Land Rover expects no recovery for two years

R&D investment is vital to woo wary public to buy

The global car industry will not show significant signs of recovery for another two years, and it will be five before it is back at pre-recession levels, according to Jaguar Land Rover (JLR).

UK car sales dropped by as much as 30 per cent in the second half of last year, and this year will be the same, says JLR. Only automakers that can cut their costs – while maintaining investment in future models – will survive, hence the application for a £340m government-guaranteed research loan from the European Investment Bank (EIB).

Phil Popham, the managing director of Land Rover, said: "At the moment we are planning on the assumption that it will be a couple of years before the industry starts to improve drastically, and may be five years before returning to the pre-credit crunch trends we were seeing globally in the motor industry."

JLR has taken drastic measures. It is saving millions through a recent pay freeze agreed with the unions, and has cut inventory by moving from double to single shifts at all plants. But it is vital to keep investing in new products, because only new products will persuade reluctant consumers to buy. "We firmly believe the market is energised by new and exciting products," Mr Popham said.

To that end, the company has a massive research budget. Some £400m a year is spent on R&D – well over a third of the whole UK car industry's total investment. In the modern car industry, much development energy is targeted to cutting carbon emissions. Under European law, car makers must cut new vehicles' carbon emissions by 19 per cent in five years. Through a five-year, £800m sustainability programme launched 18 months ago, JLR is aiming for 25 per cent. But without the £340m EIB loan agreed last week, and now awaiting the necessary guarantees from the UK Government, such pledges would be impossible to keep. "We have continued so far to invest in line with commitments from last year, but clearly with the state of the market globally we would find it very hard to continue to invest at the same pace," Mr Popham said.

But even the EIB loan, settled as part of the Government's £2.3bn Automotive Assistance Package, will not be enough. The biggest problem buffeting the sector is not long-term green investment. The issues today are liquidity and confidence. The current debate over a scrappage incentive is an attempt to address the latter (see below). But the liquidity issue has also not been solved.

JLR has been in talks with the Government since before Christmas about access to necessary finance, and those talks are continuing. Mr Popham said: "We've said consistently that we don't need a bailout but do need access to commercial loans at commercial rates. If the Government can help facilitate that, at terms the financial institutions can't manage on their own, then that is what we are looking for."

In the meantime, with the help of the EIB, JLR's sustainability programme is focusing on propulsion systems, weight reduction and cutting the energy lost from friction. The big prize is the green engine. Some models of the latest Freelander already use stop/start technology to cut the engine at traffic lights, which in an urban setting can cut emissions by up to 20 per cent. But the research team is now working on a technology that works with an automatic gearbox and the larger diesel engines. There are also plans to build plug-in hybrids with a range of 12 miles or more under purely electric power, and so-called series hybrids which use an on-board generator to raise the range to nearer 30 miles.

Scrappage incentive: What is it for?

The biggest problem facing the proposed scrappage incentive is establishing its purpose.

With the Prime Minister allegedly poised to make a decision on the scheme's inclusion in the Budget yesterday, the suggestion that only green "hybrid" cars be eligible created even more confusion about whether the priority is helping the UK's beleaguered motor industry or cutting carbon emissions.

Major manufacturers say anything that wakes up the recession-hit market is a success. Phil Popham, the managing director of Land Rover, said: "A stimulus is a stimulus: it is about getting people thinking about buying cars again. It shouldn't be restricted to certain types of cars, or certain types of people – it is about improving confidence."

Attempts to make the scheme greener also need to be thought through. Hybrids are not necessary more efficient than their more traditional rivals. A more effective approach would be to subsidise the purchase of any vehicle below a certain level of emissions, says Julia King, who wrote the Treasury-commissioned Review of Low-Carbon Cars, published in 2007. "A scrappage scheme can and will help, but only if the Government gets it right," Professor King said. "There is a danger of taking a too simplistic approach."

The political rush to take the green initiative is gathering pace. The Government is launching its five-year vision for low-carbon vehicles in Scotland this morning, including urban electric vehicle plans. In London, the Conservatives are laying out their position on the "opportunity for a green technology revolution" in the Budget.