Can Britain’s largest automobile company, Jaguar Land Rover, survive Brexit?
British automotive companies will be severely impacted after Brexit. Will the country's largest automotive brand, Jaguar Land Rover, be able to adapt and survive?
The Brexit Impact – Supply Chain
Jaguar Land Rover (JLR) posted record sales for the financial year 2017, for the first time selling in excess of 600,000 cars [1]. However, the company could be facing tough times ahead as a result of its global supply chain & reliance on overseas talent [2].
Brexit could have a severe impact on JLR’s supply chain costs. If Britain fails to secure a good Brexit deal, JLR faces the prospect of paying export tariffs to the extent of 10% on its sales to the EU [3] – a market that accounted for almost a quarter of its overall sales in the last year. To make matters worse, JLR sources nearly 40% of its components from the EU [4]. If tariffs are imposed, JLR would be penalized for buying from the EU as well as selling into it, thus seriously harming its competitiveness against European competitors such as Mercedes, BMW & Audi.
Exhibit 1: Jaguar Land Rover : Unit car sales by geography, FY 2017 [9]
Losing competitiveness long term
Company sources estimate that as a result, JLR’s annual profit could be cut by 1 billion pounds by 2020 (Annual Profits in 2015-16 were 1.6 bn GBP) [5]. However, in the long term, the effects could be even more catastrophic. Company CEO Ralf Speth is worried that his company might not be able to attract top overseas engineers after Britain leaves the EU, due to higher immigration controls [2]. This would be seriously damaging to the company’s long-term innovation capability and put into question its vision of achieving complete electrification of all models after 2020 (from no electric models today) [6].
JLR’s response: Lets diversify
In the short term, JLR is trying to mitigate the potential Brexit impact by diversifying its supply chain. In particular, it plans to spend 1 bn GBP to open up a new production facility in Slovakia to cater to European demand. The new plant will be initially equipped to produce 150,000 cars annually with the capability to subsequently increase capacity to 300,000 cars [7]. The extended capacity should be enough to satisfy demand from the EU for the foreseeable future and will shield JLR not only from future tariffs but also from any currency fluctuations related to the GBP.
The company is also considering opening a new office in Brussels in order to maintain influence with European policymakers and make it easier to attract and retain European talent [7]. However, company officials have made it clear that JLR is and will remain to be headquartered in the UK.
In the long term, JLR is planning to increase its presence in emerging markets such as China, Brazil & India in order to reduce reliability on European sales. It recently built a new production facility in China to better serve the local market there & also has plans to invest in Brazil [8].
What about R&D?
The biggest risk for JLR in my opinion is losing its innovation capability as a result of having both fewer resources to spend on R&D (due to the possibility of lower profits) and an inability to attract the right level of global talent. At a time when the automobile industry is going through a massive transformation toward newer technologies, losing innovation will drastically impact JLR’s long term competitiveness.
Thus, I would recommend that JLR open a new innovation facility either in Europe or Silicon Valley. With immigration controls into the UK likely, shifting innovation to another country will increase JLR’s ability to attract world class engineers and thus improve its ability to develop better cars in the future. I would also suggest that JLR leverage its heritage and premium brand image to partner with companies that are looking to develop next generation automobile technologies (such as UBER and Alphabet Inc). This will ensure that the cost burden of R&D is shared and also improve JLR’s innovation capability as a whole since they will now be able to learn from companies at the forefront of global technology.
Lastly, in addition to geographically diversifying their manufacturing bases, they should also look to diversify their sourcing strategy by decreasing reliance on European auto parts. A strategy of vertically integrating in the UK would help reduce risk across the supply chain.
Open questions
Will JLR be able to attract the leading technology companies to partner with it? How will JLR deal with further protectionist policies in its major markets, for example potentially in the USA? How will increased competition from companies like Tesla affect traditional manufacturers like JLR, BMW & Mercedes in the future?
