Anoop Iyer S44590477 1

Jaguar Land Rover Plc

From a fringe manufacturer to a global player faces uncertain

economic challenges ahead

Anoop Iyer
S44590477
a.iyer@uq.net.au
Word count: 2533

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Table of content:
1. Executive summary: ............................................................................................................................ 3
2.0 Background Information: .................................................................................................................. 5
3.0 Analysis using economic concepts: .................................................................................................. 5
3.1 Past performance (2007-2010) .......................................................................................................... 5
4. Reflection: ......................................................................................................................................... 11
5. Analysis of the options to address key strategic issue ...................................................................... 12
5.b Analysis of options: ........................................................................................................................ 12
6. Conclusion and recommendations: ................................................................................................... 17
Appendix 1 ............................................................................................................................................ 19
Appendix 2 ............................................................................................................................................ 20
Appendix 3 ............................................................................................................................................ 21
Appendix 4 ............................................................................................................................................ 22

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1. Executive summary:

Jaguar Land Rover Plc. (JLR) is a United Kingdom (UK) based automobile manufacturer

manufacturing performance luxury cars and premium sports utility vehicles (SUV). JLR

produces luxury normal goods, and such influenced by the global macroeconomic conditions.

From 2007-2010, the worsening of global economic conditions including lack of credit

availability and reduction in discretionary spending coupled with higher fuel prices adversely

affected the JLR’s business. The lack of substitute products and inferior goods to cater the

demand during the times of recession also resulted in significant losses. By 2010, the global

economy started improving driven by the growth in the Chinese economy. This resulted in

increased demand of these cars. During this period, JLR introduced new vehicles in the

market, which were fuel-efficient and technologically advanced. This helped JLR to increase

their product offering while operating in the premium market segment. In 2016, JLR’s

revenue from China and emerging market (representing 38% of total sales) fell. In addition,

the exit of UK from European Union (“Brexit”) led to depreciation of pound (GBP) against

US dollars and Euro. The weakening of GBP helped JLR to increase revenue from US and

Europe as exports became cheaper. However, in longer term the GBP volatility is business

risk for JLR. With growth, stalling in China, Brexit, and Trump’s protectionism plan in

United States (US) creates an uncertainty for JLR’s future growth.

To mitigate the effect of Brexit two options have been proposed. One option is that JLR stays

invested in UK and use the depreciating (GBP) to grow its market share in UK and Europe.

Another option is to put a new production facility in Central or Eastern Europe to cater the

demand in European market. Recommendations from the analysis conclude that neither of

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the options is to be followed rather JLR should adopt a cautious approach. It is recommended

that for short term (3-5 years), JLR engage a contract manufacturer in Europe to produce cars

for European market. This approach will allow JLR to maintain flexibility with least liability

and will give time to understand the terms of Brexit i.e. whether EU will remain a free market

or it will subjected to WTO tariffs. It is also recommended that JLR continuously monitor the

global economic factors to draw their strategy and product plans and or else the company

might find itself in the same predicament that it was in 2007-2010.

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2.0 Background Information:

JLR is an UK based automobile manufacturer. The company designs, manufactures, and sells

Jaguar premium saloons and sports car, and Land Rover premium sport utility vehicles

(SUV). JLR operates in an oligopoly market producing normal luxury goods. In this luxury

market segment, there are fewer car manufacturers, less differentiated products, and

intensified competition. JLR primarily competes with Audi and BMW. In addition, this

market is characterised by high barriers to entry, long product development time and shorter

product life cycle.

The demand for luxury cars is highly influenced by the global macroeconomic factors

including, the rate of economic growth, ease of credit availability, government and

environmental policies, and fuel and commodity prices. During 2008-2010, JLR had fallen to

the victim of global recession where sales plummeted to its lowest levels. By 2010, the

general economy improved and the demand of the luxury cars (normal goods) increased. By

2017, JLR has achieved a 300% growth in sales compared to 2010. However, currently JLR

faces a combination of uncertain economic and political situation with Brexit and an

economic slowdown in emerging markets including China.

