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Analysis: How Jaguar Land Rover and PSA could work together
If the rumoured tie-up, or takeover, happens, it could be good news for both parties
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by Hilton Holloway
31 May 2019
Jaguar Land Rover (JLR) recently revealed a £3.6 billion annual loss, much of which was due to it reducing the value of company assets and a recognition of a reduction in future earnings.
The results came after two weeks of speculation that the PSA Group – owner of Peugeot, Citroën, DS and Vauxhall/Opel – had made a bid to buy JLR from Indian owner Tata.
A ‘post-integration’ document was reported to have been in circulation at the British car maker. JLR boss Ralf Speth did not rule out discussions between PSA and Tata but suggested he was not party to them. For its part, Tata said there was no truth in the rumours that it was about to “divest its stake in JLR”.
What Tata’s statement didn’t say was that it might divest some of its stake in JLR, entering a co-operation with PSA that could make sense for both companies. This currently looks to be the most likely outcome, according to Autocar sources.
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One investor said he believed that some kind of PSA-JLR tie-up was “inevitable”, a sentiment backed up by former Land Rover chief engineer Charles Tennant, who told the Coventry Telegraph that JLR was in a “death spiral”.
So is JLR really in trouble, or is this major bump in the road simply due to the collapse of JLR’s sales in China? The hard figures suggest that there is trouble ahead.
According to JLR’s accounts for 2018-19, sales in North America were up by 8.1% to 139,800 and up in the UK by 8.7% to 117,900 units. But sales across the EU were down by 4.5% and they crashed in China by 34%. North America is now JLR’s biggest market.
Behind those headline figures, there were big drops in the 2018-19 sales of the Evoque and Discovery Sport (both down by around 30%) as buyers waited for the new models, but this should spring back over the next 12 months. A 20% fall in F-Pace sales is not helpful for a comparatively young model, though.
However, sales of the E-Pace grew strongly, as did sales of the Velar. The Range Rover Sport was up to a profit-enhancing 80,000 sales globally.
Investment in the new MLA multi-fuel platform is weighing on the company, though. JLR spent a significant £3.8bn in 2018-19 on investment, of which 62% was on new products and 14% on electrification.
Sources also told Autocar that the JLR operation in China is in particular difficulty. Rocky relationships with dealer networks need to be repaired after significant sales and marketing mistakes were made.
Sources also claim that JLR’s relationship with Chery, its joint-venture partner in China, is also not as settled as it might be. Rocky releationships with dealer networks need to be repaired after significant sales and marketing mistakes were made, with insider concern JLR won't be able to turn that operation around.
Stories of quality problems with Chinese production are also common in the local media. The JLR-Chery combine builds the Evoque, Discovery Sport, E-Pace and long-wheelbase XE and XF for the Chinese market.
If we boil all that down, JLR’s predicament looks something like this: sales of less than 600,000 units across 13 model lines is a recipe for trouble down the line. And although the company is merging most of its cars onto the MLA platform, it is an expensive architecture and the investment needed to redesign its current bestsellers and launch three new model lines will be vast.
Even selling more than 700,000 cars by 2021 may not generate the cash needed for the future of the business. Rival firm BMW, for example, sold more than three times that in 2018. Moreover, JLR’s financial projections predict profit margins in the 3-4% range for the next three years and 4-6% by 2023. Tricky, when a recession is entirely possible in the medium term.
Take, for example, the current Evoque/Discovery Sport platform, which is due to be phased out in 2025, leaving no replacement architecture for these big-selling cars and, one investor claimed, no money in the bank for a project that needs to start in 18 months or so.
Outline plans for a range of smaller, more affordable and low-CO2 ‘city Land Rovers’ are also dead. Jaguar’s future in saloon cars has to be in question, too, despite official protestations.
How could an alliance with PSA help JLR?
Tata, Jaguar Land Rover's owner, is looking for a partner for a new medium-sized platform for its own future models. Chery was in the frame, but PSA could present itself as a better match.
PSA’s well-regarded EMP architecture could be upgradable for the next Evoque and Discovery Sport, perhaps fitted with an electrically driven rear axle. It could also underpin a family of Land Rovers priced below £30k, helping JLR build much-needed scale and appease dealers.
