Car firms run to stand still in EU’s cutthroat market

Date: 13/03/1997

By Tim Jones

CARMAKER Renault made a big mistake when it announced the closure of its profit-making Vilvoorde factory in Belgium.

It was never going to be easy. The loss of 3,100 jobs at one fell swoop in such a small country was equivalent to making 15,000 manufacturing workers redundant in neighbouring France or 25,000 in Germany.

But Renault president Louis Schweitzer and his management team could hardly have handled it less skilfully if they had tried.

The fact remains, however, that whatever Belgian politicians or European Commissioners may say about the way the decision was taken, no amount of legal action against Renault by workers suing the company for non-compliance with EU directives or seeking support within the Organisation for Economic Cooperation and Development is going to bring those jobs back.

The firm has made it clear that it will negotiate with the authorities over how the lay-offs should be carried out, but carried out they will be.

The reason for this is the Commission's coveted single market. While many fiscal obstacles remain in the way of the cross-border retailing of cars, the days of protected national markets for car manufacturers are long gone.

The European auto industry is facing a serious problem of overcapacity, and Renault is far from being an exception to this.

For a decade, the formerly state-owned company was a beacon of hope for European carmakers, turning in regular profits and coming up with innovative, popular and cheap small models such as the Clio and the Twingo.

In Nicole and Papa - the chic father and daughter who made the Clio both sexy and sophisticated - the company boasted one of the continent's toughest marketing double acts.

However, Renault has reacted late to the crisis of overcapacity in the European car industry, reckoned to be running at close to 6 million vehicles. A profitable company has turned into a regular loss-maker, and is believed to have incurred deficits of more than 700 million ecu last year alone.

Renault has too many factories and wants to cut them down to five specialised plants - three in France and two in Spain. Vilvoorde, with its small output and mixed product range, did not fit into the plan.

The company felt it was fortunate that the Belgian plant fulfilled the criteria for closure, since its demise would cause less of a political storm than shutting down one of its nine French factories - or so Renault believed.

This was not to be, but only for want of going through the right procedures.

The closure of Vilvoorde is just part of a programme of savings which Renault hopes will top 130 million ecu per year. It will involve the loss of 2,700 jobs in France, although this will be achieved by shift-cutting and redistribution of model manufacturing rather than through wholesale closures.

The real point is that Renault is not alone. Even in the UK auto market, which has become lean, mean and foreign during 18 years of economic Thatcherism, companies are facing the same problems.

Workers at the Peugeot 306 factory in Coventry voted last week in favour of a strike to fight changes in working conditions imposed to give the firm a competitive edge in an increasingly cutthroat market.

The 1,600 employees at Ford's plant at Halewood in Merseyside had an early taste of the Vilvoorde effect in February, when the company decided to eliminate a shift and transfer output to its factories at Saarlouis in Germany and Valencia in Spain.

The reasons were similar. Like Vilvoorde, Halewood was small and an ideal target for cutting back on capacity for making Escorts.

Both are examples of how carmakers are having to run just to stand still. On the face of it, the market is healthier than it has been for years. Manufacturers sold nearly 13 million cars last year and expect to sell even more in 1997.

The industry is infinitely more competitive than it was a decade ago. Japanese and Korean manufacturers, such as Nissan, Toyota, Honda and Daewoo have moved into Europe in a big way, bringing not only manufacturing plant but also their unique management and marketing skills.

The growing consciousness that old cars do greater harm to the environment has also helped, encouraging people to trade in their old bangers for new models with catalytic converters, lower fuel consumption and reduced noxious emissions. Governments have encouraged this with special schemes such as the French juppettes, offering a trade-in premium for swapping old cars for new.

This is all well and good, but manufacturers are having to compete like never before for what remains essentially static demand.

The impact of the expiry of the juppettes scheme at the end of last year tells its own tale. Once the scheme disappeared, car sales in France collapsed. Car registrations fell by 34&percent; in January this year compared with 12 months earlier, followed by a 25&percent; fall in February, although the rich end of the market rose with a 3&percent; increase in sales of Mercedes-Benz cars.

The problem, in a nutshell, is that profitability is low. The standard quoted sale price of a car is never the price at which it is sold. Throughout Europe, carmakers are having to offer all kinds of inducements, discounts and bulk reductions to encourage individuals and, above all, office fleet purchasers to buy their vehicles.

In this tough market, Renault and Ford have become stuck in first gear. Volkswagen and General Motors have managed to compete, although they were also the first volume manufacturers to take the most ruthless action to restructure their activities.

The supporters of a free and single market in Europe should not be surprised by what is happening. Why should Vilvoorde be any different from Halewood, except that Belgian Prime Minister Jean-Luc Dehaene lives there and it is a stone's throw from the EU's institutions?

Commission President Jacques Santer can speak out as much as he likes about the need for a “market based on a certain solidarity and on social cohesion”. But while legal challenges may encourage firms to think twice about issuing unilateral announcements of closures, they will certainly not stop them from making those closures.