Jaguar Land Rover Plc, the luxury unit of India’s biggest automaker, is betting surging sales in China will help it defray royalty payments triggered by the company setting up factories outside the U.K.

Jaguar is liable to pay royalties to Ford Motor Co., which sold the brands to Tata Motors Ltd. in 2008 for $2.5 billion, for use of the platform required to make its best-selling cars when manufactured outside the U.K., it said in a U.S. regulatory filing on Jan. 23. The unit of Mumbai-based Tata Motors will build vehicles to suit Chinese markets, spokeswoman Kay Francis said in an e-mail response to questions.

The owner of the marque brands is banking on rising volumes in China, which trumped the U.K. as its biggest market in 2012, to counter the levies amid growing popularity of its cheaper models that stalled profit, according to Umesh Karne, an analyst with BRICS Securities Ltd. Shifting focus to the world’s biggest auto market helped Jaguar Land Rover sell a record 357,773 vehicles last year even as total car sales in Europe plunged to its lowest in 19 years.

“The management is very confident about doing well in China,” said Mumbai-based Karne. “While royalty payments will affect margins, Jaguar Land Rover may be able to offset this by saving on import duties and thereby being able to reduce prices and increase volumes.”

Shares of Tata Motors, which derived three quarters of its operating income from the unit in the year ended March, gained the most in a week, the biggest gainer on the benchmark BSE India Sensitive Index, which increased 0.3 percent. They gained 2.6 percent to 301 rupees in Mumbai.

Tata Motors in the Jan. 23 filing said margins in the three months through December may have declined due to the pound weakening against other currencies and higher sales of its best- selling model.

Profit at Tata Motors, led by Cyrus Mistry, may have dropped 13 percent to 29.5 billion rupees ($549 million) in the three months to Dec. 31, according to the median estimate of 35 analysts compiled by Bloomberg. The company on Nov. 7 reported net income in the quarter ended Sept. 30 rose 11 percent to 20.8 billion rupees, from 18.8 billion rupees a year earlier, missing analysts estimates. Tata Motors will report December quarter earnings next month.

The average selling price of models such as the Jaguar XF, Land Rover Freelander and the best-selling Evoque is about 30,000 pounds ($47,500), compared with the 42,000-pound average on other models, Vijay Somaiya, the head of treasury and investor relations at Tata Motors, said on a conference call Friday.

Jaguar Land Rover will have to pay access fees and royalties when producing models based on the EuCD platform developed by Ford. The Freelander and Evoque are among the vehicles built on the so-called European D-class platform and eligible for the payments to Ford if made outside the U.K.

“It’s a question of how much Jaguar Land Rover will have to pay in royalties to see how it will affect profitability,” said Juergen Maier, a fund manager in Vienna at Raiffeisen Capital Management, which manages about $1.1 billion in emerging-market assets. “We will have to wait and watch to see what models they decide to make in China, and the royalties that they will have to pay Ford.”

Maruti Suzuki India Ltd., the nation’s biggest carmaker, tripled payment to parent Suzuki Motor Corp. in the year ended March 31 from 2008. The company paid 18.03 billion rupees, or 5.2 percent of its sales in the latest financial year.

Jaguar Land Rover, which together with Chery Automobile Co. is investing 10.9 billion yuan ($1.75 billion) to build a manufacturing plant in eastern China, hasn’t decided on the models it plans to make in the nation, said Francis, who declined to discuss royalty payments.

The equal venture between Jaguar, which produced its first car, the SS Jaguar 2.5 liter saloon in 1935, and Chery will include a local brand as well as a research & development center and an engine plant.

Jaguar Land Rover is also studying the feasibility for a plant in Saudi Arabia, it said last month. The initial investment is estimated at 4.5 billion riyals ($1.2 billion), the National Industrial Clusters Development Program, under the Saudi Arabian Ministry of Commerce & Industry, said in a separate statement. The factory would produce 50,000 Land Rovers a year by 2017, it said.

Local manufacturing may help Jaguar Land Rover avoid paying import duties in certain nations. With a factory in China, the luxury carmaker won’t have to pay a 25 percent levy to ship the vehicles into China.

“It’s cheaper to make cars in China,” said Deepesh Rathore, the New Delhi-based managing director of IHS Automotive in India. “So they will factor in the royalty payments in the price.” 

(Bloomberg)