Pound forces Jaguar into the slow lane

DAILY EXPRESS
By Philip Robinson

Jaguar is no longer purring along an open road , powered by the twin engines of a weak pound and a strong American economy . After rising from £10 million to £121 million between 1982 and 1986, profits went £24 million into reverse at £97 million last year. The luxury car maker suffered a £50 million jolt from a soaring pound and spent a further £50 million on research, development and launch of the new XJ6 saloon.

Output climbed from 41,400 to 48,000 cars and turnover topped £1billion for the first time . But the crucial American market felll away after the October crash. Sales there slipped 1,000 to 23,000.Jaguar chief Sir John Egan says that switching production lines to the new saloon braked the company's drive for productivity , leaving output at only four cars per worker compared with Mercedes six . But he is raising the dividend by 10 per cent to 10.5p and Jaguar's production by 16 percent to 56,000 cars this year. Jaguar can switch cars from the flat American market to British , European and Japanese markets.

And the Budget , which has added only £200 a year to the cost of having a Jaguar as a company car, has doled out an extra £200 to many potential customers. But it will be hard to boost prices in America this year and the strong pound could wipe £40 million off profits. Jaguar shares slipped 18p to 302p yesterday as analysts decided the group will be on a bumpy road from now on. Nomura's John Lawson is downgrading his 1988 profits forecast from £128 million to £120 million and expects only £100 million in 1989.

THE GUARDIAN
Falling dollar puts brake on Jaguar
By Andrew Cornelius, Industrial Correspondent

The continuing rise in the pound against the dollar cost Jaguar , the luxury carmaker, £30 million in lost profits in 1987, Sir John Egan, the chairman, said yesterday. Without action to offset the effects of currency exposure by hedging on the foreign exchange markets and a $3,000 increase in the price of Jaguar cars sold in the US, the profit loss would have been £SO million, he said.

The problems in the US, which accounts for about half of all Jaguar's sales, have worsened since last year's stock market crash . The demand for luxury cars fell, particularly in the financial centres of New York , Boston and Chicago. Waiting lists for Jaguars in Britain have also shortened from about 15 months a year ago to about six months now, although Sir John said there is still scope to switch product away from the US to other markets.

Fears about the effects of currency and the weaker US market saw Jaguar shares marked down 18p to 302p after publication of the company's trading results for 1987. Rob Golding, motor industry analyst at Warburg Securities , said yesterday there was still "a two-way tug on the Jaguar share price ".

Short-term concern about the level of earnings was countered by speculation that Jaguar would become a target for bidders when the golden share , which prevents a takeover , expires in 1990. Jaguar's reduced pre-tax profits of £.97 million for 1987, against pre-tax profits of £120.8 million in 1986, were largely in line with market expectations. Yearly sales topped £1 billion for the first time, compared with £830 million the previous year.

The poorer figures resulted from the currency effects, problems in building production after introducing the new XJ6 model during the year and £30 million costs of depreciation , research and development. Despite that, Jaguar increased production by 16 per cent to 48,020 cars in the year and is on course to make 56,000 cars this year. Sir John said that the higher production would be achieved by increasing productivity from about four cars a worker each year, closer to the six cars a worker achieved by rivals BMW in Germany. This means there will be no further recruitment of production workers at the Jaguar plant in Coventry, although the company is still looking for more skilled engineers. Sir John said Jaguar was ploughing ahead with plans to improve its existing cars and also to launch a new sports car in the 1990s.

"We now have a platform for growth in 1988" he said.

THE GUARDIAN
A big dent in a powerful image that is proving hard to beat . . .
By Janice Warman

When Jaguar was floated off from British Leyland in 1984, its glamorous image was enough to ensure it was eight times oversubscribed; despite the fact that it had only recently emerged from losses. And, initially at least, investors confidence was justified. Sir John Egan used the dollar's strength to build US sales, competing at the top end of the luxury import market headed by BMW and Mercedes- Benz, and their shares climbed from the flotation price of 165p to 632p at its height last year.

Profits climbed from £91.5 million in 1984 to £121.3 million in 1985. Then in 1986 they fell slightly. The reason? Production difficulties in switching to the new XJ 6 saloon range , with associated launch costs, increased engineering expenditure and depreciation charges. That the market swallowed; and it remained loyal. But it's a cruel old world.

The first hint of what was to follow came with the interim announcement in August last year. This fulfilled every analyst's nightmare, when £16 million start-up costs for the new XJ6 saw profits plunge £10 million, below even the City's gloomiest expectations. The shares followed suit and in the crash which followed just two months later , Jaguar's shares were among the worst hit. It is the crash, and the consequent weakness of the dollar , which lies at the heart of Jaguar's troubles. Add worries about a consequent softening in the US luxury car market to yesterday's 20 per cent pre-tax fall to £97 million, and the day's 21p mark-down to 303p seems positively generous.

The peculiar injustice of Jaguar's difficultieslies in the fact that the group is doing more things right wan wrong. The £30 million currency hit which decimated profits would have been £50 million without efficient forward hedging , and it has covered forward well into 1989.

Productivity has increased despite the inheritance of unsuitable, even rundown , headquarters at Browns Lane, Coventry. This year production rose by 16 per cent to 48,020 cars and Jaguar estimates 56,000 in 1988. But at four cars per employee annually , it is well below Jaguar 's main competitors, BMW and Mercedes-Benz, which have attained an impressive total of six. It has been forced to add a third shift at its paint factory, employing 150 more people, and last year took on a total of 900 new staff. There are other areas where the group has fallen short. The high launch costs of the new model should ideally have been foreseen, although Sir John will only admit to setting the productivity level too high, too early.

"It was a case of fine tuning rather than serious mistakes," he says.

Jaguar 's cash pile is diminishing fast, as it commits ever increasing sums to capital expenditure to modernise production , and to research and development , in what seems to be a frantic chase after the big boys. In 1987 total capital spending rose by 40 per cent to £132 million, with £50.4 million of that on R&D. Its new convertible, fresh from its Geneva launch, is designed to take them on of their own ground , and appear to have been well received while its new sports car planned for the early 1990s, is intended to combat the Porsche , whose own fortunes have dwindled.

No one can say that Jaguar does not have an excellent product, with a powerful image But it faces in America – ”by far its best market – a signiflcant fall in demand for luxury cars particularly in the North's Chicago, New York and Boston. Its products are competitive, selling at a $7,000 discount to the Mercedes and BMW ranges, and it is keen to keep them that way. Significantly, talk of further price rises has switched to talk of discounting, although at this stage the group maintains it would switch markets rather than do so.

No one can argue Jaguar's dominance of the UK luxury car market, where it has a 50 per cent plus share. The question is what other markets could possibly provide the kind of growth which the company has found in the US. West Germany provides obvious nationalistic resistance , with its owndominant brands. Japan provides similar resistance and some minor markets in Europe have fallen in the second half. After yesterday's meeting, analysts were busy cutting chunks off their profits forecasts, from £126 million to between £105 million and £110 million. Not that the figures were a surprise , but as one of their number put it: "Fabulous people, fabulous car – but the dollar is agin them."

That , unfortunately, is where it begins and ends. Even a strengthening dollar could scupper the group if it prompted a US recession. Opinion is divided as to whether the group can turn its fortunes around. The fact is that whether Sir John can pilot it into safe waters or not, the Government's golden share expires at the end of 1990. The share price ought to reflect the fact that it will then present a tempting prospect for any large motor company wishing, like Fiat (Ferrari), Chrysler (Lamborghini) or General Motors (Lotus) to acquire a cheap route into luxury car manufacturing.