By Geoffrey Smith
Investing.com -- Renault signalled a retreat from its global ambitions on Thursday, unveiling a new strategy based on making fewer and more valuable cars.
The struggling French automaker is essentially following the path beaten four years ago by General Motors (NYSE:GM), acknowledging that it has spent the last five years making too many cars, and too many cheap ones at that. It accelerates a process that was already in full swing since last year, when the group sold out of a joint venture with Dongfeng Automotive for the Chinese market.
It also came in the same week that Renault (PA:RENA) signed up to a joint venture with hydrogen fuel cell maker Plug Power (NASDAQ:PLUG) in a bid to defend its position in light commercial vehicles, a segment set to gain in importance as online shopping bolsters demand for door-to-door goods delivery.
The plan is a strong statement of intent from new chief executive Luca di Meo, stamping his authority on a company that has drifted alarmingly since the scandalous ouster of Carlos Ghosn that exposed a parlous state of affairs both internally and in relations with its alliance partner Nissan (OTC:NSANY).
In the next five years, the group will cut its manufacturing capacity by 22%, chiefly in Latin America and India, and significantly streamline its product offering, ultimately producing 80% of its output on three basic model platforms shared with Nissan. By 2025, it expects that two-thirds of models in its sales mix will be either battery-powered or hybrids.
Renault hopes to reduce cash breakeven costs by 30% by 2023 and raise operating margins to 5% by 2025. While that would be a clear improvement from under 4% in 2019, the last pre-pandemic year, it would still leave it well below rivals Peugeot (OTC:PUGOY) and Volkswagen (DE:VOWG_p), against which it has typically measured itself.
Strikingly, Peugeot and Volkswagen stock sharply outperformed Renault’s on Thursday. Peugeot stock rose 5.0%, helped by the formal completion of its merger with Fiat Chrysler. VW stock was up 4.0%.
That makes sense: the reduction of global overcapacity will help them just as much as Renault, although both may now face more focused competition in their home market of Europe. Renault’s new strategy sees an enhanced role for low-cost manufacturing locations in Romania, Morocco and Turkey.
It is, however, less forthcoming about the future of the high-cost French plants. Not a word in the strategy presentation was devoted to capacity adjustments there. Clearly, this is not the best time to be announcing large-scale job cuts in France, but there never is a good time for that. It remains a nettle that di Meo will have to grasp sooner or later. For all that the strategy calls on Renault to embrace disruption, whether from the electric revolution or changing usage patterns, the reality is that disruption embraced Renault a long time ago, and that the multibillion euro losses of last year have been a long time coming. It will be an uphill struggle.