How Jaguar Land Rover solved its China problem

In reviving the discontinued Land Rover Freelander in China with its joint venture partner Chery Automotive, Jaguar Land Rover has fixed the problem of what to do with the JV’s factory in Changshu, near Shanghai.

JLR ended production of the Freelander in 2014, but the U.K. automaker and Chery are relaunching the SUV as an electrified model. The new version of the SUV will be built in Changshu. It will be launched first in China and then exported to other markets.

JLR has built lower-profit models at the plant for the past 10 years, but its business model has since shifted toward more luxurious segments that are highly profitable but sell in lower volumes. This means the Changshu plant was becoming surplus to requirements.

JLR said last year that the average selling price of vehicles built by its Chinese JV was the equivalent of €42,000. That is far below JLR’s overall average selling price in China once imported models, including the Range Rover and Defender, are taken into account.

This year the overall selling price was the equivalent of a little more than €100,000, JLR said during an investor day on June 19.

JLR’s China-built models are fighting in a sector that’s slowly being dragged into the same price war that has hurt global mass market brands. The segments where those models compete are also turning electric, reducing the appeal of the automaker’s vehicles equipped with smaller combustion engines.

“It's more and more difficult at the lower price points in China at the moment,” JLR CFO Richard Molyneux said during the company’s earnings call for the quarter ending June 30.

New Freelander family

Production of Changshu’s current models will be phased out. Vehicles built at the plant include the Land Rover Discovery Sport, which replaced the Freelander; long-wheelbase versions of the Jaguar XE and XF sedans; and the Range Rover Evoque compact SUV.

Chery will build a family of Freelander-branded full-electric and extended-range electric vehicles in the factory. The models will be based on a Chery architecture. Local news reports say the architecture will be the E0X premium electric platform used by Chery’s upmarket Exceed and Luxeed models.

Sales will initially focus on China but are also destined for export “over time,” JLR said in June. Chery is China’s biggest exporter of vehicles.

JLR and Chery did not say when production of the Freelander models will start.

JLR will oversee design and brand development, but the products will be developed by Chery and sold in a dedicated network of Chery-run dealerships.

The new Freelanders are “mainstream" and will not come under JLR's luxury-focused House of Brands marketing and sales strategy, JLR said.

“This is a real win-win,” Molyneux said. “It's the best of what we do in terms of brands with the best of what Chery do. It's complementary to both companies.”

Under the deal, Chery licenses the Freelander name in return for JLR getting half of any profits.

Molyneux said the Freelander is being turned from "a dormant brand into a royalty flow.”

The arrangement with Chery will result in a step-by-step boost to JLR’s financial performance, he said.

JLR’s most recent run of losses started in 2018 partly because the company was forced to discount its China-made models heavily when the factory capacity of 200,000 was not matched by demand.

In the first half, JLR sold 21,254 of its China-built models, down 17 percent on the year before and exposing the under-utilization of the Changshu plant.

The Chery-JLR JV has become profitable in recent months, but margins are well down on those posted by the successful global business after JLR’s focus shifted to higher profit Range Rover, Range Rover Sport and Defender models.

Strong brands

The import business into China is strong, Molyneux said. “It reflects the strength of the brands, particularly Range Rover and Defender,” he told analysts on the investors call.

Recent consumer weakness is starting to affect sales, with the U.S. overtaking China as JLR’s biggest global market in the first six months.

“There are certainly signals that demand is not at the level that we would like to see going forward,” Molyneux said.

JLR’s lack of EVs, however, is not currently the problem. “Chinese customers for Range Rover and Defender are still very much ICE customers,” Molyneux told analysts.

In reviving the Freelander, JLR and Chery are creating a JV brand. The two companies had planned to do this when they formed their Chinese JV in 2012. The joint brand plan was dropped when the Chinese government ended its requirement that foreign automakers could only build cars in China through JV partners.

The Freelander revival is another example where foreign automakers are turning to Chinese companies not because legislation demands it, but because China’s automakers now have technology solutions the foreign players need to compete against much stronger local competition.

Examples include Volkswagen brand partnering with Xpeng to use the Chinese automaker’s platforms and technology for new models, as well as Audi’s linkup with SAIC to jointly develop a new platform.

The revived Freelander brand also shares similarities with Smart after Mercedes-Benz sold a 50 percent stake in Smart to China’s Geely, with the Chinese automaker in charge of development and production while Mercedes oversees design.

The Freelander brand will enter a packed market filled with competitive EV brands forced to cut prices on their products to gain consumer attention, so profits might be thin at best.

But it leaves JLR in China to focus on its Europe-built luxury brands — including the reborn Jaguar, which compete at a much higher, and much more profitable level.