Volvo owner Geely, Jaguar-powered Tata Motors’ shares diverge

Bloomberg News, August 14, 2017

By Bloomberg News

Since Geely’s US$1.5 billion purchase of Sweden’s Volvo Cars in 2010, the Chinese automaker has seen the share price of its listed unit increase sixfold in Hong Kong trading. SOURCE: EPA

(Bloomberg) — Tata Motors Ltd. and Zhejiang Geely Holding Group Co. both bought iconic luxury brands from a struggling Ford Motor Co. in the wake of the global recession. Both acquisitions were met with skepticism from investors, who now view the two companies very differently.

Since Geely’s $1.5 billion purchase of Sweden’s Volvo Cars in 2010, the Chinese automaker has seen the share price of its listed unit increase sixfold in Hong Kong trading. India’s Tata Motors, which bought Britain’s Jaguar Land Rover two years earlier for $2.5 billion, has merely doubled in the same period.

The contrast is even starker if one shortens the timeframe: Tata is down about 21 percent this year, while Geely is up 149 percent.  The difference, says Jochen Siebert, a Singapore-based automotive consultant, lies in what the companies have done with their landmark purchases. Under Chairman Li Shufu, Volvo Cars was able to lower its costs and gain economies of scale by manufacturing and selling in China, the world’s largest auto market. Geely in return benefited from the technology of the more established Swedish automaker through the development of common underpinnings, which Volvo Cars also uses for its smaller models.

When Tata Motors wanted a partner to help it break out of the domestic India market, it looked not to its luxury division, but to Volkswagen AG’s Skoda. JLR and its Indian parent were just “too far from each other” in positioning, preventing them from creating any synergies between them, said Siebert.  Talks about a partnership between Skoda and Tata ended last week without a deal as the projected cost savings fell short of expectations, leaving the latter without a global partner.

“Tata sees JLR as a standalone and a financial shareholding,” said Siebert, managing director of JSC Automotive Consulting. “As long as Tata doesn’t want to develop into a higher-positioned brand in its own right, there is just no way to cooperate with JLR.”

Volvo’s Ethos

Tata didn’t immediately offer a comment on the market perception of its acquisition of Jaguar Land Rover. A spokesman for Zhejiang Geely Holding said in a message sent by WeChat that the success of the acquisition “has been down to Volvo’s strong product range and customer-centric design and engineering ethos.”

Tata is now almost entirely dependent on its luxury unit for profits. Jaguar Land Rover accounted for 78 percent of the group’s total revenue and 96 percent of its operating income.

Sales of Tata’s own namesake brand of vehicles contributed 1.3 percent to operating profit, behind that of construction equipment.  This has made the parent vulnerable to any hiccups at the British unit. When JLR said it expects pressure on profit margins to continue due to higher incentive levels, investors sent Tata’s stock down 8.6 percent to a 15-month low on Aug. 10.

Deliveries at JLR grew at a slower 4 percent pace in the April- to-June quarter because of weak demand including for Land Rover’s Discovery Sport and Range Rover Sport SUVs.  JLR also counts China as a major market and Tata can do little to help in the world’s biggest auto market given its lack of presence there, said Bill Russo, managing director of Gao Feng Advisory Co.

By contrast, Volvo Cars was the first Western carmaker to export a premium China-made car to the U.S. in 2015 with the S60 Inscription. The company last year began building high-end versions of its S90 premium sedan in Daqing, China for global exports and plans to assemble vehicles in India this year, starting with the XC90 SUV. Geely and Volvo Cars also worked together to develop a compact-car platform that will be used by Geely’s upscale Lynk & Co. brand.

Geely’s investments in factories and in-house technologies have resulted in a series of new car models, a spokeswoman for Volvo Cars said in an email response. The transformation continues with two new joint ventures formed between Volvo and Geely this month, she said.

Geely has thrown a lot of money at Volvo without concern for an immediate return, a luxury available to an unlisted company, says Janet Lewis, an auto analyst in Hong Kong with Macquarie Group Ltd. This has enabled the Swedish company to invest in technology, whereas it was relatively starved of development money under Ford ownership, she said.  “The longer-term challenge for Volvo is its tiny scale.  Even combined with Geely for volume, it is going to have a hard time meeting the increasing technology needs when it is up against well-funded giants like Toyota, VW, Renault-Nissan-MMC and GM,” said Lewis. “JLR faces similar challenges with its small scale and its main hope is that Tata ties up with a global partner in India.”

