UK’s economy seems to be doing well
currently, but the way people are borrowing and spending and with savings
dropping drastically, I am afraid that there will be a situation where there
will be no money with the banks to lend and also with the people to repay the
debts, which will lead to a crisis. UK government, which is spending a most on
health and housing, should also focus on building infrastructure, providing
opportunities for investment and promoting exports. JLR, which relied on
increased demand for profits, should expand to further markets and explore
products in starting level of luxury segment, where the demand is high now. JLR,
which used to be in huge losses, has overcome all the major shocks positively
and is now in good profits.
Brexit is going to have a major impact
on JLR. The sales volume might increase due to low sterling, but the costs will
rise a lot as JLR has half of its raw materials supplied from Europe. Due to
low sterling, the import cost of raw materials will increase, which will have a
huge impact on net profit of JLR. A similar situation JLR faced in 2015 when
sterling fell, the sales volume increased but the profits fell. JLR is
focussing on electric vehicles for future and going to launch I-Pace in 2018.
(Peter, 2016). However, it is way behind its competitors who are already
selling electric cars. JLR already has one electric car i3, which has a limited
mileage. When the automobile industry is focussing on electric vehicles, JLR is
on autonomous vehicles. However, it is way behind Tesla, BMW, Mercedes Benz
that have already brought semi-autonomous in their vehicles and JLR did not.
There will be a good opportunity for JLR if they combine autonomous and electric
together. Jaguar sales share in JLR is dropping, which used to be high (Andy,
2015) due to increased competition in luxury car market. With many countries
already banning diesel vehicles by 2020, JLR has to speed its innovation in
hybrid and EV vehicles. In 2009, JLR introducing Evoque model of Land Rover,
which is one of the main reason for JLR to make profits. Similarly in 2016, JLR
introduced F-Pace, which the overall market received it greatly. Now with the
liking of SUV’s from Jaguar range by the people, Jaguar is planning to launch
E-Pace and similar models in future. JLR’s internationalization strategy by
building manufacturing sites worldwide is good in handling exchange rate
effects and transportation costs. Due to brexit, the growth is predicted to slow
down to 2.4% in 2018 and 1.6 in 2020, a rise in inflation and lower standard of
living among UK residents (Kimberly, 2017). This leads to further low spending
by the people, which will affect the sales of JLR, as sales will drop
significantly. In addition, due to the loss of free entry of people, there will
be a deficiency in the workers, which will cost JLR in terms of low production
rate. JLR needs to be more innovative and price strategically in this segment
in the future to withstand the competition.
The price elasticity of demand for
automotive sector is close to zero. According to Harvard research, it is 0.2,
which means it is highly inelastic. For land Rover vehicles, there are no close
substitutes, which gives its market power. In JLR, the loss in revenue with
lower production is smaller than the rise in revenue with higher prices.
Therefore, it is beneficial in increasing revenue.
In auto sector, if firm raises prices,
with its rivals having same prices; firm will lose customers and the demand is
elastic above the equilibrium price. If firm reduce prices, then its rivals
will also reduce prices and the firm will not gain more market share; so demand
below the equilibrium is inelastic. Therefore, the shape of demand curve is
different. Because of the kink in the demand curve, there is a gap between the
marginal revenue. If we consider marginal cost at the respective marginal
revenue values, the forms will not mostly change their prices if their marginal
cost lies in between those marginal cost curves. Kinked demand curve does not
show how a stable price is arrived, which is the major drawback.
Figure 14: Kinked Demand curve. Source:
Economics for business.
With 97% of SUV market in UK, Land rover
is almost a monopoly in SUV segment. There are many car manufacturers in the
market, but in the luxury segment, there are only a few players. Automobile
industry involves a lot of investment and infrastructure, so the entry barriers
are high. In the past, there used to be many small car manufacturers, but now
various big automobile companies have bought many and only around 13 automobile
firms (parent companies) are there in the market. There is also a lot of
competition among the firms and they price similarly. As a whole JLR is in
oligopoly market. In auto sector there is always competition among rivals and
the chances of cartel among the firms is very less. The competition among auto
firms can be explained with kinked demand curves as shown in figure 14.
Figure 13: Volume of luxury cars market
in UK. Source: Statista
Automobile sector is a market, where
there are only few sellers and the entry barriers are high. If we consider five
firm concentration ratio in UK market for luxury segment from figure 13, the
percentage is 90.9%, which clearly show the market power of the firms.
In 2008, when TATA acquired JLR, it was
in dying stage and asked for UK government’s help in loan. As government
demanded control over strategy and loan term, TATA got loan form SBI, India and
invested in JLR (John, 2009). This investment helped the firm in innovation and
manufacturing. Understanding the demand for SUV’s in China, Russia and North
America, the company produced more land rover vehicles and exported them; no.
of buyers increased so there is an increase in market demand (Statista). With
Jaguar cars, it slowly entered luxury segment and now has become as a
competitor to the luxury cars worldwide. In 2016, Jaguar saw the increased
demand for compact SUV’s and introduced F-Pace which boosted Jaguar’s and also
F-Pace was named as car of the year at 2017 World car awards (Jaguar, 2017).
