Planning for prosperity Premium winners; volume losers

PLANNING FOR PROSPERITY

Europe’s carmakers look for routes to profitability as premium marques and value brands thrive while volume products decline. Tony Lewin reports.

More powerful than either horsepower or corporate power, the forces now sweeping through the European – and global – automotive industry are reshaping the landscape like never before. The longpromised new era of electric cars has finally become reality, with big names such as BMW and Wall Street darling start-up Tesla fielding advanced products and gaining very positive press along the way. Despite high early-adopter prices, Europeans bought over 30,000 battery-powered models in 2013, and with both the Volkswagen Golf and Ford Focus now available as electrics, the figure could double once again in 2014.

Though these may come to be seen as significant milestones in the history of the automobile, when considered in the broader context of the 12 million customers who buy petrol and diesel-powered cars in Europe each year, electric models are still no more than an intriguing sideshow. For the same prevailing winds of continent-wide austerity that have blunted the take-up of minority-appeal electric cars are also rocking the foundations of the volume car business – to the extent that one automaker group has had to reform its structure in order to ensure its survival.

A quick roll-call of winners and losers shows how things are changing. Business is booming – provided your product is in a trendy segment such as that for compact SUVs. Typified by the Nissan Juke, Renault Captur and Peugeot 2008, these have successfully captured the zeitgeist of urban escapism and, being built on the basis of mass-production hatchbacks, are also good news for profit margins. Prestigious small-to-medium cars are good news, too, with the new Mercedes A-Class and a refreshed Audi A3 helping boost the segment by a quarter – impressive in an overall market that struggled to reach its already disappointing 2012 sales total.

Yet for those producers not fortunate enough to have strong products in these few growth segments, the picture is one of a continuing struggle. Large, exotic and ostentatious cars of whatever stripe appear to be falling out of favour with consumers, though individual launches of long awaited new models such as the Mercedes S-Class and Jaguar F-Type sports car have provided a misleadingly positive influence on otherwise troubled sectors. Another remarkable performance is that turned in by the Range Rover Evoque, the super-stylish sporty SUV that has the Land Rover factory working round the clock to meet worldwide demand.

At the opposite end of the prestige scale comes an equally successful story – that of Dacia, the Romanian-based budget brand controlled by Renault. Its sensible, familyoriented hatchbacks and light off-roaders have caught the mood of the moment and have seen their sales rocket by a quarter: in a still-declining climate this represents a powerful trend.

Big-number losers include larger nonpremium saloons such as the Ford Mondeo, Peugeot 508 and Toyota Avensis, all down by a third, and the Renault Mégane, down by a quarter; other stalwarts such the Nissan Qashqai and Mercedes C-Class paused for breath as their factories geared up for newgeneration models.

C4 Cactus – a welcome return to originality for Citroen

Problems for volume manufacturers

So much for individual models. Widening the focus back to the fortunes of the broader manufacturing groups reveals a rather different picture. Though they may be experiencing slackening demand for many of their core products in the European market, German premium carmakers Audi, BMW and Mercedes are regularly reporting the best-ever monthly sales totals in their corporate histories thanks to eager, status-hungry buyers in booming markets such as China and the US; Jaguar and Land Rover, too, are benefiting from this phenomenon and also reporting all-time highs in sales. These automakers with a global sales footprint have the luxury of not being over dependent on the still troubled European market – in stark contrast to difficulties faced by Ford, General Motors in the shape of Opel and Vauxhall, Renault and, most critically, PSA Peugeot Citroën.

The French automaker, though traditionally Europe’s second largest by volume and the only one apart from Volkswagen still selling more than a million units per year in the region, is continuing to pay the price for largely lacklustre models and a lack of serious reach outside Europe; things came to a head in February this year when China’s Dongfeng and the French government each took a rescuing stake, the Peugeot family sacrificing its overall control in the process. Now led by dynamic ex-Renault manager Carlos Tavares and with the Citroen C4 Cactus marking a return to design originality and the Car of the Year title awarded to the Golf-rivalling Peugeot 308, PSA is displaying the hardware and the talent – if not yet the hard business figures – that may allow it to survive.

A further string to PSA’s bow could be the new generation of its C1 and 108 city cars, produced in conjunction with Toyota in the Czech Republic: this is launching into a growing segment, presently dominated by the stillpopular Fiat 500 and destined to be the focus of worldwide attention as Renault launches its radical rear-engined Twingo, itself developed in parallel with the upcoming two- and fourseater Smart models from Daimler.

It is tempting to speculate that were it not for the stellar performance of its Dacia budget brand, Renault could have been in similar straits to its compatriot PSA. The core Renault brand did well to stem its fall to just 1.5 per cent in 2013, the declines across its larger ranges offset by the positive buyer response to its new Clio and Captur. For Renault, the new Twingo is a major opportunity to claw back customers lost to classier rivals such as the Fiat 500 and Mini; the new Mégane and Scenic cannot come soon enough, and a prestigious new-concept Espace will be good for corporate self esteem. Yet with austerity still the watchword, the icing on Renault’s cake will surely continue to be Dacia for some while.

The squeezed middle

Much has been said and written about the travails of the Americans in Europe, with GM’s Opel-Vauxhall suffering particularly public agonies in the face of the frequent policy shifts imposed by headquarters in Detroit; now, with Chevrolet and its rebranded low-cost Korean cars finally withdrawn from the equation, Opel has a better chance of competing as a full-line manufacturer once more. Like Ford, however, it is one of the principal victims of the squeezed middle phenomenon as value brands such as Kia, Hyundai and Skoda gain yet more traction and the premium marques expand into the segments for smaller cars.

Opel’s compact Adam city car, with its two-tone paint finish and extensive portfolio of personalisation options, is another model seeking to cash in on the Fiat 500’s kudos; it will be facing ever stronger opposition as Peugeot and Toyota add stylish touches to their upcoming 108 and Aygo respectively, Renault launches its innovative Twingo and Ford weighs in with a larger, though less stylish, Ka. Not to be overlooked, either, are Renault’s companion models from Smart, hoping at last to bring Daimler’s small-car brand into the black.

No overview of the European scene would be complete without mention of Fiat and the Asian brands. Fiat has lost out heavily in recent years, with only the chic 500 saving it from commercial and critical meltdown; now, however, the formalised fusion with Chrysler has given the group more financial muscle and a clearer focus. Enough, perhaps, to end the string of unfulfilled promises for Alfa Romeo, a marque of such enormous potential that VW boss Ferdinand Piech repeatedly states

Renault Twingo – new city car with radical rear engine layout

he would like to buy it. One way or another, there is so much emotion tied up in Alfa that with the right products it could begin to worry BMW. As for Lancia, another proud marque under Fiat’s roof, any residual goodwill risks being squandered as it is forced to market ungainly US Chrysler models distinguished only by token Lancia styling touches.

Many would however argue that such sentiment has no place in the hard-nosed business of surviving in a shrinking market. While others mourn classic marques like Saab that have been hung out to dry, the Korean combine Hyundai Kia has been quietly mopping up customers and building a sizeable market share. With their sharply styled and generally European assembled family hatchbacks, MPVs and SUVs, Hyundai and Kia have become the largest Asia-based force in the European market, comfortably outdistancing the traditional number one, Toyota, and the aspiring number one, Nissan.

The big loser here, surprisingly, is Honda. Though known for their technical prowess and quality engineering, Honda’s models have failed to keep up with consumer tastes and the brand has sunk to seventh out of the eight Asian car brands – behind even Suzuki and Mazda, the latter bolstered by its successful CX-5 compact SUV and stylish Mazda6 executive saloon. Modular solutions

Yet as every auto industry CEO knows, some to their cost, sales league tables do not tell the whole story. In crisis times in particular, many sales take place at less than cost, with companies keen to run down stocks and keep the factories turning. Aside from the obvious starting point of a competitive product, two further factors are essential prerequisites for long term independence: meticulous management of production capacity, with no slack in the system, and a hawk-like control of production costs achieved through the use of standardised ranges of components that are all interchangeable.

The market leading Volkswagen group was first to show its hand in the systematisation of design and assembly, one of the most far-reaching industrial developments yet seen. VW’s MQB system is a modular kit of parts that will eventually underpin every model from the small Polo to the big Passat – as well as most of the ranges of sister marques SEAT, Skoda and Audi – and allows the easy and low-cost production of almost any permutation of length, width, suspension, gearbox type, diesel, petrol, hybrid or battery power. Elements from a second set of parts will eventually underpin the larger Audi models, with some commonised systems even to be found on elite marques Bentley, Porsche, Lamborghini and Bugatti.

Other carmaking groups to have committed themselves to similar modular strategies are Renault Nissan, PSA Peugeot Citroën and Volvo, the latter also managing to commonise many components between petrol and diesel engines. Such strategies are costly and timeconsuming to force through as they reach into every layer of the process, from product planning to design, to testing and to manufacture and in-service maintenance. But if you want to show the agility today’s fast-moving market demands and to be able to respond quickly and cost-effectively with the right product at the right time, it’s the only way to go.

“With our modular toolkits,” says VW group CEO Martin Winterkorn, “we already have the key in our hands. They place us in a position to develop and build our cars faster, more flexibly and more economically than in the past. We can offer even greater variety – as well as producing niche models in a profitable way. Our toolkits also mean that we can roll out all our innovations and powertrains to all segments and brands within a very short space of time.”

The Volkswagen group already has 310 different models on the market around the world, assuredly all sold at healthy margins, and Winterkorn has stated it will add a further hundred this year and next. Flexibility, agility, scalability and profitability are all built into the system – and that says it all. n

Dacia Duster- keenly priced no-nonsense utility is a formula or success Opel-Vauxhall Adam- aming for slice of Fiat 500 action