Aston Martin and Jaguar Land Rover: Driving Profits

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Aston Martin and Jaguar Land Rover (JLR) were once the most expensive baubles in Ford's jewel box of luxury-car brands. The Detroit automaker jettisoned them just ahead of the downturn, selling Aston Martin to a consortium led by British motor-sports executive David Richards for $925 million in 2007 and JLR to India's Tata Motors for $2.3 billion in 2008. Ford's timing at first looked fortuitous; it sold them just in time to avoid the high-end car market's sudden plunge. Last year, Aston Martin's sales plummeted to about 4,000 units, from 5,800 in 2008, while JLR's tumbled from a 2007 high of 286,880 to 196,226 in 2009.

What a difference a year makes. The luxury-car market is showing signs of recovery, and Aston Martin and JLR are coming back to life under their new owners. JLR, which recently confirmed its plans to assemble cars in China, ended its fiscal year on March 31 back in the black, boasting a pretax profit of $46.5 million. Its April sales hit 17,909, up 61% over the previous April. Aston Martin, meanwhile, predicts its sales will zoom past 5,000 in 2010. Paul Newton, an auto-industry analyst at Britain's IHS Global Insight, says the luxury-car market is bouncing back more quickly than expected because of improved sales in Europe and the U.S., as well as in economically booming China and India. "We thought that there would be a bigger hangover," he says.

Both companies are benefiting from sleek new models that are winning rave reviews from critics. Jaguar already has a crowd pleaser with its midsize XF, and in May it launched a new version of the XJ, its full-size sedan, which will sell for $72,500. Land Rover won't have a new model ready until mid-2011, when it launches a baby-size Range Rover, but analysts expect that it will get a boost from renewed demand for SUVs. "Now that the recession is over, SUVs are still popular," says Jay Nagley, an analyst with U.K. automotive consultants Spyder Redspy. "Folks who got used to that ride want to keep it." Aston Martin, meanwhile, recently debuted its $199,950 Rapide sedan. Like all Aston Martins, it is almost entirely hand-built and is stuffed with expensive goodies ranging from hand-stitched leather seats to a Bang & Olufsen audio system. London's Sunday Times called it "the world's sexiest four-door, four-seat sports car."

Beyond this year, the outlook remains strong for JLR but is uncertain for Aston Martin. Garel Rhys, an automotive economist, says JLR could easily push sales to 350,000 or 370,000. Expectations are also high that Jaguar will eventually augment its lineup with a two-seater sports car. Company spokesman Simon Warr declines to confirm that but adds, "We clearly aim to expand our portfolio."

As an independent manufacturer of a niche brand, Aston Martin could stumble over the costs of development. "Designing a beautiful car is not hard, but meeting all the regulations for testing and safety costs time and money," Nagley says. The company has one car in the pipeline, the Cygnet, a small Toyota iQ commuter car that has been Aston Martinized and will sell for up to $75,000. Rhys estimates that after that, Aston Martin would need an investment of $150 million to $180 million to develop a new product. "Eventually, it is going to have to face the reality that it is nigh on impossible to replace those cars out of its cash flow," says Rhys.

It can probably coast for two to three years before pressure for new models will start to build. By then, however, some of the big boys may be feeling a bit more acquisitive. Rhys reckons Aston Martin would fit neatly into Volkswagen's luxury-studded portfolio, which already includes Lamborghini, Bugatti and Bentley. "Aston Martin complements what Bentley does," he says. "They would be very happy bedfellows."

A sale of Aston Martin to another major automaker seems unlikely right now. Caution and pragmatism are the industry bywords this early into the recovery. Moreover, Aston Martin's majority shareholder in the consortium probably isn't in a selling mood. The Investment Dar (TID), a Kuwaiti investment firm that owns half the company, defaulted on a $100 million Islamic bond a year ago, and in March it received Kuwaiti government protection as it worked out a deal with lenders — concluded earlier this month — to restructure $495 million in debt.

TID "will not be in a great rush to get rid of Aston Martin anytime soon," says Rodney Wilson, an expert on Islamic finance at Britain's Durham University. It would rather wait until the brand's value rebounds on improved sales. But TID is essentially a private-equity business. One day, it will want to cash in its investment — but perhaps only after this precious bauble has fully regained its luster.