Jaguar’s New Compact Sedan XE Unveiled In London

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As Jaguar launched its much-awaited compact saloon XE at its world premier in London this week, we take a look at the luxury marquee’s foray into the lower end of the premium vehicle market. Jaguar, owned by the Indian automobile manufacturer Tata Motors (NYSE:TTM), previously offered the X-Type, which was discontinued in 2009 without a replacement model, due to its poor perception and stiff market competition. Jaguar will hope to leverage the XE’s state-of-the-art modern architecture and technological advancements, and the booming demand for compact luxury vehicles globally, to fuel volume growth in the coming years. The XE is set to be a volume model for Jaguar, which will compete with bestsellers such as BMW 3-series, Audi A3 and A4 and Mercedes-Benz C-Class in the lower-end of the premium vehicle market. Following the launch of the XE, we expect volumes for the British manufacturer to increase significantly, but the average revenues per vehicle to fall on account of the lower prices for the XE. The new compact sedan, built on a new modular architecture, could also be crucial for Jaguar as the company looks to expand its operating margins.

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Riding on Jaguar Land Rover’s strong quarterly and year-to-date performance, and as the luxury vehicle market gears up for the launch of the XE, Tata Motors’ stock has jumped by over 30% since April, the start of the company’s fiscal year 2015.

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The XE To Take On The 3-series, A3 and A4, C-Class

Jaguar sold 80,644 vehicles in fiscal 2014, up almost 40% year-over-year, boosted by incremental sales from the new F-Type. The new XE, priced lower than the other Jaguar models, will aim to attract consumers who prefer cheaper luxury vehicles, and the ones looking to trade-in their large non-luxury sedans for relatively inexpensive premium cars. A reference point for the British carmaker could be the strong sales for the 3-series, A3 and A4, and C-Class compact luxury sedans. The 3-series is the best-selling sedan for BMW, the world’s largest luxury vehicle manufacturer, constituting 30% of the net volumes last year. The model sold 236,215 units in the first half of the year, up 21.8% over 2013, while overall BMW volumes rose 9.4%. [1] On the other hand, the new A3 lineup and the revamped C-Class are also volume models for Audi and Mercedes-Benz respectively, growing by more than the company average this year. The global compact premium car market dominated by the BMW 3-series, Mercedes-Benz C-Class and Audi A3 and A4 is expected to surpass 1.3 million units this year, with these three models constituting a massive 88% of the volumes. Going forward, as consumers in developed countries look to shift to fuel-efficient smaller luxury variants, and those in emerging economies with increasing disposable incomes look to make premium vehicle purchases, the compact segment is expected to be the growth driver in the luxury vehicle market.

The XE might be able to garner considerable consumer attention by leveraging its relatively economical appeal and Jaguar’s high-end premium brand image. Unlike the X-Type, which was criticized for its retro styling and similarity with the much cheaper Ford Mondeo, the XE could lure-in consumers looking to buy compact sedans due to its superior technology and low ownership costs. The new XE is based on an aluminium monocoque, providing a weight saving advantage to Jaguar. In fact, the XE uses RC 5754, an aluminium alloy made predominantly from recycled material. In a bid to become more environmentally friendly and reduce CO2 emissions, Jaguar plans to use this alloy in the coming models as well, aiming to use 75% recycled material by the end of the decade. Not only will this innovation help the company reduce costs of production in the long term, volumes could rise. Millennial customers are more conscious of their environmental impact, and combined with rising carbon taxes and stress on fuel-efficiency in many countries, lower energy consumption of the XE could attract higher sales.

Investment In Expanding Production Capacity

For the purpose of building models with the new aluminium chassis, Jaguar announced an investment of around £1.5 million ($2.4 million) at its Solihull factory in the U.K. [2] In addition, the company also invested £500 million for an engine factory in Wolverhampton, U.K. Jaguar currently manufactures its vehicles only in the U.K., with over 80% of the cars produced in the domestic market exported. The brand will for the first time expand production outside the domestic market with manufacturing beginning in China this year. In addition, the automaker will also build a manufacturing plant in Brazil this year, and could roll-out its first locally produced vehicle in the country by 2016. Jaguar Land Rover’s current production capacity is at about 450,000 units, and could rise to 700,000 by 2017. The new XE will almost double the production capacity for Jaguar, which is around 77,000 units presently. [3] Bolstered by incremental sales from the XE, we expect Jaguar’s volumes to rise by 25% from fiscal 2015 to 2016, to over 110,000 units.

Revenues Per Vehicle To Decline For Jaguar

While Jaguar’s net volumes are expected to rise significantly with the launch of the XE in Europe in early 2015, and the U.S. later on in the year, the average revenue per vehicle will decline. This is because the starting price for the XE is pegged at around £27,000 ($43,400), which will make it the cheapest Jaguar model on sale, following its launch. The mid-size executive car XF is the highest selling Jaguar at present, with a starting price of around £30,000 in Britain, the lowest of any Jaguar cars at present. [4] The starting price for the XE is 40% lower than the revenue per unit for Jaguar Land Rover last fiscal. We expect revenue per model to decrease by a cumulative 10% by the end of the decade, from the last fiscal, assuming the XE to form almost one-fourth of the Jaguar volumes by then.

Recycled Aluminium Could Improve Profitability

The XE is the first Jaguar to be built on the company’s new modular architecture, having a lightweight aluminium structure. [5] Apart from being lightweight and more fuel-efficient, the use of recycled aluminium will reduce the cost of sourcing aluminium for the production process. Jaguar aims to reduce CO2 emissions of its fleet by 25%, consuming lesser energy. Following the launch of the XE, Jaguar is expected to start production of a crossover codenamed C-X17, also built on the same aluminium architecture, leveraging an integrated manufacturing model. By employing the new modular architecture, capable of extending to other chassis sizes and forms, and extensive use of recycled aluminium, Jaguar’s production costs could slightly decline. Rising volumes and anticipated lower production costs could boost profitability for Jaguar in the long term.

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Notes:
  1. BMW first half sales []
  2. Jaguar creates 1,700 job in a £1.5m investment at its Solihull factory“, September 2013, metro.co.uk []
  3. Flying start for the latest Jaguar, dailymail.co.uk []
  4. Jaguar model prices []
  5. Jaguar Land Rover press release []