The conversions of Carlos Tavares

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To launch Stellantis, which he will manage for at least 5 years, Carlos Tavares gave a very enthusiastic and optimistic speech the week of January 18th, seeking to convince that it will be possible to generate the announced synergies while keeping the two key commitments made: not to eliminate brands and not to close factories. Backed by 2020 results which, like those unveiled by VW the same week, will probably be very flattering, the credibility of this speech is associated with proven technological and industrial levers during Opel's recovery. However, it should not detract from the importance that public support for manufacturers has had in preserving their profitability in the crisis. The post-Covid period may therefore see the question of overcapacities reappear.
The automobile industry does not tire of surprising those who observe it and try not to let themselves be swayed by the successive admitted truths that are the hallmark of its history. Insofar as these changing truths can be formulated by the same tenors with the same assurance, unchanged, one is nevertheless prompted to wonder how what was true yesterday ceases to be true today and what can explain why the same leaders have been able to claim in a few years everything and the opposite of everything.
From this point of view, the answers given by Carlos Tavares at the press conference held following the birth of Stellantis and the remarks he made to the Italian trade union organisations are quite astonishing for non-amnesiacs. 
 
He was indeed heard to say: "Employment only represents 10% of the total costs of manufacturing a vehicle. We have a lot of levers to pull before reducing jobs". 
Recognising, however, that there may be cases where it is not possible to do otherwise, he was trying here to address the doubts expressed by sceptical observers who point out that the promised 5 billion euros a year of "synergy" will sooner or later run up against the promises made elsewhere that no brand and no factory will be sacrificed.
Auréolé of the successes achieved in the recovery of Opel-Vauxhall's profitability and the very enviable profitability of PSA semester after semester, Carlos Tavares wants to convince analysts and investors that Stellantis will only be able to create value, in Europe included.
 
The main argument here is that, given the investment costs that a manufacturer's investment costs represent, the obligation that politics places on it to change in a very short time the range of products it offers and the technologies it uses, it is crucial to spread them out over the highest possible sales volumes in order not to increase its customer sales prices too much and to preserve its profitability.
 
The PSA-FCA merger would make this possible and the question of overcapacities, for the moment very real in Europe and China, would be secondary and soluble by activating for Fiat, Alfa-Romeo and Lancia the techno-economic lever used to give Opel-Vauxhall back its health: PSA platforms and modules would make it possible to reconstitute catalogues of multi-technology products developed rapidly at low cost.
 
So without having to sell off products to buy volumes or market shares, capacity utilisation rates will return to "normal" levels and profits will be there.
To the very alarmist discourse that Carlos Tavares held - with many others - during the entire period preceding the vote of - 37.5% of CO2 by 2030 by the European Parliament in October 2018 and the one that followed, we are getting used to hearing it, in 2020-2021, replace a new, much more electrophile one, which, in successive stages, will join that of VW.
 
Carlos Tavares claimed that, because manufacturers would lose money every time they sold a BEV or PHEV, and because the -37.5% would be calculated for 2030 on the basis of the performance achieved by the end of 2021, it would be necessary to monitor very closely the CO2 levels associated with its registrations and absolutely avoid "outperforming" even if it meant pushing sales of petrol and diesel vehicles.
He now says the opposite: the versions of PSA products offered in rechargeable hybrid and battery electric are profitable and reinforce the "pricing power" of the brands concerned; there is no longer any reason to limit their diffusion, on the contrary.
 
He also claimed that, in view of consumer preventions and the difficulty of convincing a majority of consumers to buy electrified vehicles, the only industrially rational solution was to organise its product policy and industrial tools in a "multi-energy" logic. He now sees the interest that there can be in developing, like VW or Renault-Nissan, one or more platforms and, possibly, dedicated factories. 
 
To understand these reversals, one must first understand that, at the head of ACEA, he thought it was his duty to preserve the interests of all the manufacturers who, partly under pressure from the authorities, had invested very heavily for years to improve and green their thermal engines and were going to have to downgrade its assets and destroy the related skills.
 
In so doing, he defended, from his point of view, not only the profitability of European manufacturers under threat but also employment in the sector and the technological and financial independence of European automobile construction. Having painfully noted the vanity of this fight, he then endeavoured to work to ensure that the burden of adjustment and/or the costs of transition were shared between industry and public authorities and, from this point of view, the pandemic, which could have been an absolute disaster, was rather a godsend for the manufacturers.
In fact, if PSA and VW will, when they present their final 2020 accounts to us in two months' time, announce enviable scores, it is certainly because they have organised themselves to "lower their break-even point", it is also and above all because the public policies supporting the activity have helped them considerably.
 
In Europe, short-time working and its very good coverage by the States in most of the countries where they assemble their vehicles have enabled them to vary their fixed costs and not to see the losses in turnover associated with a 25% drop in volumes sold turn into a loss: It is first of all the financing of partial unemployment by public debt that has made it possible to lower the break-even points well below what was in the business plans; it is also the financing of partial unemployment that has made it possible in this very particular context to maintain profitable sales, pricing power and controlled stocks. 
 
In the same way, the health crisis has made it possible to increase, generalise and perpetuate aid for the purchase of BEV and PHEV. This is what has allowed sales to take off and the reversal of the expectations of many manufacturers, including PSA: where some still doubted the capacity of BEVs to convince, even with the aid and the obligation for manufacturers to put them in the catalogue and make them accepted by customers, the breakthrough achieved in 2020 is interpreted as sustainable and destined to increase.
 
Purchase aids and announcements related to LEZs and the eventual ban on sales of internal combustion vehicles in the short term (2030) in many countries have reinforced this conviction. As long as the aid is substantial and relatively sustainable, volumes are there without the need to sell off, the anticipated residual values are high and, as Renault and PSA emphasised during the presentation of their third quarter results, the effect on the mix is very favourable: electrification in 2020 was a good deal for the manufacturers; even if the subsidies are destined to decrease progressively, they will remain in the years to come sufficiently consequent so that the shared conviction is from now on that electrified vehicles will certainly not pull the volumes sold upwards because they will be more expensive, but will eventually allow them to be profitable.
 
The Stellantis case in the years 2021 to 2023 will be quite emblematic of the problems in which the European automobile will find itself. It was already known a year ago, before the health crisis, that the levels of light vehicle registrations reached in 2019 (18.36 million) were exceptional.
 
The second half of the year had set the trend and the "normal" level of sales expected for Greater Europe was rather between that of 2015 (16.35) and that of 2016 (17.5) than at the levels reached in 2018 and 2019.
In this context, one can either make, like Renault, the hypothesis that it will be necessary to be profitable on a stagnant market with stagnant market shares and one is then led to announce both capacity reductions and modest profits or consider that one will have the means to relaunch brands that have become confidential without compromising its profitability despite electrification and the exacerbation of competition that a stagnant or declining market will imply.
Of course, as Florence Lagarde underlined on Thursday, the markets prefer that the tenor Tavares sings the second song to them than the first one. 
 
25/01/2021

The weekly column by Bernard Jullien is also on www.autoactu.com.

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