3.0 Analysis using economic concepts:

3.1 Past performance (2007-2010)

The general global economic condition, JLR’s strategy of operating in a narrower market

segment, and with increased availability of substitutes and competitive rivalry adversely

affected the JLR’s business performance. See appendix 1 and 2. Without innovating,

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consolidating, and expanding an existing competitor was inevitably going to win their market

share.

Normal goods:

The luxury cars can described as normal goods, where the demand of these cars increases as

the income of an individual or economy rises and decreases as the income falls. The

relationship between income and demand for a normal good is shown in figure 1 below.

The company operates at a premium end of automotive market, and such is influenced by the

global economic conditions. During the 2008-09, global financial crisis affected the global

economy, which resulted in lack of credit availability and reduction in disposable income,

which ultimately affected the spending on discretionary purchases. Since, the company

operated in premium end of the market, these factors adversely affected its business

performance as seen in figure 2 below.

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Substitutes and inferior goods:

The lack of substitute products in the market had a pronounced effect on the company’s

performance and earnings. JLR operates in the premium performance (saloon and sports cars)

and SUV market segments, which are very specific market segment. See appendix 2. JLR

performance is linked to the consumer demand in those market segments. JLR’s competitors

(BMW and Audi) have a much broader product portfolio (mix of luxury and inferior good),

which enables them to operate in broader spectrum of the market, which makes them

comparatively less vulnerable to the variations in consumer demand. As a result, when the

income fell, people naturally gravitated to the inferior goods. Since, JLR did not have any

inferior good to cater this demand it negatively affected its business performance as seen in

figure 3.

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3.2 Current Performance (2011-2017)

Normal goods

By 2010, the global economy improved and this has in turn resulted in increased demand for

these normal luxury goods as see in figure 4 and 5 below.

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JLR’s recent growth can be attributed to the growth in Chinese economy. This growth in

economy has resulted in increase in income levels and rise in disposable income, which has

increased the demand for JLR Vehicles. See figure 5, 6 & 7.

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Substitutes:

JLR has launched new smaller and fuel-efficient cars to ensure that JLR has right vehicle

available for right markets, at right price, and meeting different consumer priorities in the

global market. These new substitutes also resulted in increased sales. Further, the fall in the

price of complementary product (gasoline) also increased the demand.

Current global landscape

Recently, the growth in emerging markets including China and rest of the world has

decelerated. Although, Europe and U.S. has registered the increase in revenue, this is due to

weaker pound (GBP) against Euro and US dollars (USD), which has made exports attractive.

Currently, JLR faces tough challenges ahead with Brexit, slowdown of Chinese and emerging

markets economy, and Trump’s protectionism approach and possible higher tariffs in US.

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4. Reflection:

From the analysis, it can be seen that global macroeconomic conditions heavily influence the

demand normal luxury goods. During recession, the fall in consumer income causes decrease

in demand of luxury goods, which in turn increases the demand for inferior or substitute

goods. During the period of economic expansion as the real income of people rises the

demand of luxury goods increases.

JLR operates in narrow spectrum of the market and such its performance is linked to market

conditions and consumer demand. JLR’s product mix is effectively capable of catering the

demand during economic expansion. With lack of substitute products, JLR falls into risk of

losing business during the period of economic recession when people prefer cheaper and fuel

efficient cars. JLR currently does not have products, which can be considered as inferior good

to cater the demand during recession. Its competitors operate in a broader spectrum of market

and have a mix of product, which makes them comparatively less vulnerable to the market

conditions.

Furthermore, with 45% of total sale coming from UK and Europe, Brexit has created an

uncertainty in predicting the future course and direction for JLR. Additionally JLR’s reliance

on Chinese market and the uncertainty over the future performance of Chinese economy

further aggravates this challenge.

JLR’s reliance on luxury products and uncertainty in global market raises the following key

strategic questions for JLR:

 Should JLR develop an inferior good to cater the demand during the recession or

should JLR acquire a small car manufacturer to enhance its competitiveness? or given

the price also signals quality and brand status JLR should not produce inferior good?

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 Given the uncertainty with Brexit should JLR stay invested in UK or look to expand

outside UK?

 Should company expand into other new markets and avoid being over-reliant on one

particular economy such as China?

