Jaguar's days chasing German rivals over

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

At 129,000 square feet, 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 $700 million overhaul of JLR's engineering facilities, was the latest in a series of expensive capital investments aimed at helping CEO Ralf Speth achieve his long-sought goal of selling a million vehicles 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 product 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 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.

Vehicles on the so-called "MLA low" and "MLA mid" architectures were canceled, including the long-heralded electric Jaguar XJ sedan, a lower-riding electric Land Rover dubbed "Road Rover" by the U.K. press and the Jaguar J-Pace crossover.

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 (then $4 billion) for the quarter that ended December 2019, signaling the end of a run of incredible profits that reached a high of £2.6 billion in 2015.

The company, owned by India's Tata Motors, reduced its work force 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," CFO 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 the 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 profits by using his slide deck. He noted how investment outlays overtook operating cash flow in 2017 as the number of vehicles JLR needed to sell to reach breakeven rose to 600,000 in fiscal 2019 from 425,000 in fiscal 2014.

JLR's spending spree reached £4.2 billion in the 2018 financial year, which included its £1 billion 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 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 U.K. plants and one Chinese factory.

It also added two complete knockdown kit plants, one in India and one in Brazil during the period.

The infrastructure was now in place for JLR to make 1 million vehicles 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 latest financial year, which ended March 31.

Cost cutting undertaken since 2019 reduced JLR's annual break-even figure to 400,000 in the last financial year, Mardell said. Spending is clamped at £2.5 billion 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 2026 financial year.

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 competitors 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 utilities that competed with Land Rovers.

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," 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 global sales sunk to less than 100,000 in its financial year that ended 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.

Sales targets were "reasonable" for an all-electric Jaguar brand after 2025, Bollore said, without elaborating. Analysts contacted by Automotive News Europe 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 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' U.K.-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 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 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. "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 secondhand vehicles could cut lease rates, making premium vehicles more affordable. Pent-up demand will reduce discounting as normality returns. "COVID-19 has given them another shot at investment," Rakesh said.