China lockdowns, chip crisis cloud JLR sales outlook for FY23: Tata Motors

Jaguar Land Rover (JLR) faces headwinds due to lockdowns in China for Covid-19, as the UK subsidiary of Tata Motors battles global supply chain issues caused by the war in Ukraine and difficult macroeconomic conditions. These problems may impact JLR financially in FY23, including the possibility of stopping production in some or all of its plants, Tata Motors said in its annual report.

N Chandrasekaran, chairman of Tata Motors, wrote about the disruptions in a letter to shareholders. “The global shortage of semiconductors had a disproportionately adverse impact on Jaguar Land Rover’s production and sales compared to our competitors. Even though we took various steps to address the issue, the situation continues to remain challenging. This is a key issue facing Jaguar Land Rover and we are working assiduously to address the same during FY23. This should aid a gradual recovery in performance through the year,” he said in the letter.

The impact on JLR’s China operations--its most significant market financially and by volume --is the most severe challenge and may impact the company’s sales outlook in FY23. “The recent lockdowns in China as the government pursues a strategy of containing the spread of COVID-19 are adversely impacting our supply chains as our suppliers are unable to produce or deliver products to us. Similarly, we are also witnessing a temporary decrease in demand,” said Tata Motors in the report.

The lockdowns have also led some dealerships in parts of China to temporarily close, “which may have an adverse impact upon our sales outlook in FY 2022-23. If we are unable to ensure a supply of critical parts from China for production, we may be forced to stop production in some or all of our plants, which will have a significantly negative impact on our cash flow in the future,” the company said.

"We are witnessing certain supply chain disruptions as a result of China’s lockdowns and dealership closures possibly resulting in negative EBIT and negative free cash flows in the first quarter of FY 2022-23 for Jaguar Land Rover while our domestic business is also likely to witness a negative impact on financial performance, it said.

Continued cross-border restrictions could adversely affect JLR’s supply chains globally. “We, like other automotive manufacturers, have experienced some supply chain disruption due to the COVID-19 pandemic, including the current global unavailability of semiconductors, which has impacted our production schedules and the ability to meet global demand for some of our vehicles,” it said.

Even as the coronavirus pandemic has largely subsided in most of JLR’s key regions the company may continue to experience an adverse impact to its business as a result of its global economic impact, including “any recession that has occurred or may occur.”

"Difficult macroeconomic conditions, such as contraction in per capita income and level of disposable income, increased and prolonged unemployment or a decline in consumer confidence as a result of the Covid-19 pandemic could have a continuing adverse effect on demand for products, as well as limit or significantly reduce points of access to such products, it said. The disruption caused by the pandemic may force us to change, in whole or in part, our strategic plans for the future," it said.

JLR's revenue fell 7 per cent to £18.3 billion in FY22 whilst EBIT margins fell to negative 0.4 per cent, with lower volumes impacting working capital in the first half of the financial year resulting in a free cash outflow of £1.2 billion. Retail sales declined 14 per cent.

On Thursday, Tata Motors stock was down over 5 per cent to Rs 393 on the BSE, compared to the previous day's close.