Key Strategic Issue:

In the short term with Brexit happening, the key strategic issue for JLR will be whether to

stay invested in UK or look to expand outside of UK.

5. Analysis of the options to address key strategic issue

5.a. Possible options:

Option 1: JLR stays invested in UK and focuses on to improve its business performance

Option 2: JLR expands outside UK and look for putting up new factory in Central or Eastern

Europe

5.b Analysis of options:

5.b Option 1: JLR stays invested in UK and focus on cost-efficiencies to improve its business

performance

Brexit will remove the free market access and the movement of goods between (UK and

Europe) will be subjected to WTO tariffs. As per WTO, the car parts would attract a 4% tariff

and completely built automobile will attract 10% tariff. With tariff, there would be two

scenarios:

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Scenario 1: Cost of importing the cars in UK for the European manufacturers Audi and

BMW will increase

In UK market, as the cost for these competitors will rise, it would cause a shift in supply.

Since, with tariffs these manufacturers will profit less at price P, these car manufacturers will

be motivated to produce fewer at given price, thus decreasing the quantity supplied as seen in

figure 8.

Since, these luxury cars are less differentiated, the reduction in supply by European

manufacturer in UK will result in an opportunity for the substitute product i.e. JLR to gain the

market share in UK equal to the difference between Q1 and Q as per figure 8 or difference

between Q and Q1 as per figure 9 below.

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Therefore, by staying in UK and managing cost effectively JLR can increase the market share

in UK. JLR can possibly look to capture some of 18% market share in UK as per figure 10

below. (See appendix 3 for detailed calculation and discussion)

Scenario 2: Cost of exporting the cars into European region will increase for JLR

The tariffs on auto part and the vehicle will increase the cost but JLR is benefitted by

weakening of the GBP. With GBP depreciating by 12% against Euro, this makes JLR

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products 12% cheaper thereby offsetting the price increase due to tariffs. Therefore, JLR can

maintain supply as for the given price while exporting into European market.

5.c Option 1: Assumptions:

1. The GBP is expected to remain the at same level and there is no further upside

expected

Any upside volatility in the GBP will adversely affect JLR operations and can erode

the tariff offset making JLR less competitive

2. The trade between Europe and UK will be subjected to tariffs and the competitors will

pass on the increased cost to consumers.

If the competitors will absorb the cost then JLR will not be able to grow its market

share

3. The competitors will also stay in UK market

In automobile industry, a single supplier supplies parts to several manufacturers. If

competitors move out of UK, then the incumbent parts supplier will lose the business,

which in turn will affect their economics of scale. This will lead to increase in

marginal cost and therefore, they will be forced to increase the cost and thus

increasing JLR’s marginal cost.

4. JLR’s manufacturing facilities and suppliers have the capacity to cater this excess

demand

Any constraints in above factor will result in increased marginal cost to meet the

demand, thus negatively affecting profitability.

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5.b: Option 2: JLR expands outside UK and build new factory in Central or Eastern Europe

With favourable exchange rate to its advantage, JLR could look to expand into Central or

Eastern European countries such as Poland, Slovakia, and Czech Republic. This expansion

will provide following advantage to JLR:

1. Moving its manufacturing facility to Europe, JLR can exclusively cater to European

demand. With favourable exchange rate, JLR can import the automotive parts to its

European plant at 5% less cost. This will reduce the marginal cost for JLR and will

provide an advantage over its competitors. See appendix 4

2. The cost of labour in these countries is 40% of labour cost in UK. This lower wage

cost will further reduce the marginal cost of production for JLR. See table 1 below.

JLR can also use this additional capacity to create specialisation to achieve profit

maximisation. By moving high margin vehicle to this production facility, will

increase the profit margin, as the marginal cost to manufacture the cars is less for this

facility (low volume – high margin). JLR can build low margin vehicles at its UK

facility by spreading the cost over large volume, and achieving economies of scale

(low margin – high volume).

Therefore, expansion into Europe reduces JLR’s marginal cost.

