Jaguar Land Rover 1 Automotive News Europe Congress, Barcelona, Spain, 5 May 2005 Sustaining Growth In The New Europe Slide 1. JOE GREENWELL, CEO, JAGUAR LAND ROVER I think I should start by congratulating our hosts on their sense of timing. The Automotive News Congress provides a great opportunity to discuss the trends and challenges in our industry and I’m delighted to be here ... but this year it coincides with another rather significant event in my own country - the British General Election. Slide 2. In the early hours of tomorrow morning, we will have a new government and for companies like Jaguar Land Rover, it will have a direct bearing on our ability to Sustain Growth in the New Europe. As we’re all well aware, the automotive business is facing a whole raft of challenges: * Recessionary economies * Damaging exchange rates - notably the weak dollar * Escalating commodity prices * Increasing regulation and taxation * And of course, intense competition fed, in part at least, by low cost producers. Large parts of the industry are not in the best of health right now and in the past few weeks, we’ve had very sharp reminders of that fact ... not least by events in the UK. The election was announced just as the MG Rover situation was entering its most critical phase and for all the political parties, the issues concerned became part of the campaign agenda. In the most dramatic way possible, the threats and challenges we deal with daily were revealed to the general public ... and they also showed how a new world order is shaping the industry’s future. Last week I spoke at a conference alongside 2 key figures on the British political scene - the Chancellor, Gordon Brown and the Leader of the Conservative Party, Michael Howard. My brief was to set out what domestic industry needs from the incoming government because obviously the environment in which we operate is crucial ... but with Longbridge in mind, I was also conscious of the industry’s own responsibilities. There will always be challenges and there will always be changes and we have to be prepared for that. Whatever the current situation, the only business strategy worth having is one that will deliver regardless. Slide 3. This is my own agenda for sustained, profitable growth. Management must demonstrate effective leadership. It has to invest in people and skills ... in new technology and R&D ... in process management and continuous learning. It must ensure cost and investment efficiency and above all, it has to recognise the needs of consumers and the competitive threat. Jaguar Land Rover 2 Automotive News Europe Congress, Barcelona, Spain, 5 May 2005 Sustaining Growth In The New Europe Slide 4. In today’s globalised industry, none of us can afford even a shred of complacency. I mentioned the ‘new world order’ a moment ago and that was vividly demonstrated in the proposed joint venture between MG Rover and Shanghai Automotive. At its best, the automotive business is a cauldron of innovation and a magnet for other technically advanced, high-value industries ... and long-term, those are precisely the kind of industries we need to nurture and retain in Europe. But does anyone really think that countries like China and India will be content to serve as the low-cost workshops of the world ... or that in the West, we’ll naturally become the high-value producers? If so, these are very complacent assumptions. Businesses don’t move anywhere naturally and neither do national economies. They both require purpose and direction. In his new book ‘The World is Flat: A Brief History of Globalisation’, the American commentator, William Friedman, quotes some very revealing statistics. Here are just two ... Of the 2.8 million science degrees awarded around the world last year, 1.2 million were gained by Asian students in Asian universities. And in China last year, a staggering 46% of all degrees were gained in engineering. In the United States, it was 5%. China has already mastered low-cost production. Now they’re buying western technology and intellectual property ... and they’re educating huge numbers of people to exploit it. That’s purpose and direction. The most high-profile example is probably the recent acquisition of IBM Personal Computers. A Chinese company bought it lock, stock and barrel - the manufacturing, the management and the brand. In the face of this kind of competition, our only option is to innovate - to work harder and smarter ... to develop the technology, the design and the high-value premium products they don’t have. At the same time, we have to target value and quality ... and we have to sustain the promise of a brand and constantly work on improving it ... or consumers will go elsewhere. It’s already happening in the mature, developed markets and indigenous manufacturers in Europe and North America have to be acutely conscious of the threat. Most of the industry’s growth in TIV over the next decade is expected to happen in China and South East Asia ... and I say ‘expected’ because there’s bound to be a lot of uncertainty along the way. More to the point, Jaguar and Land Rover export about 75% of total production and the vast majority goes to North America and Europe .... so our plans for the future have to work for those markets. We can’t rely on growth in the rest of the world to make our programmes financially viable. Jaguar Land Rover 3 Automotive News Europe Congress, Barcelona, Spain, 5 May 2005 Sustaining Growth In The New Europe As any exporter to the United States will know, that’s even more of a challenge at the moment with the American exchange rate. Last year, the bottom line cost to Jaguar and Land Rover was several hundred million dollars. It makes having a leaner and fitter infrastructure an even more urgent priority. Slide 5. Let me provide a bit of background to this discussion, focussing on the premium sector. You may be familiar with some of these facts and figures but they bear repeating because they underline how intensely competitive the market is. Premium cars and SUVs - shown in red - currently represent about 8% of global TIV. Cars are shown in blue and SUVs in green and together, they represent around 5 million vehicles - up from 3 million in 1996. That figure is set to grow to over 6 million by the end of the decade. But the premium sector share will peak and then fall back slightly because the growth in countries like China will be mainly in non-premium vehicles. And there are the big unknowns - like political developments and trade tariffs ... but there is strong Chinese interest in Jaguar and Land Rover products and to meet the demand, we already have (5) official importers. Jaguar sales have tripled in the past year and Land Rover's 160 per cent growth over the previous year is consistent with a level of growth we are still seeing. There’s another reason why the premium share will plateau and that’s because there will soon be an established premium offering in almost every segment. Slide 6. This is the situation in Europe where the Compact and Medium Premium segments have been established at the expense of non-premium brands ... And the introduction of smaller cars like the Mercedes A Class and the BMW 1 Series is now driving growth in the sub-compact premium segment - shown in blue. Effectively, European volume manufacturers are caught in a double bind. Consumers can now add either premium or better value imported cars to their shopping lists ... and in many cases, better value may also mean better quality. Slide 7. With Premium SUVs, there’s an even more dramatic story. Worldwide, it’s the fastest growing segment in the industry and obviously that’s hugely important to companies like Land Rover. Again this is the world picture and it shows what happens when established premium brands enter a new segment. Jaguar Land Rover 4 Automotive News Europe Congress, Barcelona, Spain, 5 May 2005 Sustaining Growth In The New Europe Ten years ago, Land Rover dominated the medium-sized market - shown in blue - with the Range Rover and the Discovery. Then they were joined by new competitors like the Mercedes ML and the BMW X5 ... and the same explosion has happened in the Small Premium segment where Freelander now has a whole host of new rivals. In fact, the number of SUV products on sale globally has doubled in the last decade to well over 200. Slide 8. Having said that the main markets for Jaguar and Land Rover are North America and Europe, there are big differences between them as regards the source of future premium growth. In North America, it will be predominantly SUVs; in Europe it will be compact and sub-compact cars ... But at a total industry level, we do not see absolute growth in either market because broadly speaking, they’re saturated with each accounting for about 20 million vehicles a year. Slide 9. The opportunities for Jaguar and Land Rover are in changing trends, in the mix of the segments and also in the richening of the mix which is playing to our favour due to economic growth. But the more crowded the premium sector becomes, the more competition will increase and the more important it will be to present a distinctive customer choice. Faced with such a competitive world market, my aim - and the aim of my management team - is to build a world class infrastructure so we can deliver world class products and create a world class business – but the challenges remain enormous.