Dear Ratan Tata,
I cheered when Tata Motors acquired Jaguar and Land Rover (JLR), two global luxury brands. But that acquisition has poisoned your balance sheet, and threatens your whole future.
JLR dragged Tata Motors into a net loss of Rs 329 crore in the April-June quarter, following a whopping Rs 2,505 crore loss the previous quarter. You hope JLR will turn the corner in 2010-11. But this assumes a return to business as usual, and that may not happen. The luxury car market may have changed forever—in the direction of electric vehicles. You ignore that change only at your peril.
Six years ago, the world auto industry talked of hydrogen-powered cars, using fuel cells, as vehicles of the future. That turned out to be a passing fad. Actual market fashion moved in a different direction—toward huge sports utility vehicles (SUVs). The biggest of these was the Hummer of General Motors. Every big auto manufacturer shifted to SUVs.
However, the market was transformed when oil crossed $ 100/barrel in 2007 and touched $ 147/barrel in 2008. Simultaneously, the Great Recession arrived. Demand for SUVs crashed as buyers switched to more energy-efficient vehicles, and the switch drove General Motors and Chrysler into bankruptcy.
The Great Recession may be ending. Optimists hope for an upturn this quarter, although pessimists warn about a double-dip recession. But even if the optimists are right, the auto industry will not go back to old fashions and mammoth luxury cars. If the world economy booms again, the price of oil will surely boom to $ 150/barrel once again. The era of cheap oil is over.
Does this matter for luxury brands like Jaguar and Land Rover? Rich buyers hardly care about the price of petrol: it’s a negligible part of their expenses. Even rich buyers hold off buying new vehicles during a recession, so sales of all luxury cars have fallen. But once the recession ends, won’t the rich flock again to buy large luxury cars, regardless of the price of petrol?
No, because we have reached a turning point in consumer values, and that matters infinitely more than the price of petrol. Remember, ivory was once a standard luxury product, but demand for it evaporated once it was associated with the extinction of elephants. The rich could still afford ivory, but did not wish to be seen wearing it. That was not a passing fad: it was a turning point in consumer values.
The same is now true of large, carbon-emitting cars. Whether or not you personally view global warming as a threat to humanity, you cannot ignore two imperatives. First, governments across the world are going to penalize manufacturers of large carbon-emitting vehicles. Second, and more important, the rich no longer want to be seen as large emitters of carbon, just as they no longer wish to be seen wearing the remains of dead elephants.
So, all global manufacturers are rushing into petrol-electric hybrids, whose technology is now well established. Some are experimenting with fully electric plug-in cars, but those are expensive and lack the high-performance characteristics of a luxury car. The Tesla Roadster, for instance, costs $ 100,000 (Rs 50 lakh), but has a very limited driving range between recharges. As for small electric cars, the Tesla Model S will cost around $60,000. This is almost thrice the price of the best-selling small hybrid, Toyota’s Prius. New technology could make electric cars more affordable in a decade.
The luxury section—to which Jaguar and Land Rover belong—is now moving to hybrids too. BMW, Mercedes-Benz and Porsche are all lining up new hybrid models. The Cadillac Escalade has a hybrid SUV at $ 70,000 (Rs 35 lakh), as expensive as a fancy Jaguar.
Now, purists will call a hybrid SUV a contradiction in terms: a huge car pretending to save on carbon emissions. Yet consumer psychology is rife with such contradictions, and this one sells well. Luxury brands like Lexus and Acura are doing well in hybrid SUVs. Below the luxury section are a plethora of cheaper hybrid SUVs.
This is more than a shift of fashion: it is a change in consumer values that will endure. The demand for old-style luxury cars will not disappear. But to meet changing demand, every luxury manufacturer needs to have a hybrid brand soon, and maybe a fully electric model in ten years.
So, Mr Tata, let’s hope we hear soon from you about JLR going into hybrids and electric plug-ins. The aim is not to save the planet, just to save JLR—and maybe even Tata Motors—from extinction.