Jaguar Land Rover: Underperformance in China | In Practise

Jaguar Land Rover: Underperformance in China

Former Marketing and Planning Director and Operating Executive Committee Member for Chery JLR

Learning outcomes

  • History and challenges of JLR entering China
  • JLR relationship dynamics with JV-partner Chery
  • Price discounting of Jaguar models in the region
  • JLR quality issues and potential solutions
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Executive Bio

Andy Gawthorpe

Former Marketing and Planning Director and Operating Executive Committee Member for Chery JLR

Andy has spent over 23 years working for Land Rover. He started his career at Rover Group, a British auto manufacturer that owned both Rover and Land Rover brands, in 1993. In 1994, Rover Group was purchased by BMW before the company split up the brands and sold Land Rover to Ford in 2000. Andy worked across many different sales and marketing operations globally for Land Rover throughout Ford's ownership between 2000-07 before the business was sold to Tata Motors. After two years Aston Martin in 2011, Andy returned to JLR as part of the Executive Operating Committee for Chery Jaguar Land Rover, the Chinese JV of the business between 2013-15 before finally finishing his JLR career as a Marketing and Planning Director.Read more

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What's the history of JLR in China? When did the company enter the region?

My years might be a little fuzzy. I'm not sure exactly when we sold our first cars in China but the initial set-up was an importer model. There were four main importers into China. I think the number of Jaguars going in was minimal and there was a couple of thousand Land Rovers, but nothing significant - but four major importers. I think the penny dropped. I don't know who and when and what was involved in this decision, but circa 2010, a decision was made to go to a sales company in China, and an agreement, which must have been long fought, was struck with the importer for them to become major retailers in the network. I think it was about 2010 when we switched across to being a national sales company. But, essentially, your VWs and your BMWs and your Mercedes had been there for a very, very long time - at that point even 10-15 years - and had significant presence in the marketplace. So it was an import-only model initially, and the volumes grew substantially, and when Evoque came along as an import car, it just absolutely hit the sweet spot and sales absolutely sky-rocketed. If you can imagine, we were doing 30-35,000 Evoques into China at 600k+ RMB, which is just unbelievable.

I've got the numbers here. I've dug around in the monthly volumes and I think for the fiscal year February 2013, 68,000 Land Rovers were delivered. But in 2017, it goes up to 115,000, and 2018, 136,000. But now, back down to 91,000. Obviously, there's probably some seasonality there in terms of launches and stuff.

So it was an import-only model; sales took off, quality took off, it was going great, and it became a dominant player within JLR.

Was it only Land Rover mainly driving the growth then in China?

I don't know the sales figures for Jaguar for that period, but it was Land Rover that was selling. And externally Jaguar seemed to be selling. But what turned out to be the case was that Land Rover was essentially subsidizing the Jaguar business at a retailer level. It was a single franchise; it was set up as a JLR contract at the beginning, single dealerships were set up for Jaguar and Land Rover. Essentially, everyone found that the Jaguar volume was forced off the back of Land Rover. As a retailer, you are desperate, "Take some Range Rovers off me. I'll give those to you as long as you take some more Jags." And Range Rovers were selling at 0% discount and in many cases, for quite some time, at a surcharge - over list price. And the Jaguars were piled through. It was a false dawn for Jaguar, I would say.

So the dealers were pretty much buying the Range Rovers and saying, "I'll take the Jags and just discount them with the profit I'm getting from the Range Rovers"?

Yeah. It was a package deal. When the profitability comes back on a Land Rover, and particularly on Range Rovers, all of a sudden, the model starts going, "We don't want to do those cars because I'm losing money hand over fist."

So it was a mistake in terms of putting it out as a single franchise, rather than two brands, in China?

Or they just pushed too hard on Jaguar. It was a way of getting some momentum in Jaguar and they thought it would come good, and it never came good. I think globally Jaguar was struggling to gain momentum. It was too tempting.

So this was before the relationship with Chery?

Yes. I think it was fairly obvious that Chinese regulation was pointing in the direction of localization, pointing in the direction of technology transfer etc. I think there were threats to your ability to keep importing unless you had a local partner, and the ability to get a license for a local partner was running out - all the local partners had already partnered up, so to speak. So I think it was a little bit of a mad dash to find somebody. I wasn't part of the process. They went through a beauty parade, it was Great Wall and Chery and some others. They ended up fixing on Chery and making a deal to go forward with Chery as a JV partner. I don't know who made the decision - I think it was Ralf - that the first car to be localized, based on the timing, would be Evoque, which in hindsight, from a marketing point of view, was a mistake. It was all a little bit last minute. There weren't many partners. Chery was risky.

What was the problem with the Evoque? Did the fact it was being locally manufactured ruin the brand and the price?

Locally manufactured cars in China, historically, have been at a discount because they were less valued. And what was emerging was that it was worth about 15% more on average for an imported BMW, versus a locally made one, for example. You worked on a 15 to 20% discount. People didn't value the locally manufactured as much. That is changing over time, now, but at the time there was a poorer reputation. And what was happening was that the manufacturers were basically putting volume through with their cheaper, locally manufactured cars, and importing their specialist, high-end cars, and making the money there. Audi were probably the most aggressively localized, with the A4 and then A6. BMW gradually dipped their toe in and gradually localized the 3 Series and 5 Series, and it took ages for X3 to localize. Rule of thumb, below about 500-600,000 RMB, everything is localized, and above that everything was imported. Evoque came into the market as this slightly peculiar premium car. Price-wise, it landed in the market similarly priced to the Audi Q5, but you got it a size smaller. That worked when it was an import car - and the thing that was its USP was that it was an import car. So you were making a fashion statement by buying it. When it's a localized car, you go, "Why wouldn't I buy a Q5?"

So at that time at JLR - when they partnered with Chery - you've got the Discovery Sport, the XE, the XF, and the Range Rover Evoque locally manufactured, right? So the majority of the volume is coming from the Range Rovers.

It's a different accounting set-up as well. The JV makes its own profit and then pays a dividend later to JLR. So at a wholesale level, from a JLR point of view, you would see a lot of investment going in, and a lack of return. And actually, the volumes in China drop because you are switching to local production. Evoque was a straight swap. 30,000 units a year of import became 30,000 units of localized. It should have been more, but it became 30,000 units of localized. Further down, there was a replacement for Discovery Sport. That came later, and was also then a volume reduction, whereas XE was a volume add because we weren't selling XEs before in China. XF was some volume switching out. It should have been a massive volume opportunity, but it didn't materialize in China.

So, historically, you pretty much had the JLR profits from the Chinese region being driven by one car, and that's the imported Range Rover?

Pretty much all the Land Rovers. It was the Evoque, it definitely was the Range Rover Sport. But Evoque and Discovery were also making way more money than they were anywhere else in the world. They were making decent money for the retailers as well. The big Range Rover is the Daddy of all that, but Range Rover Sport itself was also making very good money in a higher volume.

Just to bring it back to recent performance then. JLR released a slide in their recent quarterly update on discounting. JLR group claim to be at roughly 20% discount, 5% lower than the market. What is causing that? I'm assuming the Range Rovers are not discounted as much, but the Jaguars are heavily discounted and it averages out.

Historically, even in 2014, your Range Rovers were 0-5% discount, for Range Rover/Range Rover Sport. Discovery was starting to slip from 5% discount towards just breaking even. But Jaguar was really stuck at a level of 20-30% discount, and routinely 25-30%.

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Jaguar Land Rover: Underperformance in China

November 25, 2019

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