Jaguar Land Rover (JLR), the luxury unit of Tata Motors, is betting on surging sales in China to help it defray royalty payments triggered by the company setting up factories outside the UK.
Jaguar is liable to pay royalties to Ford Motor Co, which sold the brands to Tata Motors in 2008 for $2.5 billion, for use of the platform required to make its best-selling cars when manufactured outside the UK, it said in a US regulatory filing on January 23.
The unit of Mumbai-based Tata Motors will build vehicles to suit Chinese markets, spokeswoman Kay Francis said in an email response to questions.
The owner of the marque brands is banking on rising volumes in China, which trumped the UK as its biggest market in 2012, to counter the levies amid growing popularity of its cheaper models that stalled profit, according to Umesh Karne, an analyst with BRICS Securities.
Shifting focus to the world’s biggest auto market helped Jaguar Land Rover sell a record 3,57,773 vehicles last year even as total car sales in Europe plunged to their lowest in 19 years.
“The management is very confident about doing well in China,” said Mumbai-based Karne. “While royalty payments will affect margins, Jaguar Land Rover may be able to offset this by saving on import duties and thereby being able to reduce prices and increase volumes.”
Jaguar Land Rover will have to pay access fees and royalties when producing models based on the EuCD platform developed by Ford. The Freelander and Evoque are among the vehicles built on the so-called European D-class platform and eligible for the payments to Ford if made outside the UK.
“It’s a question of how much Jaguar Land Rover will have to pay in royalties to see how it will affect profitability,” said Juergen Maier, a fund manager in Vienna at Raiffeisen Capital Management, which manages about $1.1 billion in emerging-market assets. “We will have to wait and watch to see what models they decide to make in China, and the royalties that they will have to pay Ford.”
Maruti Suzuki India (MSIL) tripled payment to parent Suzuki Motor Corp in the year ended March 31 from 2008. The company paid R1,803 crore, or 5.2% of its sales in the latest financial year.