As it joins hands with Chery, JLR may be on China pothole

For some time now, global carmakers have been having the drive of their lives due to demand from China. The Tata Motors-owned Jaguar Land Rover (JLR) has been no exception.

News is, however, that the market in the Middle Kingdom may be showing signs of fatigue - waiting lists across car makers are shrinking and sales incentives have been rising.

JLR currently contributes 70% of the consolidated operating profit of Tata Motors.

China is the fastest-growing market for the luxury car makers, accounting for 18% of the overall volumes of the top three German manufacturers alone — Mercedes, BMW and Audi.

With the market slowing down, the German brands are offering discounts to the tune of 25% in order to boost sales.

According to analyst estimates, JLR also derives 17% of its volumes and an estimated 30-35% of operating profit from sales in China.

Srinivas Rao and Amyn Pirani, analysts, Deutsche Bank, said demand environment for high-end imported luxury cars has been weakening which could put pressure on pricing.

“Prices of domestically made luxury cars in China have already been trending down for the last six months. At this stage, we understand that the fall in prices is likely hurting dealer margins, but not OEM profitability,” they said in a note.

Abhijeet Naik and Nitij Mangal, analysts with CLSA Asia-Pacific Markets, said if the overall pricing environment in the luxury car market were to weaken for German players, JLR’s own pricing is unlikely to remain intact.

“Hence, we are more concerned about JLR’s margins post this development than its volumes,” they said in a note.
For JLR, China is one of the critical markets. The company just finalised a joint venture agreement with local Chery Automobile Co to manufacture and sell vehicles in the country.

Emerging markets such as China and Russia form 40% of JLR’s sales volumes while developed markets such as the US and Europe funnel in the balance.

JLR has been expecting contribution from the emerging markets increasing down the road.