Jaguar Land Rover has lost close to 200 bps in market share in China in recent months
Tata Motors has scaled down its capital expenditure guidance for subsidiary Jaguar Land Rover for the first time since acquiring the latter in 2008. The company aims to save 2.5 billion pounds in the current year and the next by way of cutting costs and reducing capex.
Brexit and a fall in demand in China will likely have an overbearing effect on JLR's profitability in the coming months. PB Balaji, Chief Financial Officer at Tata Motors, spoke to reporters on the sidelines of the company's results press conference.
Q: Will new product projects be axed?
A: There are 16 products that are coming in and not a single product that we want to continue is being touched. What we are doing is a (re)calibration of capex. Gearing up for 20-25 percent growth to getting adjusted to a flat growth also means that some of the infrastructure investments need to be calibrated out as we don’t need them. We need to be prudent and practical about it. We need to be razor-edged when it comes to spending in a demand environment that is not conducive. Demand is going to be muted and we need to respond in one go instead of doing a thesis on all.
Q: What are the long term issues?
A: Product delays is an issue that has been at JLR for some time, a product has to be launched as committed (as per schedule). And the delays can be due to various reasons – you are moving at too high a speed and don’t get the efficiency you need. Then there is the issue of product quality. The ranking of JLR in product quality is not good enough. The reason some of your material margins are not good enough is because there is too much of a cost sitting inside the vehicle. There is no better time to solve a problem than (during) a crisis because it gets everybody aligned. This is a crisis for JLR and we will ensure that we fully come out of it stronger.
Q: Would you have to cut back on your work force?
A: There is a full-fledged team that has been activated on that. There are multiple ideas we are working with. We have formed operational teams to decide on what is right for them just as we did for Tata Motors. We will not cut costs to win in a market. When we are growing at 20 percent we have one kind of skill set and when we are growing at 2 percent or zero percent we have a different kind of skill set.
Q: It has been a while since Tata Motors said it wants to divest stake in Tata Technologies and Tata Hitachi. Has there been any progress?
A: It takes time to have dialogues for transactions. But I am comfortable at the pace at which this is moving forward. We need to ensure that we get a fair value for them. The objective is to not do a distress sale of these assets. We also need to ensure that it goes to the right party. We are not here to do a random exit. All options are open for their sale including sale within the group.
Q: How do you gauge the China business?
A: The Chinese business has been a very successful business. This is the quarter where they have tripped, we should not read too much into it. It also offers us the opportunity on the way we want to sell there. A premium brand needs to move to a pull kind of business rather than push. The entire supply chain overshoots if from 26 percent growth you come down to -7 percent. JLR has managed to improve its EBITDA margin despite one of its profitable markets actually coming under strain.
Q: How subdued is retail demand in China?
A: Walk-ins have come down significantly, which means there is a consumer issue there. This gives us an opportunity to correct any anomaly in supply chain because it has overshot.
Q: How much market share have you lost in China so far?
A: Close to 200 basis points is what we have lost.
Q: Will there be more production holidays like the one we saw in October?
A: We are definitely watching it more closely to the extent inventory corrections are needed. If sale does not happen, we don’t intend to keep on producing. It is not good for the company and neither is good for the brand. We keep a very tight watch on inventory.
Q: How much pressure can you absorb before you decide to increase prices?
A: There is a clear pressure on prices with the rupee depreciating. And therefore our first reaction is to have aggressive savings plans. If there is a residual overflow of pricing we need to take, whatever is the bare minimum we need to take we will take because as market leader we need to be responsible and can't just destroy market value. Overall we have improved our realization by 50 bps in the last quarter.
Q: Are you maintaining your margin guidance of 7-9 percent?A: The 7-9 percent margin guidance is for JLR and that remains. We are premium OEM and we need to deliver 7-9 percent otherwise we are not a premium car maker. We have inched up the guidance in the domestic market by 100bps. It used to be 3-5 percent earlier, which is now revised upwards to 4-6 percent. PVs has turned around sharply and is becoming EBITDA break-even.