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Sources:
[1] “Jaguar Land Rover profits hit top gear as firm is making more than £182,000 an hour”, The Mirror, May 25, 2017, http://www.mirror.co.uk/lifestyle/motoring/jaguar-land-rover-profits-hit-10498919 , accessed November 2017
[2] “Jaguar Land Rover chief latest to warn of Brexit’s effects on UK industry”, The Independent, April 21, 2017, http://www.independent.co.uk/news/business/news/jaguar-land-rover-brexit-ceo-ralf-speth-effects-uk-industry-cars-a7694246.html , accessed November 2017
[3]”Jaguar Land Rover warned Brexit deterring suppliers, EU workers” , Reuters, September 7, 2017 , https://www.reuters.com/article/us-jaguarlandrover-tech-europe/jaguar-land-rover-warns-brexit-deterring-suppliers-eu-workers-idUSKCN1BI1WH, accessed November 2017
[4]”Hard Brexit will leave us uncompetitive, says Jaguar Land Rover” , Financial Times, September 28, 2016, https://www.ft.com/content/8858900c-854c-11e6-8897-2359a58ac7a5 , accessed November 2017
[5] “Jaguar Land Rover could face 1-billion-pound Brexit hit” , Reuters, Jun 21, 2016, https://www.reuters.com/article/us-britain-eu-jaguarlandrover-exclusive/exclusive-jaguar-land-rover-could-face-1-billion-pound-brexit-hit-sources-idUSKCN0Z71SJ , accessed November 2017
[6]”Jaguar Land Rover to make only electric or hybrid cars from 2020” , The Guardian, September 7,2017 , https://www.theguardian.com/business/2017/sep/07/jaguar-land-rover-electric-hybrid-cars-2020 , accessed November 2017
[7] “Brexit could cause £1bn drop in Jaguar Land Rover profit by 2020” , The Guardian , June 21, 2016 , https://www.theguardian.com/business/2016/jun/21/brexit-could-cause-1bn-drop-jaguar-land-rover-profit-sources-say, accessed November 2017
[8] Auto-Car Professional, Nov 03, 2017 , http://www.autocarpro.in/interview/china-probably-biggest-market-apac-east-europe-lot-potential-26879, accessed November 2017
[9] JLR Annual Report – 2017
Great post on the impact of Brexit! Reading this post, I wondered what it means to JLR to be a British company while building both factories and R&D facilities outside of the UK. Again, I am not sure what the UK has protected through Brexit as companies exit from the UK. One thing JLR could benefit from Brexit is, if the company could offset the increased cost of importing, the sales in the UK. I do think that JLR should think about ways in which it can maximize the benefit of potentially increasing its price competitiveness in its local market. I personally do not think this benefit overweights the loss of Brexit, but it is the reality that the company needs to face.
Thanks for great post!
I totally see the point of car manufactures partnering with tech companies, however, I think that the industry is very competitive, thus the timing is important as well. For example, Ford is already investing heavily in self-driving car technology and is said to be the leader in the category, ahead of UBER, Toyota and others. [1] I think that if JLR wants to partner with other tech companies they need to act quickly, especially in the reality of Brexit.
[1] https://www.nytimes.com/interactive/2017/11/09/magazine/tech-design-autonomous-future-cars-detroit-ford.html?rref=collection%2Fsectioncollection%2Fmagazine
Thank you for the read Yash. As you mention, a necessary concern Jaguar is whether it has the ability to attract technology companies to partner with it in light of impending challenges raised by Brexit. To this point, I actually agree with the suggestion of opening up productions in Silicon Valley. Strategically locating operations near the US technological mecca sends a signal to the industry that JRL is serious about achieving its electrification goals. Furthermore, the US would be a favorable place to launch its electrical product as Tesla has already paved the infrastructural path of having charging stations on roadways (which Britain is still working on developing) [1]. I think the prospect of reinvigorating the US market with interest in Jaguar coupled with being part of the company’s innovation efforts makes a partnership with JRL an attractive opportunity.
[1] “Jaguar Cars Set to Go Electric from 2020.” Phys.org – News and Articles on Science and Technology, 17 Sept. 2017, phys.org/news/2017-09-jaguar-cars-electric.html.
Interesting article Yash.
One thing that you did not mention but that I have seen in other industries is tariff rebates when you import components that are to be re-exported back to the same country as a finished product. This could potentially be a solution to this problem. Other firms import their subassemblies disassembled (!) so as to go to a lower tariff bracket.
The idea that they would open an office close to European policy makers is really fascinating. I wonder whether their influence remains strong as a non European company.
