This document will look at a multi-national company (MNC) that has active operations in the UK and China. I will consider the state of each economy and the effect this has on the organisation. I will describe the influence of two contrasting economic environments on business activities and compare the challenges that the organisation face and in particular there will be consideration to: * Changes in demand * Changes in supply * Inflation * GDP * Recession
My chosen company is TA-TA Group who acquired Jaguar and Land Rover (J&LR) from Ford in 2008. TA-TA is an organization (based in India) that own 100+ companies working in different sectors and countries. The total amount of revenue combine was around $100. 09 billion in 2011-2012, 58% of their total revenue comes from out-side of India. The organisation was initiated because they want to improve the quality of life in the communities they serve1 by giving back to the community what they earn, so this in turn builds up trust.
I will be comparing the UK economic state and the Chinese economic state and their influence on Jaguar and Land Rover (J&LR). TA-TA is a value driven company, they try to accommodate the needs of all their customers and communities; they have 5 key values that they operate on: * Integrity * Understanding * Excellence * Unity * Responsibility The UK Economy In the UK the TA-TA Group bought out the car manufactures Jaguar and Land Rover from Ford. The deal cost ?
1. 15 billon, the negotiation started June of 2008 when Ford put the “For Sale” sign up and both organisations (J&LR) employ around 16,000 staff at UK plants. Ford Reported that they failed to make profit on the Jaguar range but the Land Rover range proved to be profitable, but Ford decided to sell it as a package. 3 The current economic state in the UK is, in a word is, recession, with fears of double dip recession this recession has an impact on many organisations, for example the public sector have capped the salaries and therefore people would have less money in their pocket to spend.
Gross domestic product (GDP); this is the market value of all officially recognized final goods and services in the country, the formula is: GPD= Private consumption+ gross investment + government spending + (exports-imports). In the last quarter of 2012 the UK’s economy shrank by 0. 3%. Manufacturing fell by 1. 5% in the last quarter4. This was a contributing factor for Jaguar and Land Rover to seek foreign direct investment, however with this major investment Jaguar and Land Rover have a new engine factory in Wolverhampton and an expansion in Solihull with 10,000 more employees6.
Since the shrink of the GDP J&RL would, usually set aside more cash and decrease their employment level; however since foreign investment was found they were able to produce more jobs and more earnings as a result. However the GDP is not the complete figure for the state of the economy and companies in general, for that reason the GPI (genuine progress indicator) was established, this takes in to account everything the GDP does but, also provides adjustment factors, such as cost of crime, cost of resource depletion etc. this would then give a better picture of the economic state.
This may be able to explain how J&LR are able to survive in the economic climate of the UK. The company has 3 manufacturing facilities in the UK. The Solihull site manufactures Land Rover and the Range Rover products, however due to the drop in manufacturing, the company decided to have a joint venture with a manufacturing company in China. 6 In the finical year 2012 (FY12) the company saw an increase in the premium car segment by 10% compared with FY11, however the amount of units sold did decrease by 14% from FY11, hence they lost market share by 6%, however the Land Rover saw a increase by 10% in FY127, refer to graph above.
Inflation is the general raise in prices, or the fall of the value of the currency, so in brief how much money costs. Inflation is measured by the RPI (retail price index). Inflation is measures as an index number, meaning that the first year’s measurement is set at 100 and subsequent is then added on, so if the second year is 110 we know that there is a 10% increase. In the UK we have seen a rise from 2. 2% to 2. 7% adding to this the RPI rose from 2. 6% to 3. 2% in October 201215, this many not seem like much but for every ? 100, the value of has deceased by ?
2. 7, meaning the ? 100 is actually only ? 97. 3, this will be a major problem when the figures increase. Inflation is usually caused by: * Demand-pull, consumers want more than the produce can produce, so the price would increase * Cost-pull, the business costs rise, and business put prices up to compensate * Monetarist view, the government has allowed too much money to be introduced in the market and then the value of money decreases. There are a number of factors which inflation can affect J&LR, such as: 1. Distorts prices between periods- means that
J&LR should spend rather than save because their value of money is going down (assuming inflation is increasing), this can be a problem because J&LR need to save, so the J&LR would need to reduce spending in departments and this may mean that there would be less advertising for example. 2. Interest rates would rise- the lender would try to compensate for the rise, hence they would raise the interest rates. If J&LR would need to take loans out, due to the increase in interest rate they would have to raise the price of the product, spend less money and/or make reductions internally.
This would then affect the consumer, who may go to competition to shop. 3. Asset price inflation- the price of buildings and other tangible assets would increase, while the value of the currency would decrease, this means that J&LR may not be able to purchase any new assets such as machinery and information systems, since the price of assets have risen they may look to sell some unneeded assets to raise the money. There has been a general shift in consumer behaviour, which will affect the demand.
The consumers in the UK have been shifting to more economical and environmental cars as there are new laws and inflation is on the rise, this will be covered in more depth in the overall conclusion. The term recession is when two consecutive quarters of negative grows in the GDP, this would have negative effects on J&LR activities in the UK, as the UK economy enter double dip-recession, this was due to the economy shrinking by 0. 2%, enough to put the UK in a recession. For the year of 2012, the ONS (office for national statistics) stated that the output of production industries decreased by 0.
4%, construction by 3% and the service (including the retail sector) increased by 0. 1%16. This means that the effect on J&LR could be: As revenue and profits decline, J&LR will start saving money- this means cutting back hours and staff. J&LR may stop buying new equipment, slow down product development and research and may even stop new product from releasing- this is a major factor for growth and market share. This will then have a knock-on effect on the stock market prices and dividends, these prices will slump and therefore upsetting the shareholders.
