By on February 20, 2013

Prevailing wisdom today holds that small cars, manufactured in developed economies are some of the least profitable cars in existence. So why do companies like Peugeot, Citroen and Renault persist in producing them?

In article in La Tribune (France’s leading business paper) explains why. Once upon a time, when Giscard d’Estaing ruled and the Fifth Republic was just being digested after a spicy summer of 1968, France decided to tax big cars, in the name of Libertéégalité, fraternité. Since the biggest market for French cars was France, Renault, Citroen and Peugeot decided to switch to producing small cars – the Citroen SM was a footnote, rather than a mainstay of France’s auto industry, despite what the buff books tell us.

Up until recently, things were tries bien. Renault, for example, sold nearly half a millio Clio and Twingo models in 2012 alone. Not bad for a company that mostly plays in Europe, but these cars are also not so profitable. Renault is able to produce these cars in Turkey and Slovenia respectively (with some Clio production still kept in France) which takes away some of the sting.

Over at PSA, things are much more dire. Small cars (B and C segment, for clarification’s sake) make up about 45 percent of their sales, but a good chunk of them are built in France. Workers there earn 35 euros an hour, compared to 22 in Spain and just 10 per hour in Slovakia. PSA’s CEO told La Tribune that a new Peugeot 208 built in Slovakia would save an astonishing 700 euros per car, along with the contentious labor negotiations that go hand in hand with French organized labor. At Renault, the cost difference is even more staggering, with 1300 euros saved on the Clio when it’s built in Turkey. Any surprise that since 2005, both companies have cut their domestic production in half? The strong social safety net and egalitarian society designed to protect the workers has ultimately resulted in a contribution to their declining fortunes.

Ironically, the small car segment, for all the talk about shrinking profits, is growing in France. Registrations have continuously increased since 2007, from 45 percent of all cars to 53 percent in 2012. But the only way for car companies to make any money is to wither away domestic production in favor of the Dacia approach; old technology, no frills packaging and ultra-low cost production in developing economies. So far, only Renault has this capability. PSA is trying it’s hand at the Fiat and Mini approach, positioning Peugeot and the Citroen DS line as “premium” small cars, in the hopes of squeezing some more margin from their products. Given the increasing stratification in the European car market (where only the high and low ends can make any money) it is a risky approach. But not everyone wants to drive a Dacia, and not everyone can afford a Benz.

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17 Comments on “Renault, PSA Face Unprofitable Paradox...”


  • avatar

    Nor does everybody want to drive a Benz.

    Derek, this state of things is temporary. I believe small cars are selling more than ever cause they are better than ever, parking is worse than ever, environmental constraints and people downsizing to the new reality. Buyers of the mid size cars are probably holding on to their cars longer. Except for the Fusion/Mondeo there’s really little new cars to entice buyers.

    As to production in France, there’s the political angle as there’s little economic sense. I expect PSA to use most of their bailout money building up production capacity in Eastern Europe and North Africa. Renault meanwhile has Dacia, Lada and Nissan to keep it afloat. I expect Renault to keep quietly growing. PSA’s future is not so clear though the 208 is a success in France. If it sells well in ohter Western European markets that traditionally buy Peugeot (UK, Italy, Spain) PSA’s short term fortunes could look up. However, it does little to reverse the structural problem of PSA’s timid presence in growth markets, Asia and NAmerica.

    Finally, I really don’t believe you can’t make money on small cars, though my Brazilian perspective surely distorts my view. Small cars here mean big profits.

    • 0 avatar
      Magnusmaster

      You can make small cars profitable in the third world, not so much in the first world since due to safety regulations and high labor costs. It has been said that high profits in South America are used to subsidize cars in first world markets. There are four solutions to this problem:

      1) get rid of subcompact cars
      2) get rid of compact cars
      3) lower safety regulations
      4) just let manufacturers outsource everything to China or Africa

    • 0 avatar
      George B

      “I believe small cars are selling more than ever cause they are better than ever, parking is worse than ever, environmental constraints and people downsizing to the new reality.”

      Marcelo, I don’t know anyone here in suburban or rural United States that specifically wants a smaller car. What customers want here is a moderately large car with good fuel efficiency. Within the Renault universe, think Nissan Altima, not Nissan Versa. Since parallel parking is rare and almost all parking spaces are large fixed sizes, extra length costs nothing. The trend for the big selling vehicles is larger size, smaller engines, transmissions with a wider range of gear ratios, and greater use of high-stength steel and aluminum to limit weight gain. Small cars have become more popular as they have grown significantly larger.

      • 0 avatar

        “Small cars have become more popular as they have grown significantly larger.”

        Hey George! You nailed part of it, a large part. That is exactly a big part of the success of the Dacia line. They are internally larger than things like Corolla or Civic, but cost a fraction and are also shorter. Dacia is making waves even in Western Europe with this solution.