Your recommendations are very good but the one I see most promising is to localize R&D. Other companies such as DuPont have done that in the past [1] and it is much more than a way to bypass protectionism. By innovating worldwide, you tap on a much wider pool of resources and ideas. In addition, it may help you design products that match more specifically the local customer tastes and the local supply chains [2].
[1]: DuPont, “Innovation Centers”, http://www.dupont.com/corporate-functions/our-approach/innovation-excellence/science/innovation-centers.html, Accessed November 2017
[2] Romain Boutellier et al., “Managing Global Innovation: Uncovering the Secrets of Future Competitiveness”, Spring, 2008
Very interesting article, Yash. This is a challenge that various tech organizations in the UK are facing after Brexit. I completely understand your concerns with R&D and acquisition of talent. In the short-term, I do think this will pose a problem, but I think there are several longer term levers that can be used to mitigate this risk. Based on research conducted by McKinsey [1], the following levers should be employed by organizations like JLR to increase talent availability:
– Increase proportion of women working: The UK, with its 65M people, has a large workforce with the relevant skills for JLR. A large part of that population is women that don’t work, but have the expertise and background that JLR requires. By creating an environment more conducive for these individuals, JLR will be able to tap into a large part of the workforce that wasn’t utilized earlier. This lever can be used in both the short-term and long-term.
– Invest in skill working building: In order to sustain any short-term initiatives by JLR and the UK government, JLR should also undertake relevant long-term projects. One of them can be in developing institutions that teach individuals the skills required by JLR. Through this, the company can effectively regulate the supply of domestic workers with the right skills.
The above two levers cannot completely mitigate the talent shortage due to Brexit, however. In the short-term, I do think one alternative is developing an R&D center outside the UK as you mentioned. In the longer term, JLR will have to develop domestic capabilities if it wants to remain a truly British organization.
[1] Atsmon, Yuval, “The case for (cautious) post-Brexit optimism,” https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-strategy-and-corporate-finance-blog/the-case-for-cautious-post-brexit-optimism.
Yash, I thoroughly enjoyed reading this thoughtful article on Brexit’s impact on JLR. The ramifications of Brexit and the resulting regulatory changes are clearly extremely challenging for these companies to set prices, hire employees, and reduce costs. If I were JLR, I would be less concerned on the price considering our luxury buyers may be able to stomach the impact of the 10% tariff better than other automotive companies which cater to more price sensitive buyers. In terms of talent, I completely agree this is a large issue for JLR. Especially considering luxury buyers expect the latest, cutting-edge developments and technology in their automobiles. Perhaps JLR should work with or lobby the British government to make the visa application process for foreigners simpler. In addition, JLR could hire more remote workers and relay more on digital solutions such as teleconferencing. This way the company could ensure that it continues to hire the best workers and might even expand its pool of high quality talent. This solution could also help JLR protect itself against further isolationism in the US or others. This is a challenging situation for JLR indeed and hopefully one that does not stifle intuition.
Intriguing read, Yash. I agree that globalizing R&D and manufacturing makes logistical and economic sense. I wonder, however, what the impact will be on JLR’s brand and marketing efforts. I worry that JLR’s image in the eyes of British consumers may suffer if the company opens R&D headquarters in Silicon Valley. Conversely, a Silicon Valley innovation center could improve JLR’s brand awareness in the U.S. Either way, I think JLR should be careful that its operations strategy aligns with its competitive strategy.
Interesting read! I agree with you in the fact that one of the most important challenges JLR will be facing is attracting talent. With such amount of competition, and in an industry that is at the verge of disruption, I would definitely be worried about talent retention. I do not believe that partnering with Uber or Alphabet is very feasible, considering they are already working with other car manufacturers, but if I were JLR I would look into new products and markets. In a similar fashion to Volvo and Mercedez, which produce other types of vehicles. I would think about building those in other markets, away from the UK in order to diversify my portfolio and mitigate some of the risk.
You know, it’s crazy that Jaguar is even still considered a British car company! Despite its UK HQ, Jaguar was acquired by Ford, an American company, before some of us were even born, in 1990, Tata, an Indian company, has owned Jaguar since 2008, and its controlling Board is Indian. If it’s still considered a British car company despite this, the notion that its building factories and R&D centers outside the UK will hurt the brand, you rightly suggest, is baloney.
