Jaguar will make it through the recession – but in what shape?
- Professor David Bailey works at Coventry University Business School. The views expressed are his own -
The UK operations of Jaguar Land Rover lost £673.4m last year after a £640 million surplus the year before, it was revealed last week in accounts filed with Companies House. Adding in actuarial and pensions adjustments, “total recognised losses” at JLR topped almost £1.2bn last year. Not that this is much of a surprise of course. This is a “once in a century” downturn as JLR boss David Smith put it, and most car makers have posted record losses – including Toyota, for the time in its history.
JLR has announced the cessation of X-type production at Halewood at the end of this year, leaving a huge question mark over the viability of the Halewood plant. On current volumes (without the X type) it is difficult to see how JLR can keep open three UK plants.
To keep Halewood operating (which at full capacity is a very efficient plant), the LRX Range Rover concept vehicle needs the green light soon for development and production. This means accessing the EIB loan of £340 million which is already on the table from Europe.
That, of course, brings us back to the loan guarantee from the British government which is still under discussion after months of haggling. Quite why it has so long to sort this out is beyond me. The latest rumour mill suggests that the government has dropped some of its more onerous conditions like appointing the chairman, and is now prepared to offer JLR a guarantee for a £175m commercial bridging loan over six months.
However, that’s way short of what Tata was looking for, both in terms of the scale of the guarantee and the term. Just six months of guarantee seems to ignore the reality of the credit crunch facing Tata, and a guarantee covering just 50% of the EIB loan is better than nothing but well short of the 75% I was expecting.
Indeed, Tata had originally asked for loan guarantees for commercial financing of around £500m and for a £340m European Investment Bank loan to help fund investments in greener vehicles (such as the LRX, which combines lightweight materials and a hybrid engine). The EIB loan has already been forthcoming from Europe.
Tata acquired JLR from Ford for $2.3 billion in a deal completed last year, and since buying JLR it has put in over £1bn into the firm. Tata support has been crucial during this double whammy of recession and credit crunch. Remember that Saab has been offloaded by GM and Ford is trying to sell off Volvo. If a private equity firm had got its hands on JLR we would have seen significant job losses (many more than the 2,200 we’ve seen under Tata) and plant closures already. The fact that we haven’t is testimony to Tata’s commitment.
Behind the results, Jaguar as a brand is doing pretty well in a tough market, and with a cracking line up of XK, XF and (new) XJ models, is well positioned for when demand does pick up. Land Rover, meanwhile, has been badly affected by the credit crunch and the shift away from 4×4 cars with the recent oil price spike. It ideally needs models like the LRX on sale right now. This makes the lengthy haggling over a loan guarantee even more of an issue as LRX development work needs to be speeded up.
Last week, it seemed that a loan guarantee was finally within reach. Hopes subsided, though, after a letter from Lord Mandelson to Tata was leaked to the press, and Mandelson made TV appearances apparently giving a ‘take it or leave it’ impression to Tata.
I’m not party to discussions, so can only guess why Mandelson’s team thought it was appropriate to leak the letter, which called for immediate “face to face” negotiations. Maybe it was intended to shift attention to Tata after some stinging criticism by the Business Select Committee of the government for its failure to arrange a loan (MPs on the Committee said they were ‘astounded’ it had not been sorted out sooner).
If so, it backfired. Last week another group of MPs, in the form of the West Midlands Select Committee, said it was “dismayed’ no money had been forthcoming for West Midlands’ producers. It called for an acceleration of applications to the government’s Automotive Assistance Package, including that by JLR.
And the leak didn’t go down very well with Tata either, unsurprisingly. The slow pace of agreeing suitable access to finance is the responsibility of the government, not Tata. JLR has maintained a diplomatic silence in public throughout the whole loan guarantee negotiations. It would be helpful if our politicians did the same.
Indeed, I hope politicians can step back for a moment and consider what’s going on. Given where the industry and JLR are right now, Halewood’s fate hangs in the balance. It really is that serious. The longer the loan negotiations drag on, the more vulnerable Halewood becomes.
This may be what Tata’s vice-chairman Ravi Kant meant recently by his comment that “plant shutdowns” could not be ruled out. OK, he could have meant temporary shutdowns, as Halewood will face in September. Yet without LRX production, I can’t see how Halewood can be kept open in the medium term.
I should stress that JLR will get through this recession. The questions are: In what shape? With how much R&D? With how many plants open? And with how many workers employed?
JLR is not asking for a bail out but rather help in accessing commercial finance at commercial rates. It’s not too much to ask the government to assist when so much is riding on the firm in terms of R&D, jobs, the supply chain, and the revenue the firm raises for the government in income tax, National Insurance and VAT.