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Few brands have been as well-positioned to take advantage of the rapid shift from sedans and coupes to SUVs and crossover vehicles as Britain's Land Rover, which is in the midst of a rapid expansion of its light-truck lineup.
The transformation has been a lot tougher for the other half of Jaguar Land Rover, which is owned by Indian auto company Tata Motors. Best known for sleek sports cars and sports sedans like the two-set F-Type and flagship XJ, Jaguar has been struggling to adapt to changing market conditions, resulting in a loss of 281 million pounds ($372.2 million, based on this week's exchange rates) for JLR during the most recent quarter. The good news is that after years of delay, Jaguar now has three utility vehicles in its fleet and they're generating a surge in demand.
CNBC recently sat down with Joe Eberhardt, one of Jaguar Land Rover's senior global executives and CEO of its North American operations, to discuss the company's plans.
CNBC: Your bottom line did not look very good during the fourth quarter of 2018. What went wrong?
Eberhardt: It's the result of serious headwinds, like the rest of the industry. The China business has slowed down for everyone. Meanwhile, a lot of our business is dependent on diesel, which is slowing down in Europe. I don't want to say the speed of change took us by surprise, but they were too quick for us to react to immediately. It takes time to transform ourselves to the point we can be profitable again.
CNBC: How are you planning to do that?
Eberhardt: Going forward, we'll put two transformation programs in place. In the short term is one called "charge," that is purely focused on cost reductions. The other one is called "accelerate," which is meant to address some of the systemic issues we're facing from a market perspective. Both efforts together will generate 2.5 billion euros ($2.8 billion) in profit improvement, and we think we will have a sustainable business.
CNBC: Speaking of systemic issues, Land Rover seems well positioned to respond to the surge in SUV demand. Not so with Jaguar, however.
Eberhardt: The shift to SUVs continues. We're now at 70 percent SUVs for three consecutive months in the U.S. which nobody would have expected, and the trend is moving in the same direction in the rest of the world. It's hard to say where that will end. When it was 50 percent, I thought it would be the end. I don't think we knew how quickly that trend would happen when we did the F-Pace, E-Pace and I-Pace, so I guess you could call it luck. I can guarantee at the time, nobody said it would be 70 percent at planning meetings. The good news is that we have the product. The question now is how we react on the downside with cars that are not in demand.
CNBC: Do you have to start thinking about dropping some of your Jaguar passenger cars?
Eberhardt: We haven't yet. Despite their lower volume, we think there's still significant demand for cars. Thirty percent of the market is still a huge number. But there might come a point. It's like manual transmissions. There's no demand, so we have to exit that market. Another area is the sport brake or wagon. The market doesn't take to it. And diesel will be an interesting market to watch. It continues to sell well on Range Rover and Range Rover Sport, but we have to watch it. So, a long answer to your question, if, three years from now, that 70 percent becomes 85 percent we have to ask (which products) make sense anymore.
CNBC: On the flip side, do you need more SUVs and crossovers?
Eberhardt: There's always something under development, but nothing I can talk about. You shouldn't think that Jaguar Land Rover isn't working on new products. We always are, (but) I don't know if we need more models. We have a broad spectrum of derivatives, engines and price points. And we have a huge portfolio on the Land Rover side that is getting even bigger. I want to make sure we don't step on ourselves. We have to have clearly defined and delineated products on the Jaguar and Land Rover sides that speak to the core values of each brand.
CNBC: On the Jaguar side, you just launched your third SUV. And it's also your first all-electric model. Do you expect any real sales volume for the new I-Pace?
Eberhardt: I don't know. No one has really made much of a market except for Tesla because of the mystique of Elon Musk. The I-Pace is a really cool car and it drives real well. It may be the future but we just don't know yet. It's tough for the industry as a whole to know what the natural demand is. The big problem for all of us manufacturers is residual values (which) are a fraction of what they are on regular cars. Some competitors are seeing only 20 percent, which doesn't allow you to make a case for a competitive lease.
CNBC: The industry is being driven by three trends: the explosion in SUV sales, the emergence of electric vehicles, and the push for autonomous driving. Only one of these is actually being driven by consumers, the shift to SUVs.
Eberhardt: Electrification could become consumer driven. What it needs is for the industry addressing customer pain points: range, charge times and costs. Anyone who drives a car like the I-Pace knows how much fun it is to drive and it can be very practical if you have a charger at home. To get to large scale adoption, all these points have to be addressed and I think it will be long-term. Some people say it will be 25 percent (of new vehicle sales) by 2025. I don't think it will be that quick.
CNBC: In terms of self-driving vehicles, you've teamed up with Waymo, the Google spinoff that will buy as many as 20,000 I-Pace SUVs for its new Waymo One autonomous ride-sharing service. What does that mean for your own plans for autonomy?
Eberhardt: Waymo is a great opportunity for us to get into the space with probably the best partner in the business. That doesn't mean that will be our only application. We want to hedge our bets. We want to develop our own autonomous applications. If you asked me a year ago, I wouldn't have been so confident. I have driven in autonomous vehicles with Waymo and, I must say, they work better than humans. I can think the consumer adaptation might be great.
When I'm out for a dinner it frustrates me I can't drink more than one glass of wine and drive. There are times when I want four or five glasses of wine. At that point, I want to be able to hit the button on the car I drove to the restaurant in and have it drive me home. The biggest issue is our societal acceptance of that technology. We are nowhere near ready.
CNBC: Every senior executive I know in the auto industry has something that keeps them awake at night. How about you?
Eberhardt: What keeps me awake are the challenges we face that could be exacerbated by things outside of our control. We've lived through shifts in market demand before. But there are unknowns on the trade side that you can't plan for, like Brexit. ...
Dependent upon what the next steps will be, the implications will be significant and far reaching for us. If there's a no-deal Brexit, the profit implications could be significant for us, beyond 1 billion pounds ($1 billion). So, we are already in a challenging situation, facing market headwinds and structural headwinds. And you put on top of that key political unknowns that could potentially make the situation worse.
CNBC: That's not the only trade issue. What about President Donald Trump's threat to put tariffs on auto imports?
Eberhardt: You have the 232 investigation and we're not sure what will happen with that. Nobody knows what will happen if cars should be seen as a threat to national security.
CNBC: On last question: What is it with JLR and its fixation with long model names. You recently launched your most expensive product yet — but also one that can hit 60 in the time it takes to say its name — which I admit I can't remember.
Eberhardt: Let's see. It's Land Rover Range Rover Velar SV Autobiography Dynamic. [Dynamic Edition, interjects JLR's U.S. head of PR, Stuart Schorr.] Yeah, Dynamic Edition. They make me say it all.