Jaguar Land Rover: how a merger with the French PSA group could benefit Britain's largest car-maker

(FILE PHOTO) Britains largest automotive manufacturer Jaguar Land Rover is reportedly set to announce it will cut up to 5,000 jobs from its UK workforce. HALEWOOD, UNITED KINGDOM - MARCH 26: The Halewood operations site of Jaguar and Land Rover near Liverpool in Merseyside, England on March 26, 2008. Parent owner Ford is due to announce today that it is selling off the two luxury brands to Indian car manufacturer Tata Motors in a deal speculated to be worth in the region of GBP 1 billion. (Photo by Christopher Furlong/Getty Images)
Will PSA purchase JLR? it's been an six-month open secret that the British firm is for sale at the right price and while both parties deny the existence of an 'Integration Document' the French company acknowledges that some talks have taken place Credit: Christopher Furlong/Getty Images

Rumours of a possible integration, or even a takeover, of the Indian-owned Jaguar Land Rover (JLR) Group by the French Peugeot/Citroën (PSA) group have set the car-making world alight, but they wouldn't be entirely impossible. After all, it's been an six-month open secret that JLR is for sale at the right price and while both parties are categorically denying the existence of the 'Integration Document' which posits the possibility, PSA acknowledges that some talks have taken place.

Carlos Tavares, chairman and chief executive of PSA, is one of a new generation of brilliant motor industry managers and under his watch PSA (which now includes former General Motors brands Vauxhall/Opel) has become one of the world's leading non-premium car makers. Last year's PSA financials were very strong, with group sales, operating margins and profits all significantly up, so the Group could afford JLR, which Tata purchased from Ford in 2008 for $2.3 billion in cash.

And certainly JLR is at a low ebb, hit with high investment and depreciation costs, tumbling sales in China and a seemingly endless round of job shedding. Its full-year results will be delivered on May 20, but no one is expecting a turnaround from its third-quarter losses of £273 million before exceptional items, and sales down to 144,602 from last year's 154,447 in the same period.

Poor product planning decisions have left JLR with an over-reliance on diesel engines and it's been stymied by the pace of change into plug-in hybrid and pure battery electric cars.

PSA chairman Carlos Tavares has earned a sterling reputation after turning around the PSA Peugeot-Citroen group Credit: Denis Balibouse/Reuters

It is by no means alone, however. BMW, which also piled into Chinese markets, has been left with balance-sheet issues and outgoing Mercedes-Benz chairman Dieter Zetsche recently admitted that the transformation into electric cars "has demanded extreme amounts of investment".

And it's far too easy to dismiss JLR as a hangover of the bad old days of British Leyland. Jaguar was privatised in 1984 and bought by Ford for £1.6 billion in 1989. Ford installed Bill Hayden, a hard-headed production man, to Browns Lane, Jaguar's home for 65 years. He took one look round this cramped, chaotic factory where craftsmen lovingly caressed walnut veneer and parts went missing and declared that he had "never seen anything like it outside the Soviet Union".

Land Rover took a different route and was sold out of Rover to BMW in 1994. It was sold to Ford in 2000 and became part of the company's Premier Automotive Group before Tata acquired both companies as JLR eight years later.

JLR's Land Rover division has consistently delivered in terms of profitability Credit: Phil Noble/Reuters

Tata's heavy investment has developed JLR into a modern car company with the state-of-the-art aluminium production facilities and a skilled workforce of around 43,000. And in the last 10 years JLR has delivered on the bottom line, or at least the Land Rover division has, with annual profits of between £1 and £2.5 billion and the opening of production facilities all around the world, which are so essential for modern car makers.

That Tata deal was brokered by Ratan Tata, at 81 years, chairman emeritas of the Tata Group. He is still a huge fan of JLR, attending design unveilings and car launches, but there's a new management team at Tata with a more pragmatic view of the British car maker.

"I'd doubt the company would be actually sold while Ratan is still around," said one insider rather doubtfully.

Steel magnate Ratan Tata holds JLR close to his heart; insiders say that the company is unlikely to be sold while he is still around Credit: SEBASTIAN DERUNGS/AFP/Getty Images

That doesn't rule out closer integration, though, and certainly Land Rover and Jaguar would fill a "premiumness" gap in the PSA line-up of Peugeot, Citroen, DS and, most recently, Vauxhall and Opel. This would be ironic as Peugeot in particular is the senior partner. Formed in 1810 and initially famed for its pepper grinders, it started manufacturing cars in 1889 and by 1913 produced the acme of grand-prix racing engines and for the most part of its existence has had a fine reputation for performance, luxury and quality.

There's need on both sides, though. Tavares has deftly marshalled  the PSA Group into profit and strength, but he still needs a leg up in the pure battery car business. At the Geneva motor show in March, while simultaneously denying an intention of buying JLR, Tavares also complained that new EU rules on CO2 emissions are putting unfair strain on Europe's car makers to move into battery production too fast.

At the same motor show Jaguar was accepting the Car of the Year award for its battery-electric i-Pace and insiders say that car is much admired by Tavares, but perhaps not the company's pensions obligations, diesel difficulties and heavily UK-based production.

PSA boss Tavares is said to admire Jaguar's i-Pace, which took this year's European Car of the Year award. Jaguar is far more advanced along the road to electrification than any of the PSA brands and as such would be a brilliant acquisition Credit: Denis Balibouse/Reuters

And there's also a particular difficulty headed towards JLR in the form of Draconian EU fines for breaching those stringent CO2 emissions requirements. Previously the UK fought for derogations for its small, premium car makers such as JLR ("The British laid down in the tracks for its car makers," says one senior motor industry engineer), but with Brexit in the offing, companies like JLR will have no shelter from these fines for its heavy and thirsty luxury vehicles. Tavares says the PSA Group will not be paying fines next year, but he might have to revise that opinion if JLR joined the group.

There's a saying in the motor industry that "everything is for sale, it just depends on the price". Insiders at both PSA and JLR are saying that the fact that PSA hasn't moved more quickly to snap up JLR might be as much to do with JLR's current predicament as it is to do with the purchase price.

As they used to say about some Jaguar models; some cars are just too expensive to own as well as to buy...

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