Back in Black

JLR today unveiled terrific results today, with end of year profits of some £32m for its owner Tata, quite a turnaround after the carnage in the auto sector last year.

The firm saw big increases in global sales of Land Rover and Range Rover 2010 models, which totalled 14,350 in April, almost 90% higher than the same month last year.

Jaguar sales remain flat as the boost from the XJ has yet to feed through. The firm's shift away from higher volume X-type production also means that the firm is essentially repositioning the Big Cat in the premium sector where it can earn more money per car.

JLR's results were contained in Tata Motors' annual results. These showed sales up by 31% to £13.6bn, with Tata Motors profits of £378m (as against a loss of £310m last year).

Tata said it was also optimistic for JLR in the year ahead, especially given the warm reception to new models: "With the positive market reception of the enhanced product range in an improved market environment as well as continued cost reduction efforts, the business was able to show sustained quartered on quarter improvement towards solid profitability in Q3 and Q4 of FY10."

Over 2009-10, JLR launched updated models including 2010 facelifts for the Range Rover, Range Rover Sport, LR Discovery 4 and Jaguars XF and XK. Jaguar also expects better sales in late 2010 after the launch of the flagship XJ.

Tata stated that "JLR retail sales improved favourably in the second half of the year, after addressing the strong recovery in the UK were Land Rover retail sales were up 25% year on year... the Jaguar XF improved in the UK by 28% year on year".

And indicative of why JLR is going to China, Tata said it was also hopeful of continued expansion in China, where demand for the vehicles is growing with the emergence of the new affluent middle class; "China continued to show significant growth for JLR with Jaguar growing by 38% and Land Rover 55% year on year," said Tata.

Underpinning these results are three things: 1. a great product line-up with more to come (which is why R&D and innovation is so important); 2. strong growth in emerging markets like China boosting demand for JLR products; 3. a weak pound which has helped firms like Jaguar export.

Plant Closure Still Looms

The Guardian today reported that the sales boost at JLR has led the firm to reconsider closing one of its West Midlands plants, and that no such closure is now on the cards. JLR denied this immediately.

My reading of the situation is that a plant is still likely to close after 2015, and the announcement will probably be made sometime this summer.

Whilst unions will rightly be concerned about possible job losses, it's difficult to see how JLR could keep open 3 plants in the UK. JLR aims to ramp up production over the next few years from around 200,000 now to around 300,000 units but even then the economics of 3 plants fail to stack up.

What economists call the 'minimum efficient scale' for a car assembly plant is around 200,000 to 250,000 units a year. In theory JLR could actually shoe-horn all their production through a slightly enlarged Halewood, which would be a huge blow for the West Midlands.

So in that sense I'm relieved at least that the firm is looking to consolidate output in the West Midlands on one site and cut costs (such as by having one paint shop rather than two).

At the moment JLR jobs are roughly distributed as follows:
Halewood - aprox 1,900
Solihull - approx 4,600
Castle Brom - approx 2,400
Browns Lane - approx 400
Gaydon - approx 3000
Whitley - approx 1900

In terms of a plant closure, it's too close to call which way things will go. Solihull is a large plant with plenty of scope for expansion and with a relatively new paint shop and up-to-date multiple forming press.

But on the other hand, the firm could easily shift more Land Rover production to the big Halewood plant and focus on high-tech aluminium construction at Castle Bromwich.

On balance Castle Brom may be the more vulnerable as a more space constrained site.

Where Next?

In terms of models, JLR is looking to reduce the number of platforms to two to drastically cut development costs (I should stress that what follows is simply my own guess on where the firm might go, based on developments in the industry).

This would mean having the Range Rover, Range Rover Sport and Jaguar XJ models all on one platform, and the XK and (rumoured) new small sports car all aluminium as well. Reports in auto magazines suggest that the Range Rover and Range Rover Sport could also be available in 7 seater versions. Meanwhile, the XF would carry on in steel until its replacement comes out.

The Freelander and Discovery (which is anyway perhaps getting too close the Range Rover brand) might be phased out, leaving Halewood to produce the new lightweight hybrid LRX (nicknamed the 'Range Rover Coupe' for now) and a more utilitarian Land Rover.

That suggests the emergence of Range Rover as a much more distinct brand in its own right (as we have started to see with two models already and the Coupe yet to come)where the firm can earn higher premiums.

As previously predicted, JLR will produce in China given the rapid growth of sales there and the emergence of a middle class that will look to buy premium cars like Jags and Range Rovers.

And maybe basic Land Rover Defender production might be moved to India in the middle of the next decade, leaving JLR in the West Midlands to focus on more up-market premium models?

Boosting Manufacturing Capacity

The recent turmoil in the car industry has meant that many car firms, including JLR, have had to rapidly re-draw their plans. However, some things haven't changed: JLR currently has one car plant too many in the UK and far too many separate platforms.

Of course, I share with the unions a concern over manufacturing jobs and the need to rebalance the economy. There are two important issues to remember here though.

Firstly, JLR has stated that it aims to retain overall employment in the region after the consolidation. So, workers are likely to be moved from one plant to another. Therefore we need to focus on maintaining skilled employment levels rather than whether workers are at one plant or two.

This means thinking about how the government could help JLR get new models to market (launch aid is one element here, R&D support is another) so as to maintain skilled employment.

Secondly, we need to think more creatively about how to build and sustain manufacturing capacity. If we want more manufacturing so as to avoid over-reliance on financial services, we should be looking now at how Castle Brom or Lode Lane could be used for making something else.

For example, JLR's parent firm is Tata. They have talked about bringing electric Nano car production to Europe. What better place than the West Midlands given the supply chain expertise here and given their considerable investment in R&D in the region?

That would mean the government taking a more interventionist line (as Labour did with Nissan) to persuade Tata of the benefits of producing in the UK. I have no idea of where Tata are looking to produce Nano electric car production, but I suggest the new coalition government makes a strong case to bring it to the UK and look to use an un-needed JLR plant.

PM David Cameron will today talk of the need to rebalance the economy and foster a vibrant manufacturing base. That means intervening to make it happen, starting right now. JLR is a winner and is a great case of how we can export our way out of recession. It deserves state backing, as does the manufacturing base more generally if we really are going to rebalance the economy..

Professor David Bailey works at Coventry University Business School.strong>