What happened to the volumes?

Since the Ford T 115 years ago, there has been widespread agreement that the car industry is first and foremost a volume industry. It so happens that, with the pandemic and the shortage of semi-conductors, the European industry is experiencing for the first time a drastic drop in volumes sold that is compatible with maintaining surprisingly high levels of profitability. This has led to a conviction, expressed quite clearly by Stellantis management in Sochaux on 5 September, that volumes no longer matter - or matter much less - from now on. Based on recent experience, this conviction deserves to be questioned and the symmetrical path should continue to be considered with interest.

On 5 September, Stellantis organised a tour of its compacted and optimised Sochaux factory for the press. Insofar as the factory produces the flagship model, the symbol of Peugeot's rebirth and recovery, the 3008, this was an organised event to give observers and analysts an idea of what the company's strategic vision of the market is and how to adapt to it.

From this point of view, one can only be struck by the shift that seems to be taking place month after month at Stellantis and in the industry as a whole: low volumes tend to be presented - and managed, it seems - no longer as the exception but as the norm. Since, as successive presentations of the financial results of the major manufacturers indicate, this historic decline in the number of cars sold in Europe is now compatible with high levels of profitability, there would no longer be any reason to focus on volumes as in the past.

Everyone, including managers and shareholders, should be satisfied with this general decline in the number of vehicles sold and consider it hopelessly "twentieth century" that the car industry remains an industry in which volumes matter and place those companies that achieve the highest levels on each vehicle, market, platform or component in an economically favourable position.

Thus, if we take a step back historically, at PSA, the famous 'compacting' of sites is an old story which concerned Aulnay, Rennes or Mulhouse among others.  It has mainly consisted of doing something against the odds and trying to ensure the survival of sites stunted by the drop in market share of the group's brands and/or (above all) by relocations which allowed non-French sites (Trnava in particular, Vigo also) to perform thanks to the volumes which they reached and maintained over time. Also, the idea that even a site capable - as was the case for Sochaux in 2018 and 2019 - of joining the small club of factories in Europe that produce more than 500,000 vehicles, must turn its back on a volume strategy and seek to be efficient even when these volumes fall sharply, corresponds to an 'extension of the field of struggle' of compacting and lowering the break-even point, which raises questions. Indeed, this brings to mind the idea that the regime that has been imposed on the European automotive industry over the last three years with the pandemic, then the semi-conductor crisis and now the war in Ukraine and its cascade of consequences should not be analysed as an exceptional regime but as the 'new normal'.

Electrification and the fact that it must now be envisaged in a world where raw materials and electricity are more expensive would argue for this vision. Arnaud Deboeuf defends it when he says: "The time of productivity by volume is over. He adds: "We are clearly in a period of falling volumes and we must therefore find better productivity to absorb the costs of electricity.  In fact, as F. Lagarde tells us, the site has a capacity of 400,000 but will assemble a little more than 200,000 this year with a break-even point at 180,000. The European market will be around 14 million, whereas it once exceeded 18 million.

Between the fluctuations of the market, its structural decline and the ineliminable uncertainties on the success or failure of the vehicles, it would be appropriate for all the assembly sites and, beyond that, the whole industrial and economic organisation of the industry to cope, as in Sochaux, with very wide fluctuations in volumes in an overall decreasing trend.

This is a new credo which is beginning to take root in the European automobile industry and, as we mentioned in July, it concerns distribution as much as manufacturing. It also concerns the employees, of course, who will no longer be able to be as numerous as in the past on permanent contracts in the new system and will have to accept more willingly the constraints associated with a necessarily increased flexibility. The share of temporary work will increase. For suppliers, the lowering of the break-even point will also have to become a rule: they will have to get used to supplying a site that assembles 400,000 vehicles one year and the same site that produces only 200,000 the next!

From far and wide, the landscape described to us corresponds to a world where nothing that had been observed for 100 years in terms of productivity, costs and quality would be true. Yet Stellantis was built on the basis of a rationale in which the allocation of the very high fixed costs associated with electrification, particularly at high volumes, continues to make sense.

However, the strategy of the competitor Renault to save Douai from death and to create an electric cluster in the Hauts de France is also a strategy of volume.

Yet the gigafactories are also built with this in mind.

However, when he evokes the question of the electric vehicle and the industrial and social consequences of its development, Yann Vincent, colleague and predecessor of Arnaud Deboeuf at the head of the group's industrial affairs, today director of ACC, indicates that once we have indicated that 100% of the vehicles registered in 2035 will be electric, the question becomes to know 100% of how many registered vehicles this will be. And it is clear to everyone that the answer to this question will largely depend on the price of the products offered.

Here the industrial and strategic questions become questions of public policy, or even policy in general. 

i) If we are convinced that volumes do not matter and that they can only fall, then we are satisfied with what happens in 2021 or 2022 and we are pleased that the break-even point is falling, that pricing power is there and that, with 13 or 14 million light vehicles registered in Europe, the profits of manufacturers selling vehicles at more than 35,000 euros are at their peak. Employment is declining and becoming more precarious because volumes remain low, the employment content of vehicles is falling and the very narrow customer base is being courted by all and is therefore free to be very demanding and capricious. Subcontracting has to cope with considerable jolts. The industry is organised around these principles and no manufacturer has a product policy or industrial organisation capable of putting at the heart of its strategy the volume/price reduction pairing which was for a long time the king of this industry.

ii) If one doubts that this is the only practicable and desirable path and if one is convinced that at least some of the players will play on volumes and market shares in 2023 or 2024 and show the competition that this is still a path that is all the more practicable as the "anti-volumes" will have made it inaccessible, then the strategic picture is quite different and so are the operational decisions to be taken at the industrial or commercial level. More precisely, the idea that electrification is inevitably synonymous with higher prices and lower sales volumes is then challenged and an offer of affordable electric vehicles is being structured and questions the strategic and political relevance of the move upmarket. 

Beyond the competitive landscape, which does not appear to have clearly favoured either side to date, the debate must, in terms of European policies, include the unavoidable question of the speed of fleet renewal.

Obviously, apart from questions of management - and possibly retrofitting - of existing fleets and their uses, the ratio between the number of vehicles on the road and the number of vehicles registered annually will determine the path of decarbonisation and its speed of progress.

It is clear that if electrification were to continue to be associated with a further move upmarket, then 100% electric vehicles in 2035 would be such a low ratio that the objective of carbon neutrality in 2050 would become remote. For this reason, and because it will most likely become apparent in the coming years that volumes still matter in the car business, we can bet in the late summer of 2022 that the beliefs that are becoming dominant will have ceased to be so in two or three years.