Strategy: What future for French manufacturers?

Dongfeng Fengshan H30 Cross. PSA could use Dongfeng’s Fengshan brand as its low-cost option.

* Check out Part 2 of this Special Report on French manufacturers here *

Lately there has been a lot of talk, speculation, and actual structural changes within both French car manufacturers, Renault and PSA Peugeot-Citroen, with notably Carlos Tavares switching from one manufacturer to the other over the past year. Being French this is close to my heart and I thought it would be timely to take stock and evaluate what lies in the future for these two French manufacturers, based on a few points of comparison. Over the past years, both manufacturers have suffered from the European car market’s weakness, but even there they seem to be slowly turning around notably thanks to the arrival of the Renault Captur and Peugeot 2008. Alliances, low-cost models, strength in different markets… Which is best placed for survival and long-term profitability?

PSA and Renault’s Top 15 worldwide markets (click to enlarge) Source: L’Argus

1. European sales

With two established brands, Peugeot and Citroen, PSA is above the Renault Group in Europe. The Peugeot brand alone even passed the Renault brand last month. Over the Full Year 2013, PSA held 11% of the European market thanks to 1.34 million sales, 741,939 for Peugeot and 603,080 for Citroen. Renault for its part holds 8.85% of the market thanks to 1.09 million units sold: 803,166 for Renault and 290,078 for Dacia, by far the fastest growing major brand on the continent last year at +22%. And here is where the long-term trends show we may be on the verge of a change in leadership somewhere in the next few years…

The Renault Captur is about to become one of Europe’s 10 best-selling cars.

PSA went from 15% share in 2003 to 13% in 2007 to 11% this year. Renault went from 10.6% in 2003 to 8.6% in 2007 to 8.85% in 2013, managing to stabilise its share recently thanks to the growing success of Dacia (0% in 2003 to 2.3% in 2013). The launch of the Peugeot 2008, new generation 308 and Renault Captur in 2013, all candidates for a European Top 10 ranking in 2014, will potentially reinforce both brands, but Dacia’s progression seems unstoppable, especially on the back of a very successful launch in the UK last year.

2. Success outside of Europe

France is still both manufacturers’ biggest market. For the first time in the history of the carmaker, over 50% of Renault’s sales now occur outside of Europe, to be compared with 42% for PSA. China, the biggest car market in the world, will pass France to become PSA’s #1 market in 2014 after its sales in the country gained 26% in 2013 to 546,200 units. Renault will only start manufacturing cars in China, the key to strong sales there, later this year after its joint-venture with local carmaker Dongfeng got approved last December, which means we won’t see a significant impact on Renault’s sales in China before 2015-2016. If PSA has a clear advantage in China, Renault dominates its French rival in all other major developing markets.

The Renault Duster was the third best-selling vehicle in Russia last month.

In Brazil, with two brands, PSA sells 40% less than Renault with one brand and less models. Renault makes a profit there, Peugeot doesn’t. In Russia, Renault sells 3 times as many vehicles as PSA, almost exclusively (85%) the Duster, Logan and Sandero sold under the Renault brand, meaning it is very profitable there while Peugeot loses money. Renault’s takeover of Avtovaz/Lada, finalised this year, means it will control almost 25% of the Russian market in 2014, just above 650,000 units. Finally in India, Renault has made enormous progress over the past year, solely due to the success of the Duster there, while PSA has cancelled its project of selling there because of a lack of cash.

Carlos Ghosn

3. International alliances

Following a failed takover of US manufacturer AMC in the eighties, and of Volvo in the nineties, Renault forged a strong alliance with Nissan in 1999, of which it currently owns 43.4%. With Carlos Ghosn at the helm of both brands, the Renault-Nissan alliance has been a rare example of a truly successful international cooperation in the car manufacturing industry. Owner at 100 of Romanian carmaker Dacia and at 80% of Korean Samsung, Renault is now taking over Avtovaz/Lada, ensuring it a very strong presence in Russia (see above).

Lately, Renault-Nissan started a new cooperation with Mitsubishi which means a Renault model – the replacement for the Latitude, produced in South Korea – will hit US shores for the first time since 1987, albeit sold as a Mitsubishi. Finally Renault’s Chinese joint-venture with Dongfeng was approved last December. Yep, this is where it gets a little embroiled: Dongfeng currently has manufacturing joint-ventures in China with both PSA (since 1992), Nissan (since 2003) and Renault (since 2013).

US Nissan Maxima. Renault compensates its current absence in the USA by the strength of Nissan.