China However in China the economy is booming, and threatens to overtake the west. This region has grown by 7. 5% in 2012, and is looking to increase in 2013; there is weak demand for imports the own produce have been the main driver in this rise5. In response to this Jaguar and Land Rover LTD have decided to sign a joint venture with Chery Automotive to build cars for the Chinese market. The Chinese market has grown rapidly; meaning that the companies saw a 76% increase in the year of 2011-12, and the company expects that by the end of 2013 the Chinese market would be their largest market9.
In the Chinese market the economy has grown throughout FY12, the GDP of China stayed above 8%, in fact in 2012 it grew by 7. 8%14 this means that there is positive growth for the economy and that would indicate positive growth for J&LR, this would mean that J&LR should feel more comfortable spending money and hiring employees. As a result from rising economy means that J&LR have expanded rapidly and have no problem penetrating the market as they would make the money back. The import amounts have increased by 31% in FY12 compared to FY11 and the in the premium sports utility vehicles (SUV) segment, the economy has seen a 54% in imports10.
This means that the retail units for J&LR has seen a significant increase, Jaguar saw a 147% increase in FY12 and Land Rover saw a 69% increase in the same year, the obvious consequence in the market share increased11. J&LR are still trying to increase their market presence in China; they have increased to 104 Land Rover dealers and 97 Jaguar dealers. The joint venture is also an example of this increase; J&LR have also established an assembling factory and some product development facilities in China12.
In November the inflation rate increase in China, due to a rise in food and services, this equalled up to 2% increase, this means that impact would be less of that of the UK but still significant enough for the J&LR. Overall Conclusion According to the annual report the consumer behaviour has changed, therefore changing the demand of the car. The economic environment has influences on the demand for the car, some general factors include:
* Growth rates of the economy * Availability of credit * Disposable income for consumers Consumers want more economical and environmentally friendly cars, this overall shift means that J&RL would have to tailor to these needs; however this puts off J&RL ability to sell their premium cars and their SUVs.
The law is also changing and influencing the demand, as regulation regarding CO2, speed limits and higher taxes on SUV, makes the product less desirable. One of the main reason as to why consumers would purchase these cars is the quality, for J&RL to maintain their well-known quality and confine to laws, there would have to be substantial costs, which once again the consumer would not want to pay13.
For if the price went above the ideal market-clearing (this is the area/price region in the market place where the consumer would be happy to pay and the seller would be happy to sell) J&RL would have a surplus, meaning that they would have more stock than what consumers want to buy, however if J&RL decide to make a product that is priced below market-clearing they would have a shortage, this is where the demand for the product has gone up, but J&RL make less because it is not worthwhile to produce it.
So the challenge for J&RL is to make a good quality product at a market-clearing price. Consumers have also changes their preferences in a product, they do not look for just the current factors such as design, price, performance etc, they are also looking for technology, this could lead to a shift in demand because of the –value added parameters in the industry. Due to this J&RL are now focusing on research for better technology, and to tie in with the above point, they are producing hybrid (half electric and half petrol) engines.
The performance in the UK compared with China is further proof that China’s economy will overtake the UK. J&LR have a significant presence in the UK and China, however the company’s growth does depend on the Asians markets, as there is little expansion opportunities in the UK, if J&LR are unable to establish a market hold in China, they may fail to maintain their presence in growing markets 17. Above we can see that most of the revenue income is from China, this further proves that China is a key player for J&LR18.
The challenges that J&LRL face are two different ones, in the UK the market is already saturated and expansion is difficult, however in China the market is opening up as more people are getting more disposable income. The GDP figures in China are declining but not as much as in the UK and inflation doesn’t help either operations. In total we can see J&LR are focusing on China more, since their economy is booming, as stated they depend on this market for the growth of the company, this means that China is a Key player.
However in the UK their sales figures (please refer to sub-heading The UK Economy) suggest that J&LR are better than most companies around the area, this may be due to that the fact that their new Range Rover Evoque has won the Top Gear car of the Year award, this is a British programmes widely known in the UK for exotic and “the best of the best” car reviews, so we can assume that J&LR have played this award to their advantage and focused on it.
There are two other major factors in their growth in the UK; they are that the parent company TA-TA will have streamlined the company, taking out any unnecessary function and departments and merging others such as marketing and management. The other factor is that of their target market, the way the country’s budget and tax system means that their target market is staying within their money bracket and can still afford to buy these cars as leisure, so when J&LR release a new model their market audience can buy it.
Bibliography This is a list of my references, where I may or may not have taken direct quote(s), however it is an acknowledgement of the sources of my knowledge/research. 1. 27/03/2013 – http://www. tata. com/aboutus/articles/inside. aspx? artid=CKdRrD5ZDV4 2. 27/03/2013 – http://www. tata. com/aboutus/articles/inside. aspx? artid=CKdRrD5ZDV4 3. 27/03/2013 – http://news. bbc. co. uk/1/hi/business/7313380. stm 4. 28/03/2013 – http://www. bbc. co. uk/news/business-21193525 5.
Jaguar and Land Rover Annual Report 2011/12, Page 4 –uploaded as appendix 6. Jaguar and Land Rover Annual Report 2011/12, Page 25 7. Jaguar and Land Rover Annual Report 2011/12, Page 9 8. 28/03/2013 – http://www. worldbank. org/en/news/feature/2012/12/19/east-asia-and-pacific-economic-update-december-2012-remaining-resilient 9. Jaguar and Land Rover Annual Report 2011/12 – Page 4 10. Jaguar and Land Rover Annual Report 2011/12 – Page 10 11. Jaguar and Land Rover Annual Report 2011/12 – Page