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Land Rover: the curse in localized production of luxury brand

Jaguar Land Rover (JLR) suffered a 20 percent decline in sales in the first quarter this year in China, while other luxury brands sustained various levels of growth.

The Evoque, JLR’s most popular model and the first one made in China, has failed to live up to expectations. Its price plunged and the JLR brand took a major hit.

JLR’s Evoque is not the first victim of the curse on luxury vehicles assembled in China. A similar situation happened before to BMW and Mercedes-Benz when they started building locally. Foreign luxury brands face two challenges when they enter China. The first is the complexity of a joint venture to manufacture luxury cars. If the new company is not carefully structured and the leaders of the two partners are not capable of sorting out and resolving various conflicts, the efficiency of the JV would be greatly hindered.

Second, setting the right pricing for the China-made luxury cars is not a trivial task. In general, the prices of the locally made luxury cars are lower than their imported counterparts. Their targeted buyers are more sensitive to pricing while at the same time demanding higher value for what they pay. BMW was tripped on the pricing hurdle while Mercedes-Benz stumbled on both challenges when they began their adventures in China a few years back. In the JLR’s case, the Evoque has to fight against a third challenge: a weak market.

The China-made Evoque starts from ¥448,000 ($72,000), which is about ¥60,000 more than its competitors Audi Q5 and Mercedes-Benz GLK with similar configurations. Considering the fact that the “Chery” marque does not add, if not reduce, any extra value to the locally assemble vehicle compared to the marques of “FAW” or “BAIC,” its pricing strategy was indeed questionable.

Was JLR attempting to price the Chinese Evoque on a higher level without approval from the Chinese partner? The answer is no, according to Chen Anning, CEO of Chery Jaguar Land Rover (CJLR). “The price was jointly set by Chery and JLR after an intensive market survey,” he said. “The Chinese Evoque cannot be too much cheaper than the imported version.” CJLR’s executive vice president Zhu Guohua told the media that the market underestimated the value of the locally assembled Evoque.

It is irrelevant which party had the final say on the pricing of the Evoque. CJLR should not have set an unrealistic high price for the China-made Evoque, especially when the JV company knew very well that JLR was already cutting the price of the imported version. If CJLR had done a better job surveying the market, it should have been able to foresee the possible outcome of the so-called market “underestimation” of the value of the new local launch and chosen an appropriate pricing strategy.

Clearly, CJLR is struggling internally due to conflicts between the two partners, a fact tipped off by the resignation of Lu Yi, president of CJLR’s Integrated Marketing Sales and Service (IMSS). An overhaul of the company’s sales division is inevitable, similar to what happened at Beijing-Mercedes-Benz Sales Co. before. CJLR needs to reduce the price of the locally made Evoque and other models. The price war is currently ongoing in the mid-level segment but it will soon escalate into the luxury market.

Although CJLR tries to distance itself with the Chery brand, the company has to add the Chery name on the Evoque in order to be politically correct. This is having a detrimental effect on the car’s image. To avoid such a negative impact, Geely has named its Volvo cars assembled in China “Volvo Asia Pacific,” instead of “Geely Volvo,” a possible alternative for CJLR’s “Chery Evoque” in the future.

Some people argue that the top management at Chery should not have been trying to fight for control within the JV and should have acted like the BMW-Brilliance partnership where the foreign partner dominates. But it may not be a good idea for the Chinese partner to yield all the power to its foreign partner. Instead of fighting for power, both sides should delegate a third party professional management team to take control of the company’s operations. The management team should be less affected by partner conflicts as its performance is evaluated solely by the operations of the JV company. This would drive the management team to focus on the big picture of market demand and sales and marketing.

In sharp contrast, sales of the China-made Infiniti grew by 28.3 percent and a total of 4,714 Q50 and QX50 were sold in the first quarter. This solid performance is backed by the young luxury brand’s successful brand marketing campaign over the past two years.

For other luxury brands planning to set up JVs in China down the road such as the Lexus and FCA cars, CJLR’s failure will be a good lesson to learn from.

(Rewritten by Kevin Wang based on author’s blog on auto.sina.com.cn)

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