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5.c Option 2 : Assumptions:

1. The GBP is expected to remain the same level and there is no further upside expected

Any upside volatility in the GBP will adversely affect JLR operations and can erode

the tariff offset making JLR less competitive

2. Suppliers in UK have the additional capacity to meet this increased supply

If the suppliers in UK do not the additional capacity, JLR will be forced to source

parts from Europe, which will offset the reduction in input cost gained due to

depreciation of pound against euro.

6. Conclusion and recommendations:

6.a Conclusion:

The macroeconomic conditions and the uncertain terms over impeding Brexit, JLR faces an

uncertain future ahead. To mitigate the effect of Brexit two options have been proposed.

Option 1 suggests staying in UK focusing on optimising business and increase the market

share in UK. Option 2 suggests moving out of U.K and putting a new manufacturing plant in

central or Eastern Europe to reduce its marginal cost. Clearly option 2, offers a distinct

advantage over option 1 and allows JLR to reduce marginal cost and opportunity for creating

specialisation. However, the success of option 2 is dependent on GBP volatility and

macroeconomic conditions. Adverse macroeconomic condition can lead to lack of product

demand, which has knock on effect on low plant capacity utilisation, increased marginal cost,

and inventory build-up.

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6.b Recommendations:

Therefore, it is recommended that JLR follow a cautious approach. In doing so, it is

recommended JLR do not commit into any capital expenditure for setting up new

manufacturing plant in UK or Europe. Instead, for short term (3-5 years), JLR can form

strategic alliance with existing manufacturer to lease their excess manufacturing capacity or

use contract manufacturers to produce vehicles in Europe. Although, this approach will be

comparatively expensive with increased marginal cost, but this approach will reduce the risk,

liability and allow for greater flexibility.

It is also recommended that JLR develop a product portfolio, which can cater to broad

spectrum of the market and thus do not get much affected by the economic condition.

References:

Hubbard, R.G., Garnett, A.M., Lewis, P., & O’brien, A.P. (2013). Essentials of Economics,
2nd Edition. Pearson Australia.

Porter, M.E. (2008). The five competitive forces that shape strategy. Harvard Business
Review. Vol 78.

Jaguar Land Rover Plc. (2016). Annual Report.

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Appendix 1

Porter’s five forces: Competitive analysis for Jaguar Land Rover versus its competitors Audi
and BMW

Forces Risk

Threat of new entrant Low  High barriers to entry

 Factors of production difficult to attain
 High development time
 Difficult to achieve economies of scale
in short time
 Industry subject to strict environmental
and regulatory laws

Bargaining power of buyers High  Substitutes: In times of economic

recession people will prefer to buy
cheaper cars
 Luxury cars not much differentiated
market
 Brand loyalty

Bargaining power of suppliers Medium to  Limited number of suppliers in the

High automobile market for luxury cars
 Exclusivity of supplier can create a
local monopoly and drive up the cost

Threat of substitutes High  Substitutes: In times of economic

recession people will prefer to buy
cheaper cars
 Change in technology can create a
shift in consumer preference

Rivalry among competitors High  Luxury cars not much differentiated

market so it is a competitive market
 Same of customer segment for all
competitors therefore, all will try to
entice the customer create a very
competitive market.

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Appendix 2

JLR and its competitors (Audi and BMW) product matrix:

Price Range JLR BMW Audi

0 - £ 20,000 No product (High  BMW 1  Audi A1

risk are) series  Audi A3

£ 20,000 to £30,000  Jaguar XE  BMW 2  Audi S1

 Range rover series  Audi Q3
evoque  BMW X1  Audi A4
 BMW 3  Audi A5
series
 BMW 4
series
£30,000 -£40,000  Jaguar XF  BMW 5  Audi Q5
 Jaguar F Pace series  Audi A6
 Range Rover  BMW X4
discovery  BMW 6
series

£40,000 -£50,000  Jaguar F Type  BMW X5  Audi A7

 Audi Q7

Above £50,000  Range rover  BMW X6  Audi A8

 BMW 7  Audi R8
series

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Appendix 3

Cost analysis for Jaguar land rover after enacting tariffs:

5.b Option 1: JLR stays invested in UK and focuses on cost-efficiencies to improve its

business performance

For this analysis, FY16 values are used: For analysis purposes, it is assumed that JLR future
performance is same as FY16 and JLR sources parts from two locations: UK and Europe.