Sometimes in the risk management process it’s best to accept the likelihood and impact of the risk and identify new opportunities to mitigate losses. I think this is one such case. I’d like to better understand where Jaguar’s growth and profit have been coming since 2008. Jaguar notably never turned a profit when owned by Ford. I suspect growth has been fueled by Asia’s rise. And while the West is increasingly ambivalent about vehicle ownership, the car continues to be an aspirational tool for many in Asia, especially in India. Long term automobile growth and profits will anyway be seen in Asia. I wonder if Jaguar should see this as a politically expedient opportunity to publicly shift operating focus to the East.
It is very interesting to read a perspective on the effects of Brexit on manufacturing companies as a comparison to US isolationism. While most US companies are retracting their manufacturing operations back domestically, it appears that JLR is pursuing the alternate approach by building plants in emerging markets. Granted the policy changes associated with Brexit are slightly different than the new US policies, I would still have expected JLR to bring some manufacturing back to GB as a protection. However, I think it is a very smart play to place a location in Brussels to be closer to the EU and leverage their proximity to lobby for policies that benefit the company.
I think that JLR faces a unique challenge in that it now faces regulations on both ends of the supply chain. Brexit has potentially dangerous implications to sourcing costs and talent retention. In addition, on the other end, US isolationism hinders exports and threatens future sales. While JLR is focusing on expanding its manufacturing footprint, they should also look to new markets to sell cars in order to protect against potentially reduced opportunity in the US.
Yash, interesting post – lot of open questions about the future of British industry and technology!
After being acquired by Tata, analysts speculated if Tata would move JLR production to India, incorporate with existing Tata Motors facilities and reduce cost. I believe Tata was very intelligent to recognize JLR’s British heritage and luxury appeal of being made in the UK – contributing to their success story. Hence I would be skeptical of moving production to Slovakia – from a product quality and branding perspective.
The innovation lab sounds interesting – I think the automotive industry has to react to electric vehicles by incorporating green vehicles into their fleet. Tesla has highlighted strong design and driver experience can be incorporated whilst also reducing carbon emissions, hence the trend to electric vehicles seems inevitable. JLR can leverage it’s design and brand, while partnering with an electric specialist.
On the Brexit implications, the access to talent and engineers seems to be a large concern. JLR should consider investing in global co-ordination of it’s engineering teams so they become more used to working remotely / online before it becomes a necessity.
Yash, I really liked that you brought up the Jaguar example, since it is such a proud British company but that is now bearing the costs of its nationality. The geographic dispersion is one of the most puzzling questions for me, particularly: UK costs versus changing locations and expansion plans.
First, as I was reading the Jaguar’s plans and your suggestions, my major concern was related to the geographic dispersion that Jaguar was creating. As we have seen in several cases, it is extremely difficult to manage different geographies and cultures. Do you know, by any change, if Jaguar team has the necessary competences and capabilities to lead such worldwide operations? Are the costs of building these capabilities and enter a new culture lower than the import and export tariffs? (e.g. Volskwagen faced a 6-day strike in their Slovakia plant this year).[1]
Second, I have a couple of questions regarding the expansion plans (both Jaguar and the one you proposed). Your proposal to create an innovation hub in California seems a good idea to fight potential talent loss – and other automotive companies have done similar moves, as it is the case of Volkswagen. However, what is the risk of losing the brand identity (particularly for Jaguar, that has a strong brand image and positioning), if building the development unit outside the UK? Should this unit have the full product development process or share it with a team in the UK? Finally, these companies move to countries like Slovakia because of its great impact in the countries’ economy – that is a lobbying force with local governments. Did Jaguar account for that when choosing Slovakia? Wouldn’t be a great period to “play the same game” with the British Government, as Bentley is doing? [2]
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[1] Reuters (2017, June 20) “VW’s Slovak workers strike over pay, halt production lines”. Retrieved from: https://www.reuters.com/article/us-volkswagen-slovakia-strike/vws-slovak-workers-strike-over-pay-halt-production-lines-idUSKBN19B10I, accessed on November 2017.
[2] Reuters (2017, May 15) “UK says Brexit talks with Bentley Motors must remain confidential”. Retrieved from: https://www.reuters.com/article/us-britain-eu-bentley/uk-says-brexit-talks-with-bentley-motors-must-remain-confidential-idUSKCN18B1MV, accessed on November 2017.