Why Jaguar is done chasing BMW, Audi, Mercedes

In autumn 2019 Jaguar Land Rover invited guests from around the world to witness the opening of the new Jaguar design center in Gaydon, central England.

At 12,000 square meters, the studio was a third larger than the one the team had vacated and matched in size the adjoining Land Rover design space.

The studio, part of a wider 500 million pound ($700 million) overhaul of JLR's engineering facilities, was the latest in a series of expensive capital investments aimed at helping former CEO Ralf Speth achieve his long sought goal of selling a million cars annually.

Boosting Jaguar's volume was key to delivering the scale and profit JLR needed to match its German premium rivals.

Just 18 months later, that plan is in pieces, torn up by a new CEO, Thierry Bollore.

Since joining JLR last September, the former Renault CEO quickly determined that the British brands could not achieve Speth's dream of competing head to head with the likes of BMW, Speth's former employer.

Bollore gave a stark assessment of JLR's problems.

"Our Jaguar business has not performed. Our manufacturing capacity and operational organization is not structured for maximum efficiency," he said during an online speech to investors in February. "And despite visible improvements in quality, our customer satisfaction level is too low."

Bollore's solution was drastic. Under his Reimagine plan, none of Jaguar's current range will be replaced. Instead, the storied brand will go all-electric starting in 2025, underpinning its lineup with a new platform sourced from outside the company and positioning itself much more upmarket and exclusive.

He wrote off 1 billion pounds of investment into the planned Modular Longitudinal Architecture electrified platform that had been designed to underpin the bulk of future Land Rover and Jaguar models.

Cars on the so-called "MLA low" and "MLA mid" architectures were cancelled, including the long-heralded electric Jaguar XJ sedan, a lower-riding electric Land Rover dubbed Road Rover by the UK motoring press and the Jaguar J-Pace SUV.

Only the "MLA high" architecture was retained because it will be used for the imminent replacements for the Range Rover and Range Rover Sport large SUVs, the company's twin profit engines.

JLR has been in cost-cutting mode since a sharp change in its fortunes in China forced a write-down of 3.1 billion pounds (then $4 billion) for the quarter ending December 2019, signaling the end of a run of incredible profits that reached a high of 2.6 billion pounds in 2015.

The company, owned by India's Tata Motors, reduced its workforce by more than 7,000 people to about 35,000.

Bollore's plan, however, marks a change of thinking at the company following Speth's reign since 2010. Ambitions are no longer linked to volume and the "British BMW" dream has been laid to rest.

"Taking on BMW, Daimler or Audi makes no sense for a company that is a quarter of its size," JLR Chief Financial Officer Adrian Mardell said during the February investor day.

"Many billions of pounds were spent on bricks and mortar and infrastructure," Mardell noted, singling out the Gaydon engineering center from where he, Bollore and Chief Creative Officer Gerry McGovern delivered their presentation to investors.

"That was following the original strategy of a million units. That structure has changed," Mardell said.

The CFO spelled out how damaging JLR's spending frenzy was to its profits using his slide deck. He noted how investment spend overtook operating cash flow in 2017 as the number of vehicles JLR needed to sell to reach breakeven rose to 600,000 in its 2019 financial year from 425,000 in the 2014 financial year.

JLR's spending spree reached 4.2 billion pounds in the 2018 financial year, which included its 1 billion pound investment in a vehicle assembly plant in Nitra, Slovakia, that opened that year.

Keen to cut ties with former owner Ford, which sold the brands to Tata Motors in 2008, JLR developed its own range of four- and six-cylinder gasoline and diesel engines, housed in a new $750 million powertrain plant that opened in 2014.

The factory, where JLR builds the new Defender and Discovery SUVs, came in addition to the company's three UK plants and one Chinese factory. It also added two complete knockdown (CKD) kit plants, one in India and one in Brazil during the period.

The infrastructure was now in place for JLR to make 1 million cars a year, but retail sales never caught up. They peaked at 614,309 in the 2019 financial year but fell to 439,588 during its last financial year (which runs from April 1 until March 31).

Cost cutting undertaken since 2019 reduced JLR's annual breakeven figure to 400,000 in the last financial year, Mardell said. Spending is clamped at 2.5 billion pounds annually for the next four years. "We have reset this company by seven years [taking the automaker's cost base back to the same point it was before profits reached peak levels]," he told investors.

JLR will be profitable again, he predicted, forecasting an EBIT margin of 4 percent in the current financial year that started April 1, rising to 7 percent in the 2024 financial year and 10 percent in financial year 2026.

The message from JLR now is one many other automakers have trumpeted in recent months: profit before volume. "Our models returning the lowest profitability will make room for those that make the best returns," Bollore said.

Pitching the Jaguar XE and XF sedans, launched in 2014 and 2015, respectively, as rivals for high-volume models from German rivals was a mistake from the start, according to experts.

"If you think you can compete with the BMW 3 Series, Mercedes C-Class or Audi A4 with sales of 700,000 a year, you can't. You are chasing a runaway train," a former senior automotive executive with experience in the premium sector, who asked to remain anonymous, told Automotive News Europe.

Chasing the Germans meant JLR "overcomplicated the palette," the executive said, by launching Jaguar SUVs that competed with Land Rovers.

The Jaguar F-Pace SUV for example sat across showrooms from the Land Rover Discovery Sport, leading to cross shopping. "Dealers will chase the volume with the highest incentives behind them, and when that happens you get into a spiral," the executive added.