A lot of brands and alliances involved, but Carlos Ghosn has kept a clear focus on high potential markets. Renault has long been criticised for ‘giving up’ the US and not being present in China. However, once again according to Carlos Ghosn, this is compensated by Nissan’s strength in both markets: Nissan sells almost twice as many cars in the US as it does in Japan and has become the best-selling Japanese carmaker in China only 10 years after launching there, here too selling more than in Japan already. Point taken Carlos. Hopefully Renault can reach the same level by 2024.

Peugeot launched in 13 Asian countries over the past 18 months (here Mongolia)

PSA traditionally preferred one-off technical cooperations without alliances (with Fiat, Renault, Toyota, BMW, Ford…). Philippe Varin, who is about to be replaced at the head of the Group by Carlos Tavares, tried to negotiate ‘true’ alliances which have failed so far: first with Mitsubishi, then more spectacularly with General Motors which took a 7% stake in 2012 and forced Peugeot to stop assembling cars in Iran, costing it precious revenue over the past couple of years. We will have to wait until 2016 to see real economies of scale for the Peugeot-General Motors alliance, when the two partners are scheduled to produce 700,000 annual vehicles together, saving $1.2 billion a year split between Opel and PSA from 2018 onwards.

The Dongfeng-PSA joint-venture will produce the 2008 in China later this year.

Finally last week, 12 years after launching a manufacturing joint-venture with Chinese automaker Dongfeng to produce cars locally, PSA unveiled a $4 billion capital increase in which Dongfeng and the French state will each get a 14% stake. The founding Peugeot family’s holding will fall to 14% from its current 25% stake and 38% of voting rights, short of the 33% required to veto decisions. This reinforced alliance has left some experts skeptical, as vastly divergent interests between PSA, Dongfeng and the French state could create more instability for the carmaker.

However this is a very welcome cash injection for PSA that will enable it to pursue aggressive development plans in Asia where the brand has launched in no less than 13 countries over the past 18 months, as I described in my recent article about Peugeot’s Mongolian operations. PSA also has a joint-venture with Changan since 2012 to produce up-scale DS models locally, which we will analyse in more detail in the “Luxury segment” section of this feature article.

Dacia Logan II

4. Low cost cars

This is potentially where the two French manufacturers’ strategies differ the most at the moment. A total precursor in this domain, Renault launched the low cost Dacia Logan in 2004, originally for emerging markets only but eventually for Western Europe as well. Fast-forward 10 years and Renault has produced over 5 million units of its low cost range, including one million in 2013 alone, in every corner of the globe. Standardisation and simplification are pushed to the extreme, with significantly lower manufacturing costs resulting in a very impressive 10% profit margin for the Duster for example, even though it is sold at a dirt cheap price. Renault has also used its low-cost learnings to relaunch Datsun as Nissan’s entry range.

The Peugeot 301 is currently produced in Spain and China.

PSA has not launched any low-cost models yet. The Peugeot 301 and Citroen C-Elysée are produced in Spain for Eastern European and African markets and in Wuhan for the Chinese market, and PSA insists they are not low-cost. The 301 has been met with outstanding success in Northern Africa last year: #2 in Algeria, #5 in Tunisia and #10 in Morocco with worldwide sales for the couple hitting 100,000 in 2013 and a predicted 250,000 for 2014. Profit-wise, a PSA internal source confessed to La Tribune that “margins are virtually inexistent, we aren’t even sure we will ever make a profit on these models”. Which may not matter too much in the first place. With the 301, Peugeot is regaining a foot in Africa, a continent it had abandoned (to my bafflement) but where it still benefits from an extremely strong brand image. And a continent with a huge, untapped growth potential.

Finally, and this is potentially the most interesting development and the biggest question mark so far, its new reinforced alliance with Dongfeng could potentially spark PSA’s real landing in the low cost world. Two sides of the story: first, a 4th Chinese factory is planned by the PSA-Dongfeng joint-venture, and it would be dedicated to the production of Dongfeng’s entry models, branded Fengshan. Second, there has been talk of yet another new factory dedicated to low-cost models and located this time at the periphery of Europe. It doesn’t take too much thinking to guess the logical next step: PSA using the Fengshan brand as its low-cost offering, a la “Dacia by Renault”. This would definitely be a clever outcome of the alliance with Dongfeng, as Peugeot’s ‘guarantor’ role could alleviate European consumers’ pre-conceived ideas about China-manufactured cars, as Renault did with Romanian vehicles.

* Check out Part 2 of this Special Report on French manufacturers here *

Sources: La Tribune, Autonews (1), Autonews (2), L’Argus.