An alliance with PSA would also provide significant cover for JLR’s fleet CO2 rating, especially if JLR loses its derogation from meeting the 95g/km target in 2021.
PSA’s alliance with Dongfeng in China is said to be rocky, so a bespoke PSA-JLR venture in the country could help both partners start with a clean sheet, and JLR would have access to PSA dealers, allowing a neat brand ‘ladder’ from Citroën to Peugeot, DS and then Land Rover as a flagship.
PSA is also looking to get a foothold in the US, where JLR already has an established dealer network that it describes as “solidly profitable”.
As a first step in a PSA-JLR alliance, this all looks like a sound move. Any deal would probably lead to some major changes in JLR’s future plans, rather than ensuring business as usual. But major upheaval for JLR looks unavoidable.
Premium car firms - how it was looking last year
Mercedes-Benz (brand)
Earnings/profit - £6.26bnProfit margin - 7.8%Research and development - £6.03bnSales - 2.38 million cars
Audi (brand)
Earnings/profit - £4.05bn Profit margin - 7.8% R&D - £3.62bn Sales - 1.88 million cars
BMW Group
Earnings/profit - £8.64bn Profit margin - 7.2% R&D - £7.05bn Sales - 2.12 million cars
Jaguar Land Rover
Earnings/profit – £358m (£1.07bn in 2017) Profit margin – 0.7% (3.8% in 2017) R&D - £3.8bn Sales - 578,900 cars (614,300 in 2017)
Read more
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Comments
31
sabre
Analysis: How Jaguar Land Rover and PSA could work together
31 May 2019
I tell you how: Hiring a Japanese engineer to head Quality Control and Reliability Department of PSA and JLR' probably Europe.
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JMax18
As long as their sales
31 May 2019
As long as their sales continue to increase, someone'll buy em'
Thats assuming TATA don't keep em'.
JMax
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GODFATHER
sabre wrote:
31 May 2019
sabre wrote:
I tell you how: Hiring a Japanese engineer to head Quality Control and Reliability Department of PSA and JLR' probably Europe.
Rather see a takeover by Toyota instead. This PSA collaboration is pointless as they have nothing in common where as Toyota still have Lexus that can collaborate with JLR
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CarNut170
JLR have maxxed their credit cards though...
31 May 2019
It's important to look at the macro behaviour of JLR on borrowing to understand their dire situation, not just quarterly sales figures.
If you check out AutoNews' excellent reporting from earlier in the week "Where did Jaguar Land Rover's extra $1B come from?" - it puts into stark reality exactly how dire the money situation is at JLR.
They've thrown a load of cash onto short term borrowing, some of which is the equivalent of pay day lenders to business. Not something a company with healthy cashflow does.
.
Can JLR work with PSA? - A moot point. They NEED PSA.
As various former senior executives cited in the article also state.
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TStag
CarNut170 wrote:
31 May 2019
CarNut170 wrote:
It's important to look at the macro behaviour of JLR on borrowing to understand their dire situation, not just quarterly sales figures.
If you check out AutoNews' excellent reporting from earlier in the week "Where did Jaguar Land Rover's extra $1B come from?" - it puts into stark reality exactly how dire the money situation is at JLR.
They've thrown a load of cash onto short term borrowing, some of which is the equivalent of pay day lenders to business. Not something a company with healthy cashflow does.
.
Can JLR work with PSA? - A moot point. They NEED PSA.
As various former senior executives cited in the article also state.
Yes but No :-)
Depends on how you look at it. JLR are about to launch the Defender range, Range Rover Car and Electric XJ. They have made big strategic investments in electrification and new tech generally. They are now generating profits (see prior quarter), have cut costs and have raised cash (agree by maxing out the credit card) to complete critical projects no doubt like their new Battery making plant in Hams Hall. Their bet is clearly that over the next 24 months the cash will roll in big time. With that in mind would you sell to PSA whose own electrification plans do not seem very advanced at all, who are carry expensive and ageing German car plants, who operate in a low margin end of the car market and are still workiong on the turn around of Opel/ Vauxhall (which is now profitable, but for how long), has no US dealers and mirror problems to JLR in China.
