Will JLR Be Able To Cope With China’s Pollution Norms?

The internet was recently shot with tonnes of pictures from China where all one could see was smoke. China has been facing a severe pollution crisis that has sparked unrest and even riots in some parts. It had been high time that the government acted upon the situation and impose the long-debated stringent fuel standards. While this would mean taking a good step towards resolving a crisis, it would make life worse for automobile manufacturers who are already struggling worldwide.

China being the fastest growing market for companies like Jaguar Land Rover (JLR), any changes here directly have large implications on overall operations of these companies. The month of February 2013 was a good example of the sensitivity of JLR to China. Due to the Chinese New Year falling at different times this year and in the previous year, JLR witnessed a one-off hit on sales in China. 

Sales in the Chinese market declined by 22.60% in February 2013 as against the average growth of 65.29%. This has had a drastic effect on the overall JLR sales which came down from an average of 26.93% to a mere 3.09%. Now how do we know Chinese sales are solely responsible for this?

Firstly China accounts for 20% (and growing) of the total sales of JLR. When Chinese sales for February 2013 are adjusted according to the average growth rate instead of the decline, total sales of JLR show a growth of 24.05%. Compare this to the average 26.93% growth and you know where the bullet is.

So while the New Year mismatch hit the share prices of Tata Motors (since over 90% of Tata Motors’ profits come from JLR) a while ago, this time it was China imposing its new fuel standards. According to these rules, passenger cars’ average fuel consumption would be reduced to 6.9 litres per 100 km by 2015 and further to 5.0 litres per 100 km by 2020. 

Further, based on Euro V norms, the country introduced and implemented National V norms starting with Beijing. As per these norms, vehicles not meeting new norms would be barred from sales in the city.

This move would force players to work on technology, invest in fuel efficiency and hybrid technologies. This would mean JLR would have to work on fuel efficiency to be able to maintain momentum in China. Reports have been indicative of JLR being in need to improve fuel efficiency by 10-20%.

However, JLR said yesterday that it did not expect sales in China to be hurt by the new fuel standard norms. It said that the company is already working on downsizing engines, reducing vehicle weight and working on a new diesel technology. JLR has time till 2015 to meet these requirements and there seems enough reason to believe it will be able to do so. 

The importance of China to JLR combined with work and investments already commenced, it doesn’t seem highly questionable that JLR won’t launch new models and adhere to norms.

We maintain our long-term positive outlook on JLR and thus on Tata Motors and recommend investors to buy the scrip on dips.