Stealthy Restructuring Via Dacia Moves Production Out Of Europe
Huge Electric Investment Seen As Worrying
“You don’t need a German luxury brand to make nine per cent margins”
Everybody knows that Europe’s mass car makers, minus of course the German domiciled ones, are struggling to fend off huge losses as they pay the penalty for failing to cut costs and shutter excess production.
But Renault, 15 per cent owned by the French government, has been working away on the quiet to shake up its business and is emerging as a dark horse success story as output moves away from Western Europe on the quiet. The success of its low-cost Dacia brand in emerging markets is, against all predictions, becoming a solid producer of profits.
“Renault’s “no frills entry-range” (Dacia) proves that you don’t need a German luxury brand to make nine per cent plus margins and €1 billion of EBIT (earnings before interest and tax) contribution by 2013,” said Morgan Stanley analyst Laura Lembke.
UBS Investment Research analyst Philippe Houchois agrees.
“After years of near stagnation, Renault appears poised to grow above industry rates on core renewal and expansion of (Dacia) Logan. Reduced dependence of Europe for sales and manufacturing – down 20 and 25 points respectively since 2005 – has improved growth prospects and manufacturing competitiveness,” Houchois said.
This stealth success is all the more surprising when you recall the political flak ripping through privately owned Peugeot when it mused about closing a plant in France.
Morgan Stanley’s Lembke said Dacia will likely provide around 80 per cent of Renault’s auto EBIT in coming years.
“Renault has silently metamorphosed into a low-cost manufacturer. We think the market is overlooking the structural change underway at Renault, where we estimate that by 2014 already 40 per cent of volumes will be based on the entry range platform and only 20 per cent of cars will come from France. Unlike peers, Renault has already restructured its footprint, leaving only light commercial vehicles, electric vehicles and D-segment cars in France. Key small and medium production will benefit from up to 30 per cent lower labour costs outside Western Europe as new product momentum kicks off with the Clio in Q4 this year,” Lembke said.
Many versions of the new Clio will be made in Turkey.
Targets doubted
Not all investors are convinced by Renault. Some doubt its targets for a positive automotive operational free cash flow in 2012 and sales growth for the year of between three and four per cent, and worry that a build-up of stocks will lead to a production cutback.
J.P.Morgan analyst Bernard Donges is in the doubter’s encampment.
“We believe reiterated company guidance for first half 2012 auto division being profitable and volumes in line with the same period last year is increasingly challenging given the continued depressed market in Europe and group sales down 6.7 per cent in the first four months (of 2012),” Donges said.
But UBS’s Houchois sees a powerful turnaround on the horizon, and not before time.
“After a near decade of stagnation, during which the success of Logan was offset by the market share losses of the core Renault range, core Renault brand has been re-defined and stabilised and the group is in our view set to deliver above industry peers in 2013-16,” said Houchois.
He said factors boosting Renault should be
- Core Renault with Clio in the second half of 2012, Twingo and renewal of upper segments from 2014
- Electric vehicles from second half 2012
- Low cost platform rationalisation/expansion from second half 2012
- Entry or expansion into new markets via the new Morocco plant (just opened) Brazil, Russia and China
Houchois said Renault appears to be ahead of the game compared with most peers in Europe, with operating results marginally above break-even compared with losses ranging from €500 to €800 million for GM, Fiat and Peugeot, or worsening to €450 million for Ford.
“While Renault will continue to benefit from any reduction in sector capacity, we also believe the company has already materially reduced the fixed cost burden from excess capacity,” Houchois said.
Morgan Stanley’s Lembke agrees that Renault is ahead of its mass market rivals in the restructuring game and profit recovery. She also likes the cooperation agreement with Daimler on upper segment cars, and hopes the Nissan alliance has great potential for Renault’s long-term share price.
Electric vehicle gamble
According to Lembke there are some dangers for Renault though.
The current European market’s falling sales and weakening price prospects could get even worse. The eight electric vehicle gamble involving €4 billion over four years looks dangerous.
“Renault takes a significant risk by investing heavily in EVs (electric vehicles), whilst leap-frogging hybrid technology. We are sceptical on short-term EV profitability and fear higher than expected start-up loses,” Lembke said.
Neil Winton – June 1, 2012
No comments yet.