Examination of Witness (Question 20-39)
PROFESSOR PETER
NC COOKE KPMG AND
MR ERIC
WALLBANK
11 DECEMBER 2007
Q20 Mr Binley: I know that, that
is why I got in quickly.
Mr Wallbank: Can you clarify the
question?
Mr Binley: I will clarify it later
on.
Chairman: I think this is happier
under the climate change section really.
Q21 Miss Kirkbride: Can we ask you
to speculate on whom you think might be bidding for Jaguar and
Land Rover and can you, in the light of that, then say what you
think would be their different perspectives and approaches to
the two brands if they were successful?
Professor Cooke: Shall I put my
neck totally on the block? I think we are finding that there are
three potential buyers, as I would see it: Tata, from India, a
global corporation looking to build up its position in Europe;
Mahindra & Mahindra, again from India, builders of commercial
vehicles and 4 x 4s; and an American consortium, whose name escapes
me completely—
Q22 Chairman: One Equity?
Professor Cooke: Could be. But
it is led by a former senior and Chief Executive of Ford by the
name of Jack Nasser. So we have those three players. Looking at
the benefits of each one, what are they looking at—
Q23 Chairman: It is worth saying
that Ford has refused to name the people who are bidding so it
is all relying on speculation.
Professor Cooke: It is pure speculation.
Q24 Chairman: Although the union
seems to know something that the rest of us do not know.
Mr Wallbank: At least two of those
bidders have confirmed in the Press that they are bidding for
the companies. So there is a degree of speculation.
Q25 Miss Kirkbride: It is informed
speculation.
Mr Wallbank: But I think it is
a fair assumption that if we assume that those were the two or
three companies and then look at Indian owners versus private
equity owners.
Q26 Chairman: Sorry, we interrupted
your flow, Professor Cooke.
Professor Cooke: Looking at Tata
first, a global company, they already manufacture vehicles in
India and are looking to move more into Europe. What are they
looking for? They are looking for brand, they are looking for
technology; they are looking for manufacturing skills. They also,
I think, have the finance to be able to make the acquisition.
I suspect that if Tata were to acquire it they would keep the
company in the UK and would look to develop it. Mahindra &
Mahindra, again from India. Their particular interest, I think,
would be 4 x 4, the technology and the things that go with that.
Looking at it from a purely marketing point of view, Land Rover
Range Rover is a global, iconic brand. Could we see them over
time reversing their own Indian brands into Land Rover Range Rover,
using that brand on a global basis but continuing to develop the
organisation here in Europe and looking to use the amazing distribution
network which the company has to build up their activities that
way? The American private equity partnership, there was an interesting
comment yesterday by the Chair of the Jaguar dealer association
in North America, where he said something about, "I do not
know if Americans would like to have cars that were built by the
Indians." I thought it was a very interesting comment.
Q27 Chairman: They have toys built
by the Chinese!
Professor Cooke: An American buyer,
as we said earlier, would they look to move part of the operation
to North America? I do not know. My personal feeling is that maybe
an Indian player might be the most interesting at this stage.
Q28 Miss Kirkbride: Do you have anything
to add to that?
Mr Wallbank: No, I would agree
that to some extent that an Indian buyer with a strong vehicle
manufacturing business of their own that they wished to develop
creates some natural synergies and some natural opportunities,
whereas a private equity buyer ... I have to say, if you had asked
me two years ago whether private equity firms would be interested
in buying car companies I would have said no, but recent history
suggests that that is not the case, with Cerberus taking ownership
of Chrysler, and the fact that a private equity player is involved.
It is unclear to me what their business model is that enables
them to make this work for them as an investor at this stage.
Q29 Miss Kirkbride: So you think
that for a private equity buyer it would be hard to make the money
out of it they would expect?
Mr Wallbank: It is unclear to
me because the private equity play is to take a business, to turn
it around, develop it and create more value and sell it on at
some point in time several years down the track for more than
they paid for it. Typically they are looking for margin and revenue
growth and clearly they maybe see a story in there that enables
them to make that model fit their business case.
Q30 Miss Kirkbride: Given what you
have said, which has been largely but not exclusively about Land
Rover and the attraction of Land Rover, are there any threats
to Jaguar in all of this, bearing in mind that its profitability
has been questionable in the past?
Mr Wallbank: It is an interesting
point. There are two ways of looking at the two companies. Land
Rover has been a successful turnaround story; it is believed to
be profitable and in that sense it could be seen as a good business
to invest in. On the other hand, it could be said that maybe this
is the peak or the plateau and it could be more difficult to develop
it further. Jaguar has been consolidating back to a much smaller
base. It is widely believed that it has not been profitable for
many years, but it is a very strong brand, and in that case I
believe that some of the businesses that are interested in the
acquisition see Jaguar as the more interesting story because there
is more that can be done with it. They are both very strong brands
but the Jaguar one perhaps is more attractive from an opportunity
point of view.
Q31 Chairman: Broadening the range
for products, for example?
Mr Wallbank: They could broaden
the range of the products and they could also broaden the access
to markets and take the product out into other places. I come
back to the point that Ford has said that they cannot afford to
invest in the new products that Jaguar and Land Rover need, and
a new owner just might have the access to capital to enable him
to do that, to develop the product ranges further in a way that
could not have been done under the current ownership.
Q32 Mr Bailey: The Tata bid seems
particularly interesting because to a certain extent the Tata
group seem to be having the sort of problems that the Ford group
have but they are going ahead with purchasing, and so far as Tata
has been struggling slightly and is essentially a low cost producer
of cars why should it want to buy high value niche market cars
in Europe when, if you like, it is not a natural fit to its previous
production history?
Professor Cooke: I think that
they are looking strategically, looking ahead as to where they
see their organisation growing. The Indian economy is growing
at an amazing rate; disposable incomes in India are growing. The
Indian market is very value conscious, and to weave something
like Land Rover, Jaguar into a huge Indian market as it develops
over the next few years could be a very real opportunity for them.
I think that is the way that I would see it. Also, as I said earlier,
gaining access to that technology. At this stage Tata automotive
products tend to be small vehicles, but that would give them that
wide range of vehicles; and equally important it would give them
access to a wide distribution network, which perhaps they could
look to put other Tata products through.
Mr Wallbank: I was in India a
couple of weeks ago and the number of premium brand products on
the streets there is extraordinary. They do have the market and
the ability to buy more expensive vehicles, exactly the kind of
vehicles that Jaguar produces and Land Rover produces. Secondly,
Tata's focus is on low cost product aimed at the Indian market,
but they also produce what they call an SUV product that is a
4 x 4 off roader, which would have the natural synergies with
the Land Rover product, and I think these are interesting technology
exchanges in both directions on that. They have also said that
they are working on environmentally-friendly technologies for
vehicles and some of those would be directly applicable and relevant
to both Jaguar and Land Rover. So there are some interesting technical
synergies that are potentially there with Tata—which is
a very large corporation, as you already know, with very many
different strands to it—and potentially some quite interesting
links into the needs of Jaguar and Land Rover, technically.
Q33 Chairman: It is fair to say that
Tata has the reputation of being a very hands-off company, operating
quite a federal structure, allowing considerable discretion to
its operating units at the same time.
Mr Wallbank: I am not familiar
with that.
Chairman: It is what the union tells
us and I think I agree with that analysis. Brian Binley.
Q34 Mr Binley: Two questions. The
first concerns the long-term future of Jaguar and Land Rover and
the second concerns their supply chains because they are of equal
importance. I note that Jaguar and Land Rover collectively are
projecting a profit of about 1.6 billion sterling by 2010-11.
However, Jaguar reported a fall in sales of 16.8% over the first
half of this year. Those figures are slightly at odds with each
other, although I recognise the import of Land Rover in relation
to joint profitability. Can I ask where you think the problem
lies in terms of premium car buying and in terms of that fall
particularly of 16.8%? How much is about the British economy?
How much is it about politicians talking and frightening customers
talking climate change? And how much is it about a new model on
the way?
Mr Wallbank: I think it is worth,
when you look at Jaguar, realising that by far the bulk of their
production is exported and not sold in the UK, although the UK
is their biggest market. I do not have the statistics to hand—I
am sorry about that—but a significant proportion of their
output is exported to North America and mainland Europe. So any
local impact on the UK market, yes it has an impact but it is
not the whole story by any stretch of the imagination. That is
the first point. The second point is that if there is a decline
in sales of Jaguar I suspect it is very model specific and I suspect
that its decline—I am going to guess that it is the X type,
which is the bottom end of the Jaguar range, the product that
is built at Halewood, that is derived to some extent from some
of Ford's Mondeo products—in sales there does not necessarily
mean a decline in profitability. In other words, the products
that are selling at Jaguar are increasingly the more expensive
and the more profitable products, I believe that the XK sports
car, which was launched a year or two back, with some very innovative
aluminium body construction technology, has been selling very
well and is probably a significantly profitable vehicle. I suspect
if you go back and look at some of the reasons why Jaguar has
been losing money, it was partly to do with a very aggressive
growth strategy set in the late 1990s and the introduction of
two successive vehicles—remember Jaguar always used to produce
the XK and XJ, big sports car, and big saloon. They introduced
the S type, one segment down in the market, and very quickly afterwards
the X type, with the belief that the market would be there for
the products and it was not, by which time of course the company
had all the costs incurred with engineering and producing those
vehicles. So I think the kind of plan, as I see it, for Jaguar
is to revert back to a smaller scale manufacturer. To do that
it has had to take a lot of cost out of its system, which it has
done. It has closed the Browns Lane factory, it has shed labour;
it now shares a lot of the cost of Halewood with Land Rover and
I suspect by far the bulk of Halewood's output is now Land Rover
not Jaguar, which will have a real impact on the Jaguar cost base.
So the Jaguar's story is about getting the cost base down to a
point where the volumes mean it can make money and the volumes
will increasingly be of more expensive vehicles; and critical
to the turnaround is the XF, which is about to replace the S type,
which has been received very well by the Press and the public
in its preview form. If that is successful then we could see a
position where Jaguar is reliant on a big sports car, a big saloon
and a mid-size saloon and those would be the core of the range
of the brand.
Professor Cooke: You have put
your finger on it absolutely there. Jaguar is, dare I say it,
an aspirational brand—low volume, high value-added, it is
something that people see as some sort of peak of their career—"I
will have a Jaguar; I will look to have a Jaguar one day."
And, as my colleague says, Ford because of its volume orientation
looked to build up volumes further down in terms of price, and
I agree absolutely that Jaguar started to move back up the market
price-wise and I think over the next few years it will go up even
further price-wise into that very, very élite segment at
the top. The other thing is that we have more competition there
than we used to have; we have certain parts of the Lexus range,
we have BMW, we have Mercedes, all selling relatively large volumes
in that sector. So it has been new competition coming in for Jaguar.
There is a market there but it is not a huge one, it is a value-added
market—it is high price, low volume. I see that market as
going to continue to grow, and if you look at it on a global basis
there is what I would call a global super group of products, which
include the top end of Jaguar, the top end of BMW, the top end
of Mercedes, certainly the Italian cars, Rolls Royce and Bentley—maybe
worldwide a couple of hundred thousand units, where people will
perhaps buy two or three because they do not necessarily live
in one country. It is a peculiar market segment but I think that
Jaguar is starting to move into that sector.
Mr Wallbank: It is a segment that
is remarkably recession-proof and it is very elastic in its demands.
In other words, if the exciting product is put out there people
will find the money to buy it.
Q35 Mr Binley: I am the proud owner
of one XJ—not three, I might tell you—and they are
wonderful cars. Can I go on then to extrapolate from there that
we might be in a situation with the profitability of the two companies,
that Land Rover might be in a slight downturn with regard to profitability
in the medium to longer term and Jaguar is on a sizeable upturn.
Is that what you are telling me or have I misinterpreted it?
Mr Wallbank: There is an inevitable
cyclability of the profitability of car companies and when they
have just launched lots of new products they tend to be more profitable
and that is the position Land Rover is in. It has very successfully
launched the Discovery, Range Rover Sport, and the Freelander.
So it is to that extent—I will not say at the peak of its
cycle—potentially that might drop until the next exciting
product comes along to give another kick to the volumes and the
profitability of the business. So will it significantly deteriorate
to the point where it is likely to drop to loss making? It is
very unlikely, in my opinion, from the data that we have—and
I have said Ford do not publish the data on the profitability
of its brands independently. Jaguar could return to profitability
and if it could on the back of the next new product—and
I agree entirely with Peter—there is a lot of opportunity
for Jaguar to move up the spectrum. If we think about the history,
until very recently Jaguar and Aston Martin were both owned by
Ford and there was no overlap in the product, no overlap in the
price at which those products were retailed. Now Aston Martin
is independently owned, it looks like Jaguar is about to be independently
owned—there is a lot of opportunity for Jaguar to move up
the price range and produce more expensive vehicles and to move
the brand up to that aspirational point.
Q36 Mr Binley: So you are optimistic
about the future of both Jaguar and Land Rover?
Mr Wallbank: I think they both
have a lot of potential, but whether that is realised or not I
think is very unclear.
Q37 Mr Binley: Can I go on to the
supply chain element of it? Can you give us specific figures of
numbers employed by Jaguar and Land Rover? I think it about 19,000
UK direct. Can you tell me what you think the supply chain employs
in terms of those two companies?
Mr Wallbank: I do not have that
data. Most of the suppliers to Jaguar and Land Rover are also
suppliers to many other car companies. I just do not have the
data, I am sorry.
Q38 Mr Binley: There is a projected
figure of about 40,000 jobs dependent on the two companies. Do
you think that is fair or unfair?
Mr Wallbank: That is not an unsurprising
number. Just to look at the broad cost structure of a vehicle
that is produced—and this is generic, it is not unique to
Jaguar and Land Rover—around about 60%, maybe a little bit
more, of the cost of the vehicle is money spent by the vehicle
manufacturer with its suppliers. So you would expect there to
be more employment in the supply base than in vehicle assembly,
is the short answer.
Q39 Mr Binley: Let me evolve from
that this final question because very often when we talk about
companies like this we fail to think about the supply chain, and
you are absolutely right that there are more people supplied in
the supply chain than there are directly by the two companies
involved. How should we argue the future of Jaguar and Land Rover
with the Government, bearing in mind the needs and concerns of
the supply chain?
Mr Wallbank: A comment about the
supply chain in general to the car industry. By far the majority
of components supplied into manufacturers are produced by global
suppliers rather than small, local suppliers. Those global suppliers
are themselves increasingly looking to produce those components
in what you would call lower cost economies; that is an inevitable
trend in the industry. Almost all the car companies have a strategy,
somewhere either publicly stated or not, to shift more of their
procurement of components to what they would call low cost economies
or emerging markets, because for many things they buy they can
buy them more cost effectively from countries other than Western
Europe, North America or Japan—the traditional sources.
Having said that, there are things that would always be produced
in the country where the vehicles are assembled. There are some
things which simply physically cannot be transported around the
world, it is just not cost effective to do it; so those things
always need to be produced close to the assembly plants. Then
there are always things that will be produced locally in the UK
because of the unique technology that the company has, which gives
it a competitive advantage. Then there are some things which are
simply not labour intensive so they can be economically produced
here too. So when I look at all the suppliers there are a number
of reasons why they would have the right to exist in the UK in
the long term, but there are many others where they are producing
components which the car companies can source much more cost effectively
from other countries, and increasingly will do that, and it is
not just UK car companies doing that, but it is the stated policy
of many of the global car companies.
Professor Cooke: I would echo
that as well and suggest that there is probably a critical mass
in terms of components below that level one would look to outsource
it on a global basis because it is just not economic by the time
you have moved those components around. So for a really specialist
manufacturer you are probably over time going to source more locally
than perhaps if you are a volume manufacturer where you are creating
large numbers of vehicles.
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