The Jaguar Land Rover Debacle
Jaguar Land Rover (JLR) produces some of the most exquisite and high-end luxury vehicles in the world. The company is famous for producing vehicles which can handle off-road driving while simultaneously making a style statement when driven within the city.
The problem is that all of a sudden Jaguar Land Rover (JLR) finds itself in the middle of a cash crunch. If many analysts are to be believed, the cash flow situation is so bad that the company may not even make it to the next year!
In this article, we will have a closer look at the grim financial situation facing Jaguar Land Rover (JLR) as well as the reasons that have taken the company to these devastating lows.
The Fall of Jaguar Land Rover (JLR)
Jaguar Land Rover (JLR) has been posting quarterly losses for over a year now! This time the loss posted was close to $350 million. However, this massive loss is not really the reason for the tense atmosphere at Jaguar Land Rover (JLR).
The real reason is the gigantic $3.1 billion impairment that the company had to take upon its assets. This impairment is so significant that it has almost wiped out the existence of the company even though this is a notional loss and has no effect on the cash flow.
More than 50% of the $3.1 billion in write-downs represents tangible assets. These are factories and machines that the company expected to use in order to produce more vehicles. However, it seems like a lot of this equipment has become outdated due to rapid advances in technology. Also, given the weak demand in China which is the company’s biggest market, Jaguar Land Rover (JLR) does not need to produce as many vehicles in the first place.
The research and development expenses at the company have also gone horribly wrong. The other 50% of the $3.1 billion markdowns is from the intangible assets which were created by amortizing the expenses of the research and development department.
The problem with these write-downs is that none of them happened overnight. It appears as though insiders in the company were well aware of what is going on. They have just chosen to reveal it to the general public at a very opportune time. Also, many investors have questioned why Jaguar Land Rover (JLR) has continued to pay hefty dividends to its parent company, i.e. Tata Motors, even though a cash crunch was on the horizon.
This is the reason that the investors' trust has also been lost which serves as a double whammy. Investors want to get away from Jaguar Land Rover (JLR) as fast as they can. It is, therefore, no surprise that the shares of Tata Motors fell by 18% following the impairment announcement. The company has lost over 60% of its value in the past year as investors are trying to flee a sinking ship!
Reasons for the Downfall
There are several analysts who believe that Jaguar Land Rover (JLR) was doomed to fail a long time ago. It is only because the Tata group, the Indian conglomerate, took it over that the company has been able to survive for so long. This fact was also admitted by the management of the Jaguar Land Rover (JLR) Company. It seems like Ford Motors exited the company at an opportune time whereas Tata Motors now has to clean up the mess.
Some of the reasons behind the fall of Jaguar Land Rover (JLR) are as follows:
- Firstly, it needs to be understood that Jaguar Land Rover (JLR) produces vehicles which mostly run on diesel. More than three-fourths of the vehicles sold by Jaguar Land Rover (JLR) have a diesel engine. The problem is that European countries are now opposing diesel engines. For instance, Sadiq Khan, the mayor of London has imposed a charge on diesel vehicles older than 4 years, if they want to drive into London city. Many other governments in Europe are also threatening to bring in legislation against diesel engines. This is the reason why customers are confused and have decided to put off purchases for some time. Since Europe has been the mainstay of Jaguar Land Rover (JLR) vehicles for quite some time, legislation against diesel powered vehicles have had a devastating effect on the company’s bottom line.
- Apart from Europe, the company has also been facing a lot of trouble with its main market in China. The Chinese government has hinted that it is likely to bring down the import duty on foreign-made cars. However, no action has been taken for a long time. However, since customers are expecting a huge discount, they are deferring their purchases indefinitely. This ended up choking the sales as well as profits Jaguar Land Rover (JLR). Right now the company is offering hefty discounts in the Chinese markets. However, it is still not able to find many takers.
- Lastly, the company has also made some financial blunders. Firstly, it has an immense amount of debt on its balance sheet. The problem is that the yield on this debt is about to rise and the company has no money to pay the increased yield. This will drive the company to a cash crunch and could even lead to its bankruptcy if sales don’t pick up significantly. Also, the company has faced some very heavy Forex losses thanks to the volatility in the exchange rate between the pound and the USD.
To sum it up, Jaguar Land Rover (JLR) seems to be having more financial troubles than it can handle. It would be a miracle if the company was able to survive in the long run.
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