It's not easy being green, so Jaguar Land Rover shouldn’t rush it

The markets are abuzz with the promise of millions of new electric cars. Investors love the sound of anything green. In keeping with the trend, Jaguar Land Rover Automotive Plc — which is owned by India’s Tata Motors — announced an overhaul on February 15: It will go mostly electric in the next decade or so, setting aside £2.5 billion (roughly R52,135,260,000) annually for the move. The company promises to have net zero carbon emissions across the board by 2039. It’s a big, bold, green strategy for a company that has spent the past few years aggressively reining in its costs and investment spending. Still, with all the fanfare, it’s worth considering how realistic these plans really are.

As part of its “Reimagine” plan, the British carmaker has set ambitious timelines. Jaguar will be an all-electric luxury brand by 2025. Land Rover will bring out six purely electric vehicles, with the first model out in about three years. By 2030, it’s hoping about 60% of Land Rovers sold will be equipped with zero tailpipe power trains. JLR is even preparing for clean fuel-cell power with prototypes expected to hit UK roads within the next 12 months.

These targets fit well with the ongoing electrification rhetoric but it isn’t yet clear how the company will get there. A planned battery version of the flagship Jaguar XJ luxury sedan that was announced in 2019 will not be part of the new line-up. Instead, the cancellation is expected to lead to a write-off of at least £300m (roughly R6,255,518,172), the Financial Times reported, citing two people previously involved in the project.

Hefty investments over the past decade haven’t resulted in a fleet of electric models or outsize success for the firm. So far, JLR has only one fully electric vehicle — the Jaguar I-Pace — and it’s made by a contract manufacturer, not in-house. In the quarter ended December 2020, more than 50% of its sales were electrified but of that category, more than 40% were mild hybrids, cars that can’t be plugged in and can’t be powered by their electric motors alone. They typically aren’t seen as fuel efficient. 

Turning gas-guzzling sports utility vehicles like the company’s iconic Land Rovers into electrics requires expensive, dense and large batteries along with more motors.  It promises the first all-electric model of the Land Rover in 2024. A number of upstarts, including investor-darling Rivian Automotive Inc, are working on green SUVs and  planning rollouts sooner. 

What will matter most is how JLR manages profitability through its green transition. The company’s focus on generating free cash flow and reducing debt “led by cost cuts and slippage of market share” in key regions “point to the challenging business outlook for JLR,” Goldman Sachs analysts said in a note. On Wednesday, the company announced it was laying off 2,000 workers.

In previous years, JLR spent 14% to 16% of its revenue on investment, including research & development, and capital expenditures, according to the company’s public financial presentations and other reports. It has brought these outlays down since launching a 2018 turnaround plan. Under its current Project Charge+ initiative, the goal is to reach £2.5bn (roughly R52,142,600,000) of savings by the end of fiscal 2021 — the same amount it says it will commit per year to its new electric strategy. Investors should hope the Reimagine strategy won’t simply offset the hard work of tighter cost controls and investment spending cuts over the past few years.

Like the broader industry, JLR’s plans are underpinned by a deep sense of urgency as stringent climate regulations and a host of new-generation car makers forces a faster shift towards EV technologies. Still, full electrification comes at huge costs, which is why giants like Toyota Motor and Volkswagen have taken years to hone their strategies. And those still aren’t perfected.

Just over two years ago, Volkswagen announced plans to produce 1.5-million electric cars by 2025. In 2020, it delivered more than 212,000 EVs, up 158% from the year before. But of that total, just 134,000 run completely on electric batteries. The company is now targeting 6% to 8% of sales to be purely electric this year. Even with the increases, Volkswagen missed its European carbon dioxide targets for 2020.

Toyota released details of its latest all-electric car only at the end of 2020 and this month announced two new fully electric, mass-market models for the US, despite years of success selling millions of hybrids and holding large chunks of the alternative fuel vehicle markets. In previous years, it sparingly released (and discontinued) an electric RAV4. It’s now setting up joint ventures and partnerships to secure battery supplies. It has also accumulated among the most battery-related patents.

With no pure EV model launches this year as penetration rises in China and Europe, JLR could continue losing market share in the alternative fuel category. Meanwhile, according to company financial reports, indebtedness rose to £7.17bn (roughly R149,482,320,105) as of December, from £5.8bn (roughly R120,966,133,710) in March 2020. JLR also failed to meet European emissions standards last year. It had to purchase credits to comply with rules in the US and China.

For JLR, it’s a tough juncture, fraught with risks. Toning down the hype and the outlays is likely to benefit in the long-term — though that won’t be music to investors’ ears. But why set them up for disappointment?

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Anjani Trivedi is a Bloomberg Opinion columnist covering industrial companies in Asia. She previously worked for the Wall Street Journal.

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