News analysis: Porsche - a business model for JLR?
Clive Goldthorp
Three short months have passed since Tata Motors Limited (TML)
acquired Jaguar Cars Limited and Land Rover (JLR) for $2.3bn. but the combined
after effects of the Credit Crunch and the Oil Shock have kept JLR’s performance
and prospects in the business media’s spotlight.
JLR’s new CEO, David Smith, has now given a number of interviews
to the press and details of JLR’s Business Plan for the period to 2011
are gradually emerging. The Economist recently reported (Now
it’s personal, 21st August, 2008) that Mr. Smith’s strategy
for JLR consists of three main elements:
1) to improve customer service for both Jaguar and, in particular,
Land Rover owners,
2) to recognise that, although JLR cannot compete with other Tier 2 Prestige
players such as Audi, BMW and Mercedes-Benz in every segment, JLR can realistically
aim to have benchmark products in each of the two marques’ chosen segments
and
3) to reduce CO2 emissions because JLR would otherwise be adversely affected
by the European Commission’s current
proposal (COM(2007)856) to impose financial penalties on all OEMs with a
product portfolio average of more than 130g/km of CO2 from 2012 onwards.
JLR’s Business Plan may also see both Jaguar and Land Rover
move further upmarket. David Smith has suggested that both marques have the
potential to compete with the likes of Aston Martin and Bentley above the £100,000
price point. TML Chairman, Ratan Tata, has even indicated that Daimler might
be revived as a Tier 1 Elite/Luxury marque to compete directly with Bentley,
Maybach and Rolls Royce. See: Tata
Motors ready to pitch Daimler back in the race, Rhys Blakely, The Times,
28th July, 2008.
However, some Automotive Industry observers remain sceptical about
the chances of JLR’s Business Plan providing TML with a profitable return
on the company’s $2.3bn. investment. Robert Salomon, an Associate Professor
at the Stern School of Business, New York University, clearly falls into that
category: his Can
Jaguar survive Tata? article on the American Stock Market news website Seeking
Alpha.com includes a commentary on The Economist’s article.
Salomon contends that 'one of the reasons JLR has a tough time
competing effectively with the likes of BMW, Audi, and Mercedes is precisely
because they don’t offer ‘across the board’ models. They specialize
in up-market saloons and SUVs. BMW, Audi and, to a lesser extent, Mercedes have
a distinct advantage over JLR in their ability to spread development costs across
models by using a single platform across multiple offerings (cars and SUVs).
This makes it difficult for JLR to compete on cost with' the aforementioned
Tier 2 Prestige OEMs.
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My business role model is Porsche. The way they
structure and operate is very impressive. They have used a relatively small
amount of assets very cleverly. |
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The Economist pointed out that 'JLR is… investing $1.5bn
in new hybrids which will come on stream from 2012' and that 'Land Rover’s
e-terrain technology, a diesel-electric hybrid powertrain with an electric rear-axle
drive system, should give future Land Rovers even greater off-road ability while
cutting emissions by 30 per cent.' Salomon simply comments: 'That is not enough.
JLR does not currently manufacture one car that meets the European environmental
standards that take effect in 2012.'
JLR’s CEO, David Smith, would, no doubt, accept that Audi,
BMW, Mercedes-Benz and the other Tier 2 Prestige OEMs are likely to remain the
two marques’ main competitors but would probably counter Robert Salomon’s
scepticism by saying that JLR does not need to follow a similar business model.
Indeed, speaking to CAR Magazine’s Executive Editor, Gavin Green,
(CAR September, 2008), Smith said: 'My business role model is Porsche.
The way they structure and operate is very impressive. They have used a relatively
small amount of assets very cleverly.'
Smith’s Porsche-like vision for JLR seems, at least by implication,
to be shared by TML. Gerard Nieuwenhuys, Managing Director, Sytner Group Limited
recently told Automotive Management: 'Tata talked to us before the acquisition
very early on and we were impressed. There is an opportunity for Jaguar to do
with luxury cars what Porsche has done for sports cars.'
AROnline, though, wonders just how closely TML and JLR
might follow the business model adopted by Porsche Automobil Holding SE (Porsche
SE) and believes that close scrutiny of the commercial logic behind that company’s
now European Commission-approved plans to acquire a controlling stake in Volkswagen
AG might benefit both TML and JLR.
Indeed, given last month’s 18.6 per cent decline in UK car
sales which saw Aston Martin post a drop of 67 per cent and Jaguar one of 41
per cent, an apparently permanent shift by consumers into lower-CO2 –
if not necessarily smaller or lower-priced – cars (See: Luxury
marques lose shine for buyers, John Reed, FT.com, 4th September, 2008) and
the real prospect that the European Parliament’s Environment Committee
will present even tougher proposals on car CO2 emissions to the full Parliament
for the vote next month (See: EU
lawmakers delay vote to get tough on car CO2 emissions, Automotive News
Europe, 4th September, 2008) Porsche SE’s takeover of Volkswagen AG appears
to be an increasingly inspired move even though there are still some significant
legal and political issues to be resolved (See: VW-Porsche
tensions continue to mount, Automotive News Europe, 8th September, 2008).
Porsche AG’s current model range has a CO2 emissions average
of 282g/km and, as the European Union's Industry Commissioner, Günter Verheugen,
pointed out last year, the company would be 'in the clear' if Porsche SE had
a controlling stake in Volkswagen AG. Porsche AG would then be entitled to balance
out highly polluting models such as the Cayenne S – which are also sold
in much smaller volumes – with less polluting ones like the Volkswagen
Polo BlueMotion.
JLR would certainly be able to counter Robert Salomon’s
criticism of the two companies’ programmes for reducing CO2 emissions
by adopting a Porsche SE-inspired strategy through the introduction of a TML-built
Rover range such as that outlined in previous articles on AROnline.
See: MINI:
why JLR needs Rover and the earlier stories mentioned in that article. Tata
Motors European Technology Centre plc’s Dr. Clive Hickman has, after all,
already said that Volkswagen’s quality standards are being used as the
benchmark for all TML’s new models….
David Smith claims that JLR now has more autonomy than when the
two companies were under Ford Motor’s ownership and can therefore make
and implement key strategic decisions more rapidly than before. Indeed, that
flexibility was demonstrated by last month’s transfer of 284 workers from
Land Rover’s Solihull plant to Jaguar’s West Bromwich factory in
order to assist with production of the XF model.
AROnline has previously suggested that senior executives
at TML and JLR should now be giving active consideration to 'the Rover question.'
However, the trends identified in John Reed’s FT.com article and the risk
of tougher than anticipated legislation on car CO2 emissions being passed by
the European Parliament next month might just make that an imperative.
An affirmative answer would, in our view, not only be a positive
demonstration of JLR’s flexibility but would also underline David Smith’s
reported commitment to a Porsche SE-based business model.