Under the new plan, Jaguar will be taken upmarket. "This new brand will be lower volume, it will be more exclusive and it will be a true luxury experience," Gerry McGovern told investors in February.

McGovern is tasked with creating "jaw-dropping designs" that would be "a copy of nothing," he told investors. "And clearly, Jaguar will have quite significantly different volumes and proportions from our Land Rover products," he added.

Jaguar's volume sunk to less than 100,000 in the last financial year ending in March. That was below its all-time high of 180,198 in 2019 and the first sub-100,000 result for the automaker since 2016.

Volume targets were "reasonable" for an all-electric Jaguar brand after 2025, Bollore said, without elaborating. Analysts contacted by ANE estimated volumes ranging from 30,000 a year to more than 100,000, depending on whether JLR pitches the new Jaguar against Bentley or more toward Porsche.

The cost to reinvent Jaguar will be high.  

"You could easily be looking at 5 billion pounds over the next three years including current model run out, new product development, manufacturing facilities, marketing, dealership infrastructure," said Charles Tennant, a former Land Rover chief engineer and former director of Tata Motors UK-based European technology center, who is now retired. "I'm afraid it's big bucks to get it right."

Another expensive move by Jaguar – using a separate platform from Land Rover -- puzzles David Bailey, who is a professor of business economics at the Birmingham (UK) Business School. "The strategy for Jaguar leaves me scratching my head. I don't understand why they need a bespoke platform, unless they are planning to sell off the brand," he said.

Despite its past and current struggles, Jaguar is still important to the company's future.

"The general feedback among investors is that Jaguar can't compete with its German peers, so you might as well shut it down," said Kumar Rakesh, a lead analyst for BNP Paribas who covers the auto sector in India. "But Jaguar is a critical piece for JLR to achieve CO2 compliance. On its own Land Rover can't achieve that."

Jaguar's pivot to EVs by 2025 will allow Land Rover to make the electric transition at a much slower pace, keeping money-making, combustion-driven models such as the successful new Defender in the lineup longer. By 2030 JLR estimates 40 percent of its vehicles will still have a combustion engine.

JLR could even pay for an expensive Jaguar reinvention out of its own revenue thanks to a potential combination of events in the near-future that could see it achieving big profits, with some unlikely help from the pandemic, Rakesh believes.

Low interest rates and increased residuals on second-hand cars could cut lease rates, making premium cars more affordable. Meanwhile pent-up demand will reduce discounting as normality returns. "COVID-19 has given them another shot at investment," he said.

Within the next 12 to 18 months JLR will launch new generations of its Range Rover and Range Rover Sport, two models it categorizes as its "strongest profitability cars," according to the February investor presentation.

Bollore wants to sell Land Rovers for more money. "Land Rover has the equity to push higher in the market," he said at the investor day.

Land Rover will also launch the long-wheelbase, seven-seat Defender 130 variant in the next 12 months, and McGovern hinted at plans to maximize the Defender's potential.

"I'm absolutely convinced the Defender will become a power brand in itself," he said.

McGovern also promised that the slow-selling Discovery premium large SUV will be elevated to a more premium position, along with the midsize Discovery Sport. "Our next generation of Discoveries will be moved into that world of luxury, too," he said.

Bollore has also promised to tackle quality issues, which he said cost the company about 100,000 sales annually.

Under Speth, JLR made a number of decisions that in hindsight were poorly timed. It invested in six-cylinder engines when rivals such as Volvo were electrifying.

JLR began production of the Jaguar E-Pace premium compact SUV in late 2017 and the I-Pace full-electric crossover a year later at Austrian contract manufacturer Magna Steyr, but then its overall sales started to slide, resulting in overcapacity.

JLR also invested in the new MLA platform designed around internal combustion engines just before it became clear that a better investment would have been to create one with batteries at its core.

Bollore's decision to write off investment in that platform shows that JLR could be getting ahead of events.

"[MLA] does not fit into the Reimagine strategy. It won't be leading-edge technology at the end of this decade," Mardell told investors. "We would have been in catch-up [mode] on technology and compliance, and that just isn't good enough in this industry today."

Instead, JLR will build new Land Rovers below the large Range Rovers on the so-called "battery-native" Electrified Modular Architecture (EMA), starting in 2024. JLR was hazy on how it planned to finance this platform, but Bollore promised "new standards of competitiveness and cost" for the new architecture.

The engine lineup would be one electrified gasoline unit, with diesels cut altogether, JLR outlined in its presentation. No timeline was given for this, but Bollore told journalists in February he expected JLR to offer "almost zero" internal combustion engines by 2036.

Further savings would come from reducing its manufacturing capacity by 25 percent. Its plant in Castle Bromwich, England, will stop vehicle production and be "repurposed" and will "benefit from our plans to realize efficiencies in our Midland's property portfolio," Bollore told investors.

The plant will likely incorporate JLR's Special Vehicle Operations [SVO] performance arm, which is now based on the site of Peugeot's former plant in Ryton, England, Birmingham Business School's Bailey said.
Meanwhile, JLR's management team has moved to Gaydon from Whitley, England, possibly allowing the company to sell its engineering center, which is in a former aircraft factory.

Bollore's ability to cut costs, a skill learned under his former boss, Carlos Ghosn, as well as a strong background in EVs and China, gives Bailey hope that JLR's is good hands.

"The underlying business is very good. Land Rover is a key asset and that is a very profitable operation," he said. "A question mark remains over Jaguar. Numerous attempts to reinvent the brand over the years haven't worked. The EV revolution offers that chance."