Automotive industry: can we sustainably reconcile volume indifference, high prices and maximum pricing power?

It is hard to say who is right in the debate that has emerged over the last few months: faced with a situation where collapsing volumes coexist for manufacturers with very high profits, some see the effect of a combination of extraordinary factors that the future will not be able to bring together again; others are convinced that everything has been and is being done by the management of the major automobile groups so that, well beyond the Covid crisis and that of the semiconductors, these are structural constants. This debate is crucial for the whole industry. It is also at the heart of distribution issues and debates concerning the relevance or not of the agency contract as an alternative to the currently dominant scheme.

The first half of 2022 will not have allowed anyone to rid themselves of the doubts they may have about the future of the automobile. In fact, for the last two and a half years, factors of different nature and weight have intertwined to structure a very paradoxical landscape where an absolute depression in registered volumes frequently coexists with more reasonable levels of turnover and enviable profitability. For the economist who is used to developing reasoning "all things being equal" ("ceteris paribus" for the most pedantic), the situation is quite complicated because nothing is precisely "equal" and separating the structural wheat from the cyclical (or even contextual) chaff is therefore almost impossible: we have to wait for a "return to normality" of which no one knows if and/or when it might occur.

The issue of car distribution in Europe, which Autoactu organised last week around the evolution of the regulatory landscape, is emblematic of this difficulty. As well as the legal questions that the new regulation clarifies by trying to facilitate, if not the development, at least the experimentation of a new type of direct sales, the operational questions raised will only be answered when we know whether or not the observations made over the last two years are likely to remain true when short-time working and the shortage of semi-conductors will really be memories.

At issue here is the unprecedented triptych of 2021-2022 formed by very high price levels, very low volume levels and very high pricing power. The contextual explanation of the coexistence of these three realities is easy and, when Autoactu brings together the head of the VW group in France and the Mobilians dealer representative to discuss distribution, they can agree on this part of the diagnosis.

It is then that things get complicated. Indeed, if one considers that, once the measures for financing partial unemployment and the consequences of the shortage of components have been forgotten, a "return to normal" will take place - in a year's time, for example - then one will be convinced that, in the long term, the current edifice supporting the triptych will crack, because the traditional situation of overcapacity on the mature markets will once again become the key characteristic, as is always the case on the renewal markets.

If we make this bet, then we will look with caution at the experiments conducted by manufacturers who think that they can, like VW or Stellantis, on certain brands or components of the range, hold their customers and their pricing in their own hands, through the Net and direct treatment of customers and agent contracts. Indeed, as long as the said brands or ranges are the subject of strong demand that is difficult to satisfy, the planets will align correctly. On the other hand, if (or when) it is necessary, in order to achieve the desired volumes, to make more commercial efforts on prices, trade-in conditions or financing, then sharing the carrying of stock (which swells in these cases) and making multiple efforts to go and find customers who do not rush to the network becomes rational again. 

If the hypothesis of a probable "return to normal" is retained, then we can look at the experiments being deployed without hostility or concern: they are only partial experimental attempts that are not intended, either for the moment or probably in the long term, to offer a real alternative solution to the current situation. The manufacturers will experiment with them and will see that, under the conditions set by Brussels, the scheme is restrictive and costly. If, in addition, it obliges them to let volumes "slip" when, as is the case most of the time, demand