Tata Motors, the parent company of Jaguar-Land Rover (JLR), said it will reduce capital expenditure by 2.5 billion pounds over the next two years to soften the blow from a sales freefall in China, even as uncertainty looms on future demand in the world’s biggest automotive market.
The company will reduce capex in the two British brands by 11 percent over the next two years resulting in total savings of 1 billion pounds. Its capex plan now stands reduced to 4 billion pounds per year from 4.5 billion pounds announced earlier.
Another 1 billion pound in savings will be achieved through ‘profit and cost actions’. Inventory and working capital reductions will help save 500 million pounds. This is the first case of capex downsizing by Tata Motors since the takeover of JLR 10 years ago.
P Balaji, Chief Financial Officer, Tata Motors, said, “Any investment has to be razor sharp in a demand environment that is not conducive. When we talk about Brexit, diesel, China and US, the net impact of all this is that demand is likely to be muted. We have to keep our renovation pipeline firing on all cylinders and executions have to be flawless.”
China is one of the biggest markets for JLR. It even opened an assembly facility through a joint venture in 2014. Sales in China slumped 43 percent to 21,100 units, resulting in a market share erosion of 200 basis points (100 bps=1 percentage point). The US (30,300 units) has emerged as the biggest market followed by UK (29,700 units).
While the Chinese industry as a whole reported a fall of 7.7 percent during the second quarter, sales of JLR fell nearly 44 percent. Fall in volumes in other markets such as US, UK and Europe have been largely in line with the average industry growth in those markets.
The senior management at JLR did not precisely specify the reason behind the dramatic fall in China, merely stating that macro-economic issues remains a primary concern in that country. JLR CEO Ralf Speth told media persons that the company will not sacrifice profitability for the sake of volumes. He hinted that JLR will not participate in a discount war with German rivals in an effort to retain exclusivity and brand recall.
Tata Motors clarified that the cost-cutting drive though will not impact any product development or upgrade plan of JLR and new projects will go ahead as per schedule. About 16 new products will be unveiled between now and 2024 by JLR, including fully electric and hybrid models.
Tata Motors slipped into the red, posting a loss of Rs 1,049 crore for the quarter-ended September, on the back of a 101 million pound loss in JLR and a one-time charge of Rs 437 crore that rose from the closure of Thailand operations.