To contact Bloomberg News staff for this story:
P R Sanjai in Mumbai at psanjai@bloomberg.net;
Yan Zhang in Beijing at yzhang1044@bloomberg.net
To contact the editors responsible for this story:
Anand Krishnamoorthy at anandk@bloomberg.net
Chua Kong Ho, Abhay Singh

Premium carmakers see China drama ahead

The Financial Times, August 30, 2015

Click here to read this article at FT.com

by Andy Sharman, Motor Industry Correspondent

China’s stock market crash this week brought a jolting end to an uncomfortable summer for most of the world’s carmakers, who in past years had enjoyed a smooth ride in the industry’s most profitable market.

For the luxury marques, though, the pain had begun a while back.

A crackdown on ostentatious consumption had threatened to depress sales for the likes of Bentley and Rolls-Royce, ever since Chinese president Xi Jinping launched his anti-corruption campaign in 2013.

This year, the impact has started to show. “Everyone’s really hurting,” says one executive at a luxury carmaker.

A combination of a slowing economy, restrictions on registration plates in larger cities to ease congestion, and increasing consumer appetite for domestic brands — all against the backdrop of the anti-corruption drive — have created a difficult environment for western manufacturers.

“All of these factors have a more direct correlation to sales than a volatile stock market,” says Bill Russo, a Shanghai-based consultant.

Even so, the sudden deceleration in Chinese car sales came as a surprise to some — not least when sales went into reverse in recent months. In July, car sales fell for a second consecutive month, by 6.6 per cent, according to the China Association of Automobile Manufacturers.

Some analysts believe that the scale of the decline is such that multinational manufacturers such as Volkswagen and BMW — respectively the parent companies of Bentley and Rolls-Royce — will be forced to warn on profits in the coming weeks.

“Please keep in mind that we still have some drama ahead of us,” says Max Warburton, an analyst at Bernstein Research.

It amounts to a startling turn in fortunes for the car industry.

But registrations of luxury and ultra-luxury vehicles were down almost 10 per cent year-on-year in the first six months of 2015, based on figures from Bernstein Research.

devaluation of the Chinese currency has not helped, making already expensive European cars even more so.

This has taken a heavy toll on exports of British-made models. Bentley, which counts China as its second-biggest market, reported worldwide first-half sales down almost 12 per cent to 4,600 units. It was a similar story at Rolls-Royce, for which global deliveries fell 10 per cent to about 2,000 cars in the first half. Neither manufacturer breaks out six-month sales by country, but domestic peer Jaguar Land Rover offered a window to the state of the world’s largest car market: sales in China were down 27 per cent in the first half.

Not all luxury car brands have suffered such declines. Porsche, maker of the Cayenne sport utility vehicle, reported sales up 48 per cent in the first half of the year.

But volumes to not tell the full story. China’s economic headwinds have already created what analysts describe as a “hyper-competitive” market. Porsche has admitted that dealers, independent of the company, have been cutting the price of its Panamera sports car by as much as 20 per cent. Chinese pricing website Bitauto also carries examples of Bentley Flying Spurs and Rolls-Royce Wraiths discounted by a similar percentage.

To put that in context, in the past, western luxury cars typically sold at a premium to their list prices in China.

For some companies, this turnround is already having an effect. China accounts for more than 60 per cent of JLR’s earnings before interest, tax, depreciation and amortisation, according to Bernstein — and the country’s slowdown has caused net income to almost halve at parent company Tata Motors. Similarly, Bentley’s operating profit fell from €95m to €54m in the first half.

Both companies, however — having ridden the tide of rising wealth in China for several years — are outwardly calm.

“Don’t worry,” said Wolfgang Dürheimer, Bentley chief executive, speaking to the FT last month. “Of course we need to take the slowdown of the market seriously but . . . I strongly believe in the Chinese market. There are some changes going on at present, but on the long-term view it will be a very profitable basis for us.”

Industry executives point to low car density — less than one in 10 people drive in China — and a still growing middle class as growth opportunities. Bentley and Rolls-Royce, for example, plan to launch SUVs — increasingly the vehicle of choice in China — over the next two years.

Amid the turmoil this week came another cause for optimism. Alongside the interest-rate cut announced on Tuesday by the China’s central bank was a targeted intervention in the car industry: the country reduced by 300 basis points the reserve ratio required to be held by auto financing and leasing companies, potentially increasing the funds available to car buyers in the country.

It seemed to suggest that China was committed to supporting car sales. But with two-thirds of premium auto purchases still made in cash, the impact may initially prove limited.