TATA could well conclude that if they hang this out for another 24 months it could be them making an offer for PSA. I'd argue that JLR value is much greater than it seems right now.
Lastly PSA may want them but what they might find is that they trigger other buyers to come in. A Toyota buy out of Tata Motors inc JLR would make huge sense for example.
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CarNut170
Just Yes.
31 May 2019
TStag wrote:
Yes but No :-)
Depends on how you look at it. JLR are about to launch the Defender range, Range Rover Car and Electric XJ. They have made big strategic investments in electrification and new tech generally. They are now generating profits (see prior quarter), have cut costs and have raised cash (agree by maxing out the credit card) to complete critical projects no doubt like their new Battery making plant in Hams Hall. Their bet is clearly that over the next 24 months the cash will roll in big time. With that in mind would you sell to PSA whose own electrification plans do not seem very advanced at all, who are carry expensive and ageing German car plants, who operate in a low margin end of the car market and are still workiong on the turn around of Opel/ Vauxhall (which is now profitable, but for how long), has no US dealers and mirror problems to JLR in China.
TATA could well conclude that if they hang this out for another 24 months it could be them making an offer for PSA. I'd argue that JLR value is much greater than it seems right now.
Lastly PSA may want them but what they might find is that they trigger other buyers to come in. A Toyota buy out of Tata Motors inc JLR would make huge sense for example.
It's undoubetdly true JLR are making some millions in profits now, but they need to raise 1 billion by next March - there is no way their sales will ever cover that. As is explained in the AutoNews article.
As such, JLR either need bailing out by Tata or an external partner with cash in hand.
Tata are highly unlikely to do so, take a look at the profits they've been skimming off JLR for the best part of a decade.
As such, JLR need PSA.
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dipdaddy
I think a partnership in R&D
31 May 2019
I think a partnership in R&D is more likely. Tata has invested heavily in JLR and seems more committed to seeing it turn around with a new engine factory and new line of engines coming on stream, EV's in the pipeline. A takeover of JLR by PSA might spell trouble down the line due to eventuality of streamlining processes and manufacturing, which could mean job losses and closures. It may also be that JLR's court case win in China for chinese rip off cars might have put a dent in its sales. it's difficult to just put down a huge drop in sales due to quality issues and call the court case win for JLR followed by a drop in sales a coincidence
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WallMeerkat
Best case would like to see a
31 May 2019
Best case would like to see a shared platform EV flagship to replace the XJ and for Citroen/DS a modern EV replacement for the axed C6/DS5. The platform/both cars can focus on comfort, something both companies used to be renowned for.
However I see it as a cynical ploy to churn out more and more SUVs.
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TStag
WallMeerkat wrote:
31 May 2019
WallMeerkat wrote:
Best case would like to see a shared platform EV flagship to replace the XJ and for Citroen/DS a modern EV replacement for the axed C6/DS5. The platform/both cars can focus on comfort, something both companies used to be renowned for.
However I see it as a cynical ploy to churn out more and more SUVs.
One point worth noting is that JLR have said they will not share their electric tech with anyone else. They could if they wanted to and I'm sure it would raise cash, but their decision not to is interesting in itself. Hardly the action of a cash starved company.....
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EXJag
Capacity
31 May 2019
There is a very basic equation. 2 years ago When I worked for JLR they forecast production of 1 million by 2020 based on the incremental volumes to be produced in Slovakia including the disco and defender. Volumes then were roughly the same as they were last year. All budgets and profit and forward spending were based on this growth expectation to 1 million. Everything was rosy part from the Brexit concerns and diesel downtrend on the horizon. Fast forward to a time when JLR have now forward spent much of their expected future profits which failed to materialise and they now have over capacity issues with 3 uk plants, plus slovakia, Brazil and Gratz all producing the same year on year volumes at 0.7% profit. Anyone with a GCSE in maths can work out this will not be sustainable in the long term and either the volumes eed to almost double in the next year (unlikely) or they need to partner up.
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