% of return on all the units you sell”?

Whatever the figure is, you have to backstop the profit. You will not try to backstop the profit by just letting the supply float down to the new reduced level of demand. You can do that of course, but you’ll not achieve your overall corporate objectives of funding your model program. For me, I can’t see how that makes sense. So, you have to try and maintain your market share with good quality products for the consumers and profitable retailers, and that means that you have to move some of your markup to the retailers to make sure that the momentum continues in the marketplace. Anything different to that is not understandable as far as I’m concerned.

They also show the difference in discount between JLR and competitors, which is between 7% and 5%. So it’s a mixture of poor product quality, demand not matching supply in China, which is then exacerbated by the fact that the dealer adds on high discounts to sell the products.