Production In Brazil To Boost Volumes And Profitability For Jaguar Land Rover

Despite declining sales in the overall automotive market in Brazil, the luxury vehicle segment in the country is on the rise. Brazil is the fourth largest vehicle market in the world, but has very low premium vehicle penetration at present. While luxury sales in the country are estimated to form only 1.7% of Brazil’s vehicle market this year, the figure for the U.S., the largest premium vehicle industry, has been steady at about 10-11%. Even the other BRIC nations, Russia and China, have 10% and 7% of their vehicle volumes constituted by the luxury segment. In addition to lower premium vehicle ownership rate at present, growing disposable incomes and rising proportion of affluent consumers, are expected to boost growth in Brazil’s luxury vehicle market going forward.

Leading German luxury carmakers Audi, BMW, and Mercedes-Benz will begin local production in Brazil within the next couple of years, which is expected to reduce prices of their vehicle offerings in the country.

The British carmaker Jaguar Land Rover (JLR), owned by the Indian automobile company Tata Motors (NYSE:TTM), is also expanding its manufacturing network to Brazil. The company will also aim to tap into the vast potential of the country’s premium auto market, and add incremental volumes. In addition, low costs of production in Brazil should also boost Jaguar Land Rover’s profitability going forward.

Trefis price estimate for Tata Motors is $38.95, which is roughly in line with the current market price.

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Brazil Constitutes A Small Portion Of JLR Sales

Jaguar Land Rover will become the first British carmaker to expand production in Brazil. The automaker will build a manufacturing plant in the State of Rio de Janeiro this year, and could roll-out its first locally produced vehicle in the country by 2016. ^[1] For this purpose, Jaguar Land Rover is investing around 750 million Reals (£200 million) in Brazil through the end of the decade. Brazil’s luxury vehicle segment is presently led by the three German automakers BMW, Mercedes, and Audi, together selling 16,785 units in the country through May, up an impressive 35.8% year-over-year. ^{[2] [3]} According to our estimates, these three companies constitute around 80% of the luxury segment in the country presently, but only 1.26% of the overall passenger vehicle sales. This reflects how Brazil’s luxury vehicle segment is still very under-penetrated.

Along with BMW, Mercedes, and Audi, all of which will begin production in Brazil within the next couple of years, Jaguar Land Rover will also commence local manufacturing. The British automaker will aim to grab a significant chunk of the potential growth in the luxury vehicle segment in Brazil going forward. Brazil constituted just 3% of the net unit sales last year for Jaguar Land Rover, which sells close to three-fourths of its vehicles in China, the U.K, and the U.S. ^[4] Land Rover has sold 3,602 units in Brazil through May, forming only 2% of the net volumes for the brand during this period. By our estimates, Jaguar and Land Rover together could sell 15,000 units in the country this fiscal year ending April 2015, going by current trends.

Volumes And Profitability Could Rise For JLR

Jaguar Land Rover’s new manufacturing plant in Brazil will have an annual capacity of 24,000 units, in order to meet the anticipate demand for the automaker’s offerings. However, the surge in demand for luxury vehicles in the country lately has primarily been on the back of strong sales for the compact segment. For example, the introduction of the entry-level premium sedan Mercedes A-Class in Brazil bolstered volume-growth for Daimler, as consumers looked to upgrade to this segment from the non-luxury large sedan segment. The A-Class is priced at around 111,000 Reals ($50,000), only slightly more expensive than the Toyota Corolla priced at 93,000 Reals and in the range of the Honda Accord priced at 120,000 Reals. ^[5] As Jaguar Land Rover primarily competes in the higher-end of the luxury vehicle market, with average revenues per vehicle of over $70,000, the brand might not witness similar surge in sales as seen by the German automakers in Brazil.

However, Brazil is one of the most unequal countries in the world, where although the proportion of affluent customers is low, their combined wealth ($4 trillion) ranks third of any country in the world. This means that the rich Brazilian consumers, the target base for luxury automakers, have larger amounts of disposable incomes and might be persuaded to purchase the relatively more expensive Jaguar Land Rover vehicles. In addition, the British company expects Brazil to have around 17,000 new millionaires, providing huge growth potential. ^[5] Jaguar might also consider bringing its cheaper compact luxury sedan XE, scheduled to launch in 2015, to Brazil to compete in the fast growing compact premium segment.

Jaguar Land Rover currently has three manufacturing plants in the U.K., where more than 80% of the vehicles produced are exported. The brand will for the first time expand production outside the domestic market with manufacturing beginning this year in China, JLR’s single largest market, to meet the growing luxury demand in the country. Production in Brazil will further expand Jaguar Land Rover’s production network, and also help the company evade large transportation costs and import tariffs, bringing down vehicle prices. In addition, low raw material and operating costs in Brazil, much lower than those in the U.K., could also boost the company’s bottom line going forward. We currently estimate the long term margins for both the Jaguar and Land Rover divisions to rise to 16.3% from around 15% presently. But if the margins grow to 17% by the end of the decade, there could be a 13% upside to our price estimate for Tata Motors.

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1. JLR plans new manufacturing facility in Brazil [↩]
2. Brazil car sales in May 2014 [↩]
3. Brazil car sales in June 2013 [↩]
4. Jaguar Land Rover volumes [↩]
5. BMW to jaguar sales up as market drops, bloomberg.com [↩] [↩]