After spending the past 25 years worrying about the threat posed by Japanese and other Asian competitors, Western carmakers now find themselves in the role of rescuer and protector for many of their former rivals. Renault’s role in the turnaround at Nissan is a spectacular example.
Now, latest reports from Mitsubishi indicate that substantial progress has been achieved since March 2000 when DaimlerChrysler announced its intention to acquire a sizeable equity stake and provide funds to support a recovery programme. Thanks to DaimlerChrysler’s largesse, the past three years have seen Mitsubishi carry out a wide ranging restructuring programme with the result that sales and profits are on the increase, costs have come down and the company is poised to become a growing force in world car markets.
So why should European and American vehicle manufacturers want to preserve the likes of Nissan, Mazda and Mitsubishi? After all, the removal of Nissan¹s and/or Mitsubishi’s manufacturing capacity would help restore the supply/demand balance in the world’s principal vehicle markets. However, the issue of competition is outweighed heavily by two vital considerations.
The first concerns the huge potential for Western vehicle producers to reduce their own costs. Renault’s liaison with Nissan, for example, has yielded significant savings throughout the business, not least in the model development and purchasing functions. Similarly, there is the opportunity to avoid duplication in sales and marketing activities. Secondly, there is the chance to gain exposure to Asian markets on a scale which would not otherwise be possible without the allocation of an unacceptable high level offinancial and managerial resources.
Even before the recent strengthening of the euro, the outlook for the motor industry in continental Europe was looking frail. Beset with falling vehicle demand in line with sickly economic conditions in much of euroland, the scene was already set for the trimming of output and employment during the second half of the year. Cutbacks have already started and, with latest new car sales figures showing that the downturn in Western Europe as a whole is accelerating, there is the danger that a degree of restructuring will be necessary.
The chief worry now, though, is that the short-term challenge of falling markets will metamorphose into a medium-term crisis of inadequate funding if, as seems probable, vehicle manufacturers’ profitability takes a serious tumble. The position is most acute for French manufacturers like PSA and Renault who (unlike their German counterparts) do not use the futures market to hedge their exposure to fluctuating currencies. PSA has indicated that the euro’s rise will result in heavy pressure on its profits this year, and the position is similar for Volkswagen which engages in only partial hedging.
Meanwhile, the euro’s rise against sterling is good news for the UK motor industry whose products are gaining an important competitive edge against European competitors. In particular, UK-based Japanese vehicle assemblers are major beneficiaries of prevailing conditions and should win market share with the help of new models like Toyota’s Avensis and Nissan’s Micra. It is notable that Japanese (and Korean) penetration of Europe’s falling market is rising and also that Toyota is looking to boost its UK output over the next few months in response to rising demand.
Apart from UK consumers who may see a hardening of new car prices, the main losers will be those, like Ford and to a lesser extent GM, who have abandoned or cut back their UK car assembly presence, and also those who took the opportunity during the days of sterling’s strength to reallocate much of their component and systems purchasing from the UK to mainland Europe.
For connoisseurs of vehicle design, the early years of the new millennium are proving to be one of the European motor industry’s more exciting periods. This is all the more welcome, coming as it does after a sterile couple of decades when the manufacturers’ fear of producing something radical which would fail in the marketplace resulted in a succession of lookalike and unimaginative saloons and hatches.
Those with long memories will remember the damage inflicted on Ford’s position as UK market leader when the conventional Cortina was replaced by the then revolutionary Sierra in a development which pioneered the move from angular to rounded aerodynamic styling in the mass market.
In contrast, the trend during recent years has been for some manufacturers to launch a series of models with almost reckless designs which deliberately invite controversy and polarise opinions among consumers. With models like BMW’s 7 Series, Fiat’s Multipla, Ford’s Ka and Renault’s Avantime and new Mégane, the tendency is for consumers either to love or to hate them with little middle ground. All of these designs depart in differing ways from the ‘norm’, but add an element of welcomed variety to the street scene.
But this sense of adventure is not matched by consumer enthusiasm. Renault has pulled the plug on Avantime, Fiat has indicated that the Multipla will be replaced with something more conventional, while BMW is providing an early facelift to the 7 Series with the aim of making its rear design less controversial. The hope must be that these setbacks do not act as a dampener on future styling to the extent that the industry enters a new arid design age.
Although ‘focus’ is now the fad of management, there are an increasing number of instances where the single-minded concentration on a single competence is backfiring.
Within the motor industry a good example is provided by Henlys which, for the moment at least, must be lamenting the decision to abandon its traditional role in vehicle distribution in order to dedicate its efforts exclusively towards bus manufacturing. This must be all the more galling in view of the strong conditions that leading vehicle distributors such as Inchcape, Pendragon and Reg Vardy have enjoyed in recent years.
At the time, the decision to vacate vehicle retailing seemed fairly compelling, with margins under threat and growing uncertainty concerning the impact on traditional dealerships of the new generation of ‘virtual’ car retailers. Moreover, others have felt the same and Henlys is not the only illustrious name to exit the sector in recent years. In similar manner, Lex Service saw a more promising future by being shorn of its vehicle retailing operations. However, whereas Lex remained solidly in the services camp andretained its UK bias by acquiring RAC, Henlys committed to a narrow manufacturing segment with a strong US base.
The widely varying outcomes of these two former distributors highlight the continuing gulf which exists between the motor industry’s manufacturing and services sectors and goes a long way towards explaining major vehicle producers’ (sometimes bungled) desire to move into services like finance, retailing and servicing.
With the Lexus brand almost invisible in Europe’s luxury car market, it comes as no surprise that Toyota is to implement a new distribution strategy which is expected to result in up to one third of the marque’s European dealers losing the franchise within the next 12 months. The aim is to take advantage of the new block exemption rules by boosting representation among dealerships which already have experience in the luxury car sector. This means that, if all goes according to plan, Lexus models will be sold inshowrooms alongside the likes of BMW, Jaguar and Volvo to benefit from the halo effect that these marques generate, rather than being typically tagged on to a Toyota dealership as at present.
It will be interesting to monitor how this works out on two counts. First, it is certain that Lexus’s competitors will be less than keen to see their principal Japanese rival muscle in on their established dealer networks, even if this is allowable under the new block exemption regime. Will subtle pressure be applied to encourage retail ‘partners’ to eschew the Japanese brand?
Secondly, why are Lexus sales so paltry in Europe - is it simply a question of distribution or are the blockbuster European luxury car brands so entrenched that there is no room for a Japanese upstart? Both questions are likely to be answered conclusively within the next couple of years.
The expectation that revised block exemption regulations would lead quickly to the widespread appointment of independent service and repair operations as part of vehicle manufacturers’ franchised networks is not being fulfilled. Various theories are being advanced for this delay, two of the most plausible being the sluggish speed with which vehicle manufacturers are establishing and issuing new dealer contracts, while the other is that many independent garages are being frightened off by the demanding standards that they would have to meet in order to satisfy requirements.
Whatever, the fact remains that the establishment of an extensive network of service-only outlets is far from certain. As with so much else, when it comes to second-guessing the impact of new rules on the established order, theory may differ markedly from reality. The truth is that no-one can be sure of what the landscape will look like when the dust settles.