Auto Industry

Chery picking

Can a locally-built Land Rover woo Chinese buyers?

A Land Rover Evoque car is displayed during Chery Jaguar Land Rover plant opening ceremony in Changshu

Made in China: its local Land Rover SUVs are cheaper

One summer’s day in 1947 two brothers were walking along a Welsh beach when one of them picked up a stick and used it to draw a sketch in the sand of a new type of agricultural vehicle that might boost their company’s profits. The two brothers were the managing director and chief engineer at Rover and the inspiration for their design came from an ex-army jeep they had been using to drive around their farm in Anglesey. They decided to call their new all-terrain vehicle the Land Rover, reports the Financial Times.

Some 68 years later, the iconic Land Rover Defender model they created is finally being phased out because it now costs too much to be fitted out to 21st century safety and emissions standards.

Yet had they been alive today, the two brothers would probably have been amazed to discover it had lasted so long. They would have been even more surprised to learn their employer is now owned by an Indian company, and derives 50% of its profits from China (at the time the Land Rover was created India had only just gained its independence from Britain, while China was in the throes of a Communist revolution).

Today the carmaker continues to pin its hopes on China despite signs of flagging sales growth across the automotive sector. On February 1 Jaguar Land Rover (JLR), as it is now called, recorded a new milestone in its history when the first locally-produced Land Rovers began rolling off the company’s new Changshu production plant in Jiangsu province. The joint venture with Chery Automobile was established in 2012 (see WiC171) and the plant has the capacity to produce 130,000 cars a year during its first phase.

This is similar in number to the 120,000 cars JLR sold in China during 2014, all of which were imported.

As a relative latecomer JLR is still in the process of building market share. According to 21CN Business Herald, the company plans to add 250 dealerships over the coming 12 months, substantially increasing its current 160 strong network.

JLR also believes it will not need to provide the same level of subsidies other manufacturers have recently been forced to pay their dealers (see WiC 270), because its network currently enjoys higher margins. Greater China president Bob Grace tells 21CN, “We’ve set very reasonable expectations for them and will control inventory levels to about 35 days to ensure they stay profitable.”

Over the medium term, the company has far more ambitious targets and by 2020 hopes to be shifting 750,000 vehicles a year. This would bring it more in line with the projected market share of the big three German luxury marques, which are currently selling about 400,000 to 500,000 units each a year.

Executives believe the new plant will help increase JLR’s market share because the firm can sell cars at lower prices. Partly that is because as the plant starts to rely far more heavily on locally-sourced components, the parts will no longer be subject to 15% import taxes. As a result, the Chinese version of the Land Rover Aurora is being sold for Rmb448,000 to Rmb582,800 ($71,686 to $93,047), compared to sticker prices of Rmb578,000 to Rmb666,000 for imported Auroras.

In an interview with CBN, Peng Du from automotive consultancy Strategy and Global says that “cheaper localised models will help to expand the scope of Land Rover’s audience in China”. However not everyone agrees. CBN wonders whether the presence of the Chery logo on the back of the Land Rover will put local buyers off, given the Chinese carmaker’s “reputation for mediocre quality and lack of overseas experience”.

The joint venture’s president, Chris Bryant, says this will not be the case. “The primary goal of all our investments is to ensure the quality of local cars is the same as imported cars,” he told journalists at the launch of the Chinese Land Rover Aurora. “Except for the rear logo, the local Aurora and imported Aurora will be no different.”

The ramp up of JLR’s Changshu plant and the expansion of Audi’s Foshan plant are expected to account for the majority of capacity additions in the Chinese car market this year.

Stock market investors have been concerned about what will happen to all these new cars if the Chinese economy continues to slow and sales growth tails off into single digits. Cheaper cars are expected to take the brunt of the slowdown, although even the luxury sector may not be able to maintain the 20% sales growth seen in 2014.

When JLR released its third quarter results at the beginning of February it reported that while sales were up 18% year-on-year, this was not as impressive as the 29% sales growth for the first nine months as a whole.

The slowdown was enough to push the stock price of parent Tata Motors down 8% over the following two days, although it soon recovered and is currently up 17% year-to-date. Over the past year, Tata Motors has been one of the automotive sector’s best performing stocks rising 47% on a 12-month basis. However, at nine times forward earnings it still trades at a discount to domestic Indian peers like Mahindra & Mahindra and Maruti, as well as global giants such as BMW, Daimler Benz (which owns Mercedes) and Volkswagen (Audi’s owner), which all trade in the low to mid-teens.

Some investors worry that the best may be behind the group as its main Land Rover models were all relaunched a few years ago. The Land Rover Evoque was introduced in 2011, for example, while the updated Range Rover came on stream in 2012 and the Range Rover Sport in 2013.

The Land Rover brand has become central to JLR’s profitability, eclipsing Jaguar, which only accounts for a fifth of global sales, but will be the key focus for the group over the coming few years. This year, in particular, will be critical for JLR as it launches its new Jaguar XE range in June in a head-to-head contest with Audi’s new A4. Success is crucial given the XE’s design will form the basis of all new Jags to come (excluding the sporty F-type). Then again, the company does not have much recent form where Jaguar revamps are concerned. The X-type was launched in 2001 only to be discontinued eight years later on the back of declining sales. However, as experts have pointed out, Ford was the owner at the time and that design was said to be based on a Mondeo chassis.

By contrast, JLR is estimated to have invested £1.5 billion ($2.3 billion) on the new XE range, which will feature all-aluminium architecture and is being positioned to compete with the BMW 3 series and the Mercedes C class.

The Chinese press remains somewhat sceptical. Says CBN: “Land Rover’s renaissance is down to the rising popularity of SUVs in the emerging markets coupled with the popularity of British culture thanks to shows like Downton Abbey. Jaguar has not been so lucky and has been unable to make much of a mark among luxury Chinese car brands.” The newspaper says that while Land Rover vehicles have been so in demand that dealers could afford to mark them up, the opposite is true in China for Jaguars where “discounts became the norm” at the dealerships.

Local auto analysts say Jaguar is at a disadvantage versus its bigger German rivals too because it has fewer models on offer (currently it sells only three in China). Nor is it helped, reckons CBN, by its dealers’ preference for pushing easier to make and more lucrative Land Rover sales instead of putting a greater effort into growing customer awareness of the less familiar Jaguar brand.

Perhaps another British icon, James Bond, could assist in this crucial respect. The next Bond film Spectre is scheduled for release towards the end of the year. As usual, 007 will be driving an Aston Martin (a DB10). But this year, the villain will be chasing him down the streets of Rome in a Jag – a specially-created supercar called the CX75.

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