Is the question of volumes in the automobile becoming obsolete?

 

The situation of semiconductor shortage leads manufacturers to ration their supply and to choose to serve the customers of their choice with the products of their choice. Given the profitability associated with this situation, it would be tempting to dream that it could continue and to look for conditions under which this could be the case. If we take a step back historically, we can see that these situations are not unprecedented in the history of the car industry, but that their exceptional nature does not allow us to claim that the question of volumes has become obsolete in the car industry: the return to normality will take place within one or two years and will restore the question to a central position in the life of this industry.

Since Henry Ford at least, the ability of manufacturers to make a profit on their various models has been fundamentally indexed to the production volumes they manage to sell, and what is true of models is also true of engines, platforms or components. As a result, the economic logic puts permanent pressure on the industry to maximise planned volumes (to justify the projects and the investments made to make them succeed).
 
This pressure led manufacturers' management very early on to seek to align, through contracts and incentive systems designed to animate their networks, the interests of their distributors with those of their engineers and factory managers: dealers are there to 'push metal' and to seek out the last customers likely to buy the brand's products in the smallest corner of their territories.
 
Volume bonuses and the associated "back margin" systems are intended to ensure this alignment. They go hand in hand with a management by the distributors of the discounts and rebates that use and/or consume the said back margins to move away from the list price and thus ensure access to the bonuses.
 
The manufacturers who are supposed to manage and adjust this system on a daily basis, which is difficult to regulate in an optimal manner, incur "commercial costs" which become considerable when compared to the "customer price" - real or supposed - and seem to greatly exceed the gains made by the growth in volumes which justifies their existence. 
The long-standing nature of these practices and the very real sensitivity of profits to the volumes sold have made these ways of operating in commercial matters very deeply rooted in the industry. The professional reflexes of some and others, as well as the analytical accounts by which activity is assessed, bear witness to this: the industry has such a need for volumes that a real 'demand pull' dynamic cannot be allowed to develop.
 
In order to meet the objectives pursued by factories and competitors, it is necessary to enter into "supply push" logics that the demand that is expressed "spontaneously" does not satisfy most of the time. This logic seeks to inflate demand by engaging all those who were not spontaneously customers in a costly "commercial belly dance". 
 
However, there are cases where this logic does not need to be privileged and, in the negative, the episodes in the life of the industry that derogate from this iron law of volumes appear to be extremely privileged moments which one can only wonder if and how they could last. Historians tell us that the beginnings of the Citroën 2CV, conceived in the 1930s but not launched because of the war and finally sold from the summer of 1949 in a context of shortage of raw materials and privileges granted by the State to the Régie and its 4CV, corresponded to such an episode: customers were much more numerous than the models that Citroën was able to produce in its Levallois factory, and the management then had to manage a queue and allocate said models.
 
D. Lejeune writes on this subject (1): "The Parisian management kept a tight rein on the choice of customers, favouring those who would use the small car for their work: in a jumble, in a France that Citroën rather fantasised about, small farmers, craftsmen, country clergymen, bakers, teachers, nurses, sales representatives, etc.". Here the supply is obviously lower than the demand and the manufacturer does not need a network to "push metal". He can choose his customers and avoid the costly "belly".
 

When a model is particularly successful and/or in the early stages of its life, these episodes are also observed and manufacturers and distributors have pricing power. Typically, in these moments, the fact that the model the distributor has in stock is not exactly the one the customer would have liked does not oblige the seller to grant a discount because its rarity has a price and another customer would buy it if he maintained such a requirement. The damnation of trade is receding.

 
Similarly, a manufacturer who, in order to achieve volumes and amortise the fixed costs he has pre-committed to designing his products and components and/or setting up his industrial tool, very often proposes a less expensive and less profitable 'entry-level' model, may, if demand is strong and he has insufficient capacity, choose to market only the higher versions which carry higher margins.
 
In Europe, Renault-Dacia's Entry has long been in this situation: before the Tangiers factory became operational (2012), all the models in this range intended for the European markets left the Romanian factory at Pitesti and, despite the very strong expansion of its capacities, this factory struggled to satisfy demand for the first three models (Logan in 2004, Sandero in 2008 and Duster in 2010). Initially intended for the Central and Eastern European markets, the range sold mainly in Western Europe and Renault chose to serve these more solvent markets with higher willingness to pay first rather than push its sales to Poland or even Romania. For the most part, the logic could be maintained with the doubling of the production capacities which Tangier allowed and, in fact, as much as the considerable effort made to keep the manufacturing costs down by the teams of this programme, the capacity of this range to remain protected against the logic of traditional distribution where one "pushes metal" with big discounts and bonuses gives the Entry its profitability. The 'no haggle pricing' that many manufacturers have tried to practice without ever managing to prevent the rebate worm from re-entering the fruit can only become the rule for ranges for which the manufacturer is structurally under capacity.
 
From this point of view, 2021 is an extremely special year. Demand seems to be picking up again with vaccination but, between difficulties in conducting vaccination campaigns and variants, governments cannot afford to dismantle too quickly the plans they had devised to support activity, sales of "clean vehicles" and short-time working. In such a context, not to mention the shortage of semi-conductors, manufacturers can ensure significant pricing power regardless of the relevance of their product policies: being able not to produce without having to pay employees dedicated to these tasks, they can avoid inventories and sell-offs; they can reduce the volume requirements they pass on to their networks and draw the attention of analysts not to their volumes but to their exceptionally low levels of inventories and their exceptionally high margins
 
This summer Euler-Hermes sought to measure the impact of the semiconductor shortage on the industry and especially on the prices it can charge in Europe, and it is clear that the factors limiting production in the EU are more on the component side than on the demand side. The propensity to raise prices measured by the firm is in this context on the rise and manufacturers who, through the downward over-adjustment of their semiconductor orders in 2020, are partly responsible for the shortage they are experiencing do not have to suffer from this.
 

Insofar as, by the end of 2022, the shortage will have receded and the measures to support activity will have been suspended, there is every reason to believe that we are witnessing a return to normality, as there is little reason to think that volume issues are destined to fall into disuse in the automotive sector. On the contrary, as the case of Tesla and all the major manufacturers involved in the race for competitiveness in battery electric vehicles show, the race in question is once again a race for volume: the speed at which BEV TCO curves will fall below those of hybrids or internal combustion engines depends mainly on the volumes sold and since everyone hopes to be ahead in this race, everyone, as usual, thinking that they are in step with their market, will produce overcapacity which will force them to push metal: in the automotive industry, today as yesterday and tomorrow, the normal situation is one of global overcapacity and the exceptional one is when demand exceeds supply.

 
(1) He adds more personal memories: 
"I have a childhood memory of a neighbour, Mr Filloux, a representative for Dauby fertilisers, who "touched" a new 2CV every year, thus insuring himself against breakdowns, which were nevertheless rare. And of course, my uncle Maurice, parish priest of Le Perray-en-Yvelines (1953-1956) and then of Brétigny-sur-Orge (1956-1962), had priority for a series of 2CVs that replaced his motorbike as vicar of Chatou.
 
30/08/2021 
 

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

  GIS Gerpisa / gerpisa.org
  4 Avenue des Sciences, 91190 Gif-sur-Yvette

Copyright© Gerpisa
Concéption Tommaso Pardi
Administration Juan Sebastian Carbonell, Lorenza MonacoGéry Deffontaines

Powered by Drupal, an open source content management system