Table 3: JLR Revenue and Profits (FY
2009-2017 in million pounds). Source: JLR annual reports
JLR started with huge losses in 2008 and
slowly achieved profits continuously from 2009, with major jump in 2014 as
shown in table 3.
Jaguar Land Rover Financials
In 2012, the overall sales in UK fell
short of 2011. As from ONS data, this fall is associated with drop in
commercial vehicles. In 2011, the overall demand for new vehicles was down
according to SMMT. Therefore, there are less buyers and hence the demand curve
shifted left. In addition, majority of the automobile dealers have offered
discounts on automobiles to boost sales. Post 2012, there was a continuous
demand in automobiles and so the demand kept moving towards right. In 2017, the
production of automobiles fell; there is a fall in demand due to additional
levy on diesel cars and people shifting towards hybrids and EV (Alan, Craig,
SMMT, 2017). In automobile industry, it is difficult to change prices during recession,
as the companies cannot achieve profit with reduction of prices and cannot
increase prices, as people tend to wait until recession is over.
Figure 12: UK car industry. Source: SMMT
Automobile industry has always been of
the major contributor of economy in UK. Automotive sector was almost stagnant
pre 2008 and used to contribute around 5.4% of UK manufacturing. During 2009,
output fell sharply, however from 2010, the sector kept on booming with 4%
contribution towards GDP in 2016 as from SMMT data. The overall sales of
automobiles raised continuously from 2010, except in 2012 due to fall in
commercial vehicle sales. In 2008, as shown in figure 12, there is a slight dip
in consumer demand, but there was a shortage in supply side as the firms were
lacking investment. Therefore, the supply curve shifted towards left. The
automobile manufacturers were not able to raise prices, which should be the
case according to economics, however, with the rise and recession combined
effect the sales will not boost. Therefore, the prices are, not altered.
Figure 11: Rolling 3-month UK trade
balance 2013-2017. Source: ONS
UK has always been a trade deficit
country. The trade deficit was even until 2009. Post euro crisis, trade deficit
continued to increase (Daniel, 2010). In 2015 weak sterling helped a bit to
recover, however fall in manufacturing sector, productivity, and demand for
import goods let to further gap. Post brexit, due to weak sterling the trade
gap narrowed little, but fall in export prices, manufacturing, construction and
higher inflation led to further trade gap, as shown in figure 11 (Tim, 2017,
Figure 10: UK corporate tax rate.
Source: HM revenue and customs
Post 2012, government started to spend
less on public spending as the economy was improving. However, due to
significant cut in spending the growth of economy was slow. Government went on
reducing corporation tax as shown in figure 10, which is a way of increasing government
spending. However, as per ONS data, the corporation tax receipts surged to 56
billion pounds during 2016-17, indicating growth in economy.
Figure 9: Government spending as
percentage of GDP. Source: UK public spending.
During recession, government spending
has increased suddenly until 2012 as shown in figure 9. Government has spent
more on social sector, health (NHS), education and employment benefit schemes
as per ONS data to increase GDP by decreasing money demand. Government also
reduced VAT, corporation taxes (Bank of England, HM revenue and customs).
2.4 Government Spending
Figure 8: UK foreign direct investment.
Overall investment spending in UK is
81.1 billion pounds in the second quarter of 2017. Actually, this sudden
increase was due to correction made by ONS; as companies were reporting
construction work as capital costs. As per ONS data, UK investors earned less
on FDI than did the foreign investors earn on UK assets as shown in figure 8. From
World Bank’s data, FDI increased post Brexit due to depreciation of sterling,
which accounted for 10% of UK’s GDP (Gavin, 2017).
Figure 7: Business Investment in UK.
From table 2, it is clearly visible that
the total investment has reduced during recession. There was a decline in
public and household investment however, the public investment rose, as should
be the case during recession to increase GDP. The growth of investment was
quite flat after 2010 until 2016. The slow growth during 2010-2016 was due to
less consumer spending and double VAT increase. From 2013, savings reduced
drastically among the people and started to invest more. Investments in
technology businesses have increased a lot and in manufacturing – the
investment was in people rather than in infrastructure (Valentina, 2017). Post
Brexit, the investments reduced (Gavin, 2017).
Table 2: Investment at current market
prices, 2005, 2010 and 2015 (percentage share of GDP) in UK. Source: Eurostat
Figure 6: UK unemployment and CPI
inflation. Source: ONS
The productivity was low among the
workers, but still firms need people to get the job done. Also due to low
productivity, more people are required to complete the job done by a skilled
worker. Rise in part-time and temporary workers resulted in under employment,
as people were accepting lower working hours. In addition, the wages fell
during recession and the average wage growth was very low (ONS). Consumer
prices expanded at an annual rate of over 5 per cent was at their peak in
September 2011 (Valentina, 2017). This resulted in a trade-off between
unemployment and inflation as shown in figure 6. Brexit has not affected
employment much and the unemployment kept on reducing. During 2008-2017, there
is an increase in low paid jobs; manufacturing, financial services jobs fell,
and jobs in accommodation and food services increased drastically (ONS).
Figure 5: UK unemployment rate. Source: ONS
Post-recession, unemployment fell as
shown in figure 5, but the economic growth was relatively low.
Figure 4: Shift in AD and SRAS.
The unemployment rate at the start of
the recession was 5.2% and it rose suddenly to 8.5% until 2011. From the Q4 of
2011, unemployment fell drastically which is now at 4.3% in Oct 2017. During
recession GDP started to fall, so consumption fell and firms were producing
less, therefore unemployment raised (ONS). In addition, many jobs were lost in
the manufacturing sector as economy moved towards service sector (Emily, 2016).
Not just on the demand side, on the supply side the supply of skilled workforce
was missing. Therefore, the AD and the SRAS both shifted left, causing higher
unemployment as shown in figure 4.
The consumption in UK has fallen during
the third quarter of 2008 until the second quarter of 2009 from figure 3. The
rate of change of basic earnings fell continuously during recession, which is
the main reason for the fall in consumption (Valentina, 2017). This fall in
consumption pushed the AD to the left causing a fall in output (GDP). The
national income also fell from 39,000 to 37,500 million in GBP (ONS). During
this recession time, the government tried to increase the demand side by
expansionary fiscal policy. The government reduced VAT from 17.5% to 15% during
recession; Bank of England reduced the interest rates from 5% to, as low as
0.5% so that the AD will shift towards right, as the money flow will increase
(ONS, Bank of England). However, contrary to that the consumption did not
increase as projected as savings increased among people from 0% to 7%, also
people felt need to pay down the debt (Chris, 2017). There was also shortage of
credit with the banks to lend money. The bank of England cannot still reduce
the interest rates, as it is almost a similar to liquidity trap. The government
also did not increase public spending and the burden fell on the central bank. To
handle this situation, Bank of England used quantitative easing method by
buying government securities, bonds from the market and tried to flood banks
with money, as the banks gave most of their money as loans pre-recession and
they are now lacking of it (Chris, 2015). After Brexit, the GDP growth slowed
down in that quarter and to push the aggregate demand right to increase GDP,
Bank of England further reduced the interest rate from 0.5% to 0.25% during
august 2016 (Bank of England).
Figure 3: Quarterly household final consumption
expenditure total in billion pounds. Source: ONS
The GDP annual growth in UK
pre-recession used to be fluctuating around 2-3%. However, during recession
growth fell to -4.2% with real GDP being 34, 640 US dollars per capita as shown
in figure 2 (World bank). Post-recession, the growth was not good as before
recession but was much slow.
Figure 2: Real GDP of United Kingdom
(2007 to 2017). Source: Eurostat
GDP is the most common method of
calculating national output. Therefore, the focus is on GDP in this analysis.
Output is affected by different factors such as consumption, government
spending, investments and net exports.
Macro Analysis of UK
From figure 1, we can see the demand for
cars how it has changed in China. This economic analysis will focus on the
JLR’s performance over the last 9 years, especially in the UK market, where it
has a major market.
Figure 1: Sales of passenger cars in
selected countries worldwide (2005-2016) in million units. Source: OICA,
The aforementioned table shows that the
sales have been increasing drastically from 2008 to 2017. Land Rover with more
than 60% of sales is the main source of income for JLR. UK and Europe used to
be the major market for JLR. However, the demand for luxury cars and SUV’s in
China and North America have changed JLR’s market. Now with 25%, China is
leading in wholesales (JLR annual report 2015, pg. 70)
Table 1: JLR Retail sales in the corresponding
year. Source: Jaguar Land Rover, Tata Motors
Jaguar Land Rover Automotive PLC, which
is a car organisation with extravagance and rough terrain vehicles, established
in 2008. Prior 2008, Jaguar and Land Rover used to be different firms under
Ford Motors. However, the Jaguar Land Rover company was established when Tata
Motors acquired the Jaguar and Land Rover businesses from Ford and are now
sister brands of same company under the parent company Tata Motors. Throughout
the decade, the organization has extended vigorously in the vehicle division.
With just three plants at the start, now it has eight manufacturing plants in
total, with one being exclusively for engine manufacturing at Wolverhampton,
UK. Jaguar is the luxury segment and Land Rover is the off-road segment of the
company. Increased demand for luxury cars worldwide and SUV’s in China and
North America have helped JLR to achieve success in the market.
Introduction to the Firm and its Market