Renault Confirms "Serious" Discussions with Daimler; Expects European Decline to Continue in 2010

The chief operating officer (COO) of Renault, Patrick Pélata, yesterday gave some indication as to the state of the company and its future objectives, as well as discussing some of the challenges it could face next year. One of the most notable statements was that the company was in discussions regarding the making strategic alliances with other automakers to share costs on engine, transmission and platform development which have come under pressure during the downturn. He told Reuters that the automaker was "discussing serious matters with Daimler." However, he was also quoted by Dow Jones International News as saying that "we are in talks with at least one other company in each of these sectors," including those in China. Pélata added that Renault had been having its own discussions with Suzuki prior to the Japanese automakers eventual tie-up with Volkswagen (VW), announced last week (see World: 9 December 2009: VW to Acquire 19.9% Suzuki Stake).

Pélata also said that Renault and its Alliance partner Nissan were still focusing on stepping up its relationship with Russia's AvtoVAZ in order to position itself well in its local market. Despite the collapse in Russian demand during 2009, he said that he was confident that the market would return to growth in the second half of 2010, and was planning to take a market share of between 25% and 30% through the three automakers. This could also include electric vehicles (EVs), according to RIA Oreanda-News, which could come under consideration after AvtoVAZ completes its restructuring, and Pélata was encouraged by the mayor of Moscow seriously considering EVs due to pollution concerns. However, EV demand is expected to be more subdued in Russia because of the extent to which the country has been hit by the economic downturn. The senior executive was also optimistic about the significant economies of scale and reduction in costs that the three automakers could have together, with sales of 7-8 million units expected by 2013.

However, in the meantime, he revealed that Renault had managed to substantially cut costs itself over the past couple of years as it sought to offset the declines seen in vehicle demand. Despite sales revenues being forecast to fall by 17% and 18% compared to 2007 figures, the company was also expected to reduce its fixed costs by around 18% and cut capital investment by 24% over the same timeframe. Pélata also believes that it would have been possible for Renault to have achieve a 6% profit margin during 2009 has it not been for the downturn, but added that a target of an additional 800,000 vehicles sales between 2005 and 2009 set by chief executive Carlos Ghosn, would not have been possible. He also believed that the market challenges being faced in Europe at present would continue in to 2010, with losses of between 8% and 10% expected as market support incentives put in place by some of the regions governments were wound down or come to an end altogether.

Renault Agrees Extension of "Crisis-Period" Labour Agreement

Renault has also announced that it has agreed an extension to its "crisis-period" labour agreement in to 2010 with employee unions. The agreement will come in to force on 1 January 2010, and will take in to account the average of 45 days of short-time working the automaker is expecting during the year.

Outlook and Implications

With the downturn in vehicle demand during most of 2009, and the constraints being placed on finances at automakers, it is not surprising that Renault has been looking to join hand and share the development of basic fundamental architecture. While it already has extensive ties with Nissan which each side leverages heavily, a further sharing of the development of areas which yield lower profit margins, such as small cars, could allow it to focus its research and development (R&D) expenditure in other directions, particularly EVs which it already has experience. Previous reports have already linked the French automaker with Daimler (see France – Germany: 25 November 2009: Renault and Mercedes-Benz to Collaborate on Small-Car Platform and Powertrains—Report), and Daimler CEO Dieter Zetsche has said earlier this week that it was looking at partnerships over developing a new range of small cars, including the companies next generation Smart ForTwo model (see World: 15 December 2009: Daimler to Decide on Small Car Alliance in H1 2010). Renault would certainly be one of the strongest contenders for this type of relationship as it already has a great deal of experience producing this type of vehicle, but also aims to use a similar type of architecture for its new EVs, which Daimler could also benefit from.

While Renault entered into the red during the first half of 2009 (see France: 30 July 2009: Renault Slumps to 2.17-bil.-Euro Net Loss in H1), it has undertaken great steps to achieve its goal of a positive free cash low during the full year, through the cuts it has made to its expenditure. However, although it has seen a return to sales growth in recent months (see France: 17 December 2009: Renault Global Sales Rise 32% Y/Y in November, Scales Down Involvement in Formula One), it must be remembered that this is as a result of a low base comparison and has been helped enormously by government-backed vehicle support measures. The increase in vehicles sales has been largely focused on its smaller offerings, which as mentioned have lower profitability than larger vehicles. With the withdrawal and winding down of incentives in Western Europe during 2010, we also anticipate light vehicle sales to be down by around 9% compared to 2009, so it is unsurprising to see Renault take further steps to avoid feeling the brunt of this again, such as the new labour deal. What could also prove to be a positive in future is its position in Russia and its relationship with AvtoVAZ, but what this crisis seems to have proved is that Renault needs to become increase its involvement in BRIC countries of Brazil, Russia, India and China, and sooner, rather than later.