The data used here from JLR’s FY16 annual report.

Number of cars sold by JLR in FY16 5,21,571

Cost of raw materials to produce these cars £ 13,30,30,00,000

Cost Raw materials imported from Europe (it is £ 5,32,12,00,000

assumed that JLR imports 40% raw material
from Europe)
4% import duty on materials imported from £ 21,28,480
Europe ( WTO tariffs car parts)
Total landed cost of imported raw materials £ 5,32,33,28,480

Add 12% to the total landed cost as GBP is £ 5,96,21,27,898

weaker against EURO. Since you are importing
in Euro, you need to pay more for imports.

New cost of raw materials with tariffs £ 13,94,39,27,898

Percentage increase in cost of raw material 5%

due to tariffs
Percentage increase in cost per car 5%

It can be seen that with tariffs the cost per car for JLR will increase by 5%.

For JLR competitors, there will be direct increase of 10% per car, as they will be subject to
10%. Also, the competitors will be exporting cars to UK they will need to pay 12% more (as
the price in GBP is fixed). Therefore competitor will have to an increase of 10% plus 12%.

In UK, JLR can offset the increase of 5% by taking advantage of weaker pound. Since, JLR
exports 80% of its cars it can easily offset 5% increase in cost by taking advantage of weaker
pound and not passing to the customer.

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Appendix 4

Cost analysis for Jaguar Land Rover while operating in Europe

Option 2: JLR expands outside UK and puts a new factory in Central or Eastern Europe

For this analysis, FY16 values are used: For analysis purposes, it is assumed that JLR future
performance is same as FY16 and JLR sources parts from two locations: UK and Europe.

The data used from JLR’s FY16 annual report.

Total sales in Europe 104,314

Cost of total raw material required to £ 2,66,06,00,000
produce these cars in Europe

Cost of raw materials imported (60% of £ 1,59,63,60,000

the total raw material needs to be
imported from UK)
4% import duty on import of auto £ 6,38,54,400
components from UK
Total landed cost of imported raw £ 1,66,02,14,400
materials from UK

Reduce 12% because you are exporting £ 1,46,09,88,672

in GBP and importing in Euro. You need
to pay less

Total cost of raw material required for £ £2,52,52,28,672

vehicles in Europe

% change in cost of raw material -5.09%

If JLR sets up a new manufacturing plant, JLR needs to spend 5% less on raw materials
imports from UK.

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ECON7012: Major Assignment Marking Criteria

Student Name: Anoop Iyer
Criteria Comments Mark
1. Executive summary (max. 400 words – 6/6
included in total word count of <2,500)

2. Background information on the student’s firm:

a. Provides firm’s name and background details. 3/3
b. Integrates relevant economic terminology and
concepts to set the scene for following analysis.
3. Critical Analysis using Economic Concepts. Feedback requested:
a. Uses economic theory (incorporating graphs - Any other concepts, that I
and relevant calculations) to critically analyse could have explored.
past performances of the firm and the market it 10/12
operated in.
b. Uses economic theory (incorporating graphs
and relevant calculations) to critically analyse the
current performance of the firm and the current
market it operates in.
4. Reflection and key strategic issue
a. Based on the critical analysis, the student
reflects on what was learnt, what was confirmed, 7/8
and what remains puzzling.
b. The key strategic issue the firm faces, now or
in the near future, is clearly stated. It relates to,
and emerges from, the critical analysis.
5. Analysis of Options to address key strategic Feedback requested:
issue. - Any other concepts, that I
a. Clearly lists two possible options that could be could have explored.
implemented to address the key strategic issue. - any other suggestions on
b. Evaluates both options using economic theory, how to explain from en
outlining the benefits to the firm. economist perspective. 10/12
c. Assesses the assumptions made when
evaluating both options. Evaluates the impacts on
the firm of implementing either option should any
assumptions prove to be incorrect. 

6. Conclusion and Recommendation(s).
a. Draws a conclusion from analysis.
b. Provides a recommendation(s) to address the 4/4
identified key strategic issue. Outlines important
practical implementation measures.
TOTAL MARK 40/45
Other feedback:

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