        And yes you are correct. In the US people don’t ‘need’ to sacrifice space so much. But that makes America a peculiar thing around the world. When I said what I said, I was thinking of the ROW and not the US.

      • 0 avatar
        RobertRyan

        @George B,
        “What customers want here is a moderately large car with good fuel efficiency.”
        Same in Australia. small cars have their niche but here SUV’s (especially) and Pickups are growing dramatically as well as larger cars with good fuel efficiency..
        Midsize cars with FWD are not particularly well liked i.e Camry.

    • 0 avatar
      nvdw

      “Finally, I really don’t believe you can’t make money on small cars, though my Brazilian perspective surely distorts my view. Small cars here mean big profits.”

      Neither do I, Marcelo. Especially the Clio sized cars (which includes cars like the Ford Fiesta) have historically done very well in Europe and are still, as Derek says, the bulk of the cars sold there. You just have to be able to shift them in high enough numbers to make a profit and for some extra icing on the cake, you make people order some extra amenities or go higher up the trim level ladder.

      The point is, there are 20 different car makers offering their own Twingos and Clios in Europe, while the number of people actually buying one is getting lower and lower. There is simply too much inventory for too little demand. That is the real problem, not that these cars are built with tiny margins in mind. That is the case with small cars ever since they were conceived. I’ve never heard anyone in the business complain about low margins on these cars when sales seemed to go nowhere but up.

      Again, like before, Europe has come to a point where the weaker members in the automobile industry have to die for the others to survive.

    • 0 avatar

      That’s because small cars in Brazil, as you have shown through your posts, cost much more than even fancy European luxury cars here.

      If you can charge that much for a small car, you can make huge profits.

      Back in the far less protectionist USA, that happy situation (for automakers) doesn’t exist.

      D

      • 0 avatar

        True, but Derek was talking specifically about Europe. Prices there are higher than US though competition is arguably more intense. Like another poster said, when market is growing, no one complains. The problems arise when market stagnates or shrinks. Anyways, I think even in America smaller cars now command higher prices (mini, 500, Fiesta). I doubt they don’t make good money on those.

    • 0 avatar
      100 mph fastball

      Marcelo, I wouldn’t count on Nissan and Renault staying together post-Ghosn.

      Renault needs Nissan, but not vice versa.

      • 0 avatar

        Hey!

        You could be right, but it wouldn’t be so easy. Somebody would have to buy Renault out. Also, Nissan does depend on Renault now for some of their styling, their smaller engines, platforms. So even if Nissan were to buy out Renault, the Versa and others would still be pretty much Renault cars for a while. It would be very costly to do so. SOmething like Ford-Mazda, though in the Renault-Nissan case, the technology seems to flow both ways. Renault depends on Nissan for their more sphisticated transmissions, larger engines and cars.

  • avatar
    Polar Bear

    You saw what happened to the Citroen D6. Nice car, wrong brand. For that kind of money people want German premium.

  • avatar
    wstarvingteacher

    The united states seems to be heading towards the economics of the rest of the world. Pretty soon I won’t be considered an oddball in my own country. Hope I’m wrong.

  • avatar
    Remi

    “The strong social safety net and egalitarian society designed to protect the workers has ultimately resulted in a contribution to their declining fortunes.”

    Sorry but that’s just not true – the issue is really about wages – that’s why even China is losing jobs to Vietnam – it’s all about how little you can pay people, not how much social justice there is.

  • avatar
    Beerboy12

    The Fiat Uno rescued Fiat from the brink of bankruptcy back in the late 80′s. Good small cars that sell are profitable. Poor economic times dilute that success though.

  • avatar
    Greg Locock

    “but a good chunk of them are built in France. Workers there earn 35 euros an hour,”

    I bet assembly line workers don’t, on average, without overtime. 35 hours*52weeks*35 euros is 64000 euros, or 85000 dollars.

    Prove it. 100 of your paltry US dollars says I’m right. You have my email.

  • avatar
    Big Al from Oz

    I do believe the French will not be able to change labour practices very easily. Hollande will further reduce Frances competitiveness even further.

    Not only France but much of Europe will soon realise that protecting the labour force will produce inefficiencies and reduce competitiveness. But like th US the French and most of the Euro area’s people don’t want to change their ways.

    The only way for France and the rest of the Euro area to get back on their feet is to reduce the value of the Euro and restructure their economies.

    The major OECD economies aren’t competitive after years of confusing and extensive trade barriers in the form of ridiculous regulations across all industries not only the automotive industry.

    After re-unification in the 90s the Germans started to restructure their economy, but they will gradually be tied up in the “Southern Countries” woes including France.

    When at my uncle’s in the south of France they love to have their ce est, a couple of hours off at lunch.

    At least Renault has Nissan, just like Fiat has Chrysler.


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