Renault and PSA to face the challenge of organic growth

Is there a glass ceiling for French car manufacturers ? It is a historical fact, our national champions are never able to change dimension in terms of volumes, unlike their competitors German, or even Korean.

Certainly Renault’s top-selling record in 2016 with 3.18 million cars sold, up 13.3%. But in the detail, one sees that the Renault brand, single, has hardly changed one iota. In 2007, it had registered 2.484.472 cars, and in 2016, she put her diamond on 2.487.309 cars, or less than 3,000 cars over nine years. The difference being mainly the result of Dacia (almost 600.000 cars).

The promise failed to Folz

In PSA, same observation. In 2010, its record year, the brand had sold 3.6 million cars in the world. In 2016, sales were painfully reached 3,15 million cars. In other words, PSA has never held the commitment of Jean-Martin Folz (president and CEO between 1997 and 2007) to reach the 4 million cars in 2006…

In the meantime, competitors have continued to grow. The most visible example is that of Hyundai, which sold 2.5 million cars in 2005, and nearly double that today. For analysts, this weakness in volumes has always been regarded as a weakness of competitiveness, as it did not allow for economies of scale. Renault has, of course, tied to an alliance with Nissan which allows him to take advantage of synergies that bad. While PSA has been successful, under the leadership of Carlos Tavares, its chief executive officer since June 2014, to generate important productivity gains.

For Alessandro Roggero analyst specialist Automotive at Groupama AM, ” French car manufacturers have reorganized their situation, balance sheet and cash flow significantly, so that in the event of reversal of market, they could stay strong “. In other words, without volumes, the French manufacturers have shown that they could be as cost-effective as the biggest.

Cost-effective, but their size still remains a brake to the competitiveness of the investment as shown by the abandonment of PSA’s hybrid air technology, a breakthrough technology, by lack of critical size. Hence the urgent need for these groups than through partnerships. It is therefore true to Renault with Nissan, but also for PSA, which produces its cars in segment A and its utilities with Toyota, but which finished by buy Opel…

Renault aims for a 40% increase in its volumes

But this time seems to be over, at least at Renault. The strategic plan will Drive the Future unveiled by Carlos Ghosn last October 6 shows the strong commitment of the French group to put the turbo in the volumes. It targets the 5 million sales by 2022, an increase of 40% !

“Renault is well positioned to actuate the levers at high volumes. The group is well positioned in Russia and India with products adapted to the market, but also in Latin America. Renault can also count on its brand portfolio, ” judge Alessandro Roggero.

Bertrand Rakoto, analyst, independent expert of the automotive industry, is more sceptical :

“To increase the volume of 40% seems to be ambitious in a context, rather uncertain, it will be necessary to see the solutions that Renault wants to put in place for this. If all manufacturers were to realize its sales targets, we would have a growth of automobile production in two-digit… “

Renault is counting on its lever product to settle long term in all markets : more SUV’s, more pick-ups, most suitable products as well as in India with the Kwid… ” Renault has made the choice to align all of its launches products. The risk is that the whole of the range reaches the end of its cycle, and to find a new way to animate network commercial “, also cautions, however, Bertrand Rakoto.

China, an asset which became a handicap for the PSA

In PSA, the offensive international has the lead in the wing… sales slip in Latin America, the group is not planning to return to India before 2020, and the sales continue to collapse in China who was yet to become its first global market.

“The main focus of organic growth in volumes over the long term of the PSA should be Asia and in particular China, but given the difficult conditions of the joint ventures it will take time to straighten the dynamics of trade “, explains Alessandro Roggero of Groupama AM.

With the recovery of the european market, PSA is once again a domestic group. Some of the brands such as Citroen still make 75% of their sales in Europe, 25% in france… With the acquisition of Opel, PSA has further expanded its centre of gravity in Europe, as the German brand is present nowhere else. However, the european market was already installed on a board.

Read also: In China, the descent into hell, PSA is accelerating

For Bertrand Rakoto, the difficulties of PSA are more structural : “the growth of PSA in the emerging countries could be severely handicapped by the weakness of the offers engine. These markets want engine simple, affordable, and sometimes larger, or PSA, is limited in engine size and features a hybrid “.

“PSA has lagged behind in this race to the volumes because, until 2016, the group did not have products on the ranges the most promising,” recalls Alessandro Roggero.

In reality, volumes, PSA does not care. “The strategy of PSA is more oriented towards profitability on a strategy of volumes “, underlines Alessandro Roggero. “PSA has imposed a discipline of price and a brand image better than before. The group has proven that it preferred to renounce to the volumes that lower its prices, as recently in the United Kingdom. Conversely, Opel is the brand that breaks the prices for volumes “, he adds.

The pricing power, the true mantra of Carlos Tavares

This strategy of pricing power is fundamental to understanding the vision of Carlos Tavares. The success of the 3008 perfectly illustrates the relevance of this model. The SUV, elected car of the year by a european jury, shows a rate of finish 3 and 4, that is to say, the highest of the range, 86%. According to some analysts, the margin rate of this SUV is expected to peak even at 12%, that is, a return worthy of a premium car !

Carlos Tavares does not cease to repeat the plan Back to the breed that has a lower dead point of the production of one million cars enables the group to be sufficiently agile to overcome the constraints of volumes… This was true up to the takeover of Opel from General Motors, which was finalised this summer. This redemption certainly allowed to add 1.6 million cars in the moneybag of the group now has four brands, and 6 points of market share in Europe. But it poses a problem in terms of the breakdown of investment that could have been spent on the offensive internationally.

“The markets will wait for the group in its ability to integrate Opel in the standards of profitability that Carlos Tavares has managed to impose in the whole group,” says Alessandro. So much for the investments, particularly in the motors and in which the group was in dire need…

An industry in full transformation

The evolution of the automotive industry, however, could shake up the historical principles that have so far ordered the builders. With the explosion of new uses of mobility, the giants to 10 million cars could be forced to adjust their production downward.

“Everything depends on what growth we are talking about… General Motors, for example, speaks of a growth, but by new activities around the services,” recalls Bertrand Rakoto.

Similarly, the development of new production process, which is called the factory of the future puts into perspective the age-old equation of ” increasing returns “.

“The problem of the critical size is much less tactical than all the world announced,” concludes the analyst independent.

For Alessandro Roggero, the comparison between the two groups is telling :

“These two strategies have advantages and disadvantages, and Renault shows increases in volumes in the two figures, but its profitability is lower than that of PSA “.

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