India's largest automobile manufacturer Tata Motors on Friday said the outbreak of Coronavirus and the resultant shutdown of various parts of China has led to a steep 85 per cent fall in sales of its subsidiary Jaguar Land Rover in February in the world's largest car market. The company added that the impact on its Indian operations due to possible supply chain disruptions would be limited in this fiscal and it is secure at least till mid-March.
"Jaguar Land Rover sales in China grew on average about 25% year on year for the 6 months from July through December 2019 and we continued to see strong growth for the first 3 weeks of January. The coronavirus has significantly impacted China sales with February retails down around 85 per cent vs the prior year," the company said in a detailed statement. "In the first half of the month, about 20 per cent of dealers were open which has since improved to now over 80 per cent although most are still operating with reduced staffing and facilities. Jaguar Land Rover expects this to improve over the course of March, however, retail sales are expected to recover more gradually. The spread of the virus to other markets such as South Korea, Japan, and Italy will also impact sales in those markets."
China accounts for almost a quarter of JLR's global sales, which in turn accounts for almost 73 per cent of Tata Motor's annual turnover of around $41 billion. The virus outbreak also comes at a particularly bad time for the company as the operating margins at JLR had just managed swung into the positive zone at 3.3 per cent in the third quarter of this financial year as compared to a negative 2.5 per cent in the same quarter in 2018-19. Tata said the virus is expected to shave off at least 1 per cent of JLR's full-year EBITDA though it said the British brands would continue to have the modestly positive free cash flow for the fourth quarter of the fiscal. The financial impact on the company's domestic operations in India is expected to be far more muted.
"The reduction in China sales resulting from the coronavirus presently is estimated to reduce Jaguar Land Rover's full-year EBIT margin by about 1 per cent, however, free cash flow in Q4 is still expected to be modestly positive and JLR ha Euro 5.8 billion of total liquidity at December 2019 (Euro 3.9 billion of cash and a Euro 1.9 billion undrawn revolving credit facility)," the company said. "For Tata Motors domestic business, Q4 performance was already planned to be significantly impacted due to the switchover from BS-IV to BS-VI and the shortage of parts is likely to have some additional impact on specific BS-VI models which is expected to be secured in the coming months. Tata Motors expects to end the quarter with positive free cash flow."
The outbreak of the virus has caused significant disruptions in the global supply chain for automotive components and Tata Motors is not entirely insulated from it either. The company said there could be some volume losses in the current quarter in India due to the relatively slow ramp up of BS-VI product portfolio on account of limited parts availability from China.
"Materials management to support the ramp up of BSVI has become a daily affair and we are seeing improved availability position as vendors come on stream in China. With some flexibility in mix (models, trim levels) current visibility protects production volumes up to mid-March. The further planning horizon contains some uncertainties which are expected to be mitigated to a large extent; situation could lead to limited volume losses in Q4. This is however, expected to be recovered as market demand is likely to improve gradually upon transition to BSVI. The timeline for a complete rebalancing of supply and demand is dependent on the further developments in the coming 4-6 weeks. Domestic business is positive to overcome the current challenge with a limited impact on its overall FY21 performance," it said.
On JLR, Tata said it has managed supply chain constraints well so far but did not rule out the risk of a shortage of critical components impacting its production schedule in future.
"Jaguar Land Rover's supply chain is primarily based in Europe and the UK, with a relatively small percentage of direct parts from China. Over 95% of its Tier 1 and Tier 2 suppliers in China are now open but at reduced capacity. JLR has visibility of availability of most parts out 2 weeks or more and has managed to avoid potential parts shortages by working closely with its suppliers and with some increased use of air freight," the statement said.
"In the event of specific parts shortages, Jaguar Land Rover would ordinarily be able to still build cars and retrofit missing parts when available, however, we cannot rule out the risk that a shortage of a critical component could impact production at some point. The spread of the virus to South Korea, Japan, and Northern Italy is creating similar issues which we are managing in the same way."