Soaring commodity prices: a return to grace for automotive development policies in emerging markets?

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Long-term experience of the economic and strategic debates concerning the automotive industry means that we have to recognise the existence of cycles. From this point of view, the truth at the beginning of the 2010s was that the presence in the emerging countries was a must, which for the last five or six years has become a kind of strategic ban (or dead end). Because it will allow some of these countries that have been reviled for several years to return to better fortune, the surge in commodity prices (including gas) could turn the cycle around.

So far, soaring commodity prices have been addressed as a problem of purchasing power for households and/or as a problem of higher manufacturing costs for many industries, particularly the most energy-intensive ones.

However, there is another side of the issue that deserves attention. It concerns the countries that benefit more than they suffer from these high prices, which are the result of a recovery in activity that was too imperfectly anticipated to avoid - temporarily, no doubt - these price pressures.
Normally, the "price signal" thus given should lead to the resumption of operations, the installation of new production capacity or even the exploration of new deposits, but before these adjustments take place, high prices are a rent for producing companies and countries.

This problem concerns a certain number of emerging countries which have significant resources and will therefore be able to reap this rent. In the 2020s, it should lead to a return to a question that has become "outdated" in the global automotive industry, namely the relevance of investing in emerging countries, especially in emerging countries outside China.

In fact, when we take a step back historically, we can only be struck by the extraordinary reversal that took place between 2017 and 2020: before these dates, firms that were not sufficiently proactive in the emerging countries were presented as fragile because they were unable to take advantage of global growth, but before the Covid crisis, the insolent health of European or American-centric companies reversed the benchmark and made disinvestment in unstable emerging economies appear to be the way forward.

In France, for these reasons, Renault was perceived before the turn as having stronger 'fundamentals' than its French challenger, which was too little inter-continentalized, and Carlos Ghosn obviously did not hesitate to point this out. In 2017, he even made this commitment to a certain number of key markets outside Europe the key to his strategic plan, explicitly promoting Entry, renamed Global Access, not only in the 'Dacia' versions of the Logan line, but also in the Indian versions, which, along with the Kwid, had already been introduced in India in 2016.

At that time (5 years ago!), PSA, whose Chinese adventure had come to an end and whose South American and Russian attempts were even less convincing, had recovered in Europe but had practically left the emerging markets. At the time of the Opel takeover in 2017, many of us pointed out that this opportunistic absorption did not make up for this fundamental flaw in the 21st century: the lack of inter-continentalization. The Renault-Nissan plan of 2017, which appeared at the time as a sort of victory for Ghosn and his strategic options on the one hand, and as a rather good way to allow Renault to 'reposition' itself within the Alliance on the other, symbolises this era.

From the end of 2018 onwards, global production growth is stalling because Chinese growth is no longer as rapid, Chinese manufacturers are gaining significant market share, particularly in the SUV segment, but also because other key markets such as Russia and Brazil are turning around, while the currencies of the countries concerned are causing the most exposed Europeans (including Renault) to suffer very serious economic setbacks.

Inter-continentalization is then no longer perceived as an asset but on the contrary emerges as a machine to weaken and weaken its results. If, in order to prepare for the rebound, the management decides to maintain the company's presence in the countries concerned rather than divesting, the analysts and commentators, comparing the profitability of the inter-continental companies and those that are not, quickly make the latter the benchmark.

Little by little, the dreaded "consensus" classifies investment in the emerging countries in the category of "volume race": to engage in the race for discounts in North America (with Nissan) or in Europe (with Renault) is presented as inconsistent as maintaining a strong presence in Russia or in Brazil, as insisting on gaining a real foothold in India and/or as not letting an opportunity to be the Algerian national champion pass you by.

This is how Luca de Meo presented things on his arrival and at the same time mocked the extraordinary work done by the Renault teams both at the head office and in Russia, India, Latin America and Algeria to ensure that Renault exists outside Europe.

As if by a mirror effect, he who knew how to find the words to remobilise his French teams in the factories, undoubtedly despairs of those in charge of India, Brazil, Argentina or Russia, whom he presents as a burden. On the other hand, Carlos Tavares is trying to relaunch Stellantis on the Chinese dossier and is not letting go of the South American dossier. He has all the less reason to do so as Stellantis is now, thanks to the extremely strong position of Fiat (and now Chrysler) in Brazil, in a position to play a key role.

Similarly, Stellantis has strong ambitions in India with Citroën: Luca de Meo's ultra-European benchmark is much less convinced than it appears to be of the need to desert the emerging markets. In fact, if we look at Renault's commercial results in 2021 (from January to August), we see that in volume terms, the volumes recovered (131,000) are primarily outside Europe: 118,000 compared to 13,000.

This upturn is primarily due to the Eurasia zone and the 67,000 additional vehicles sold in Russia. Morocco and India account for the remaining volumes. Of course, these volumes do not make up the turnover or the profits of the company. Nevertheless, giving up on emerging markets on the pretext that profits are very unstable because all the risks (economic, political and exchange rate) are combined is obviously not a good choice. High commodity prices in 2022 and the implications for a market like Russia should convince everyone.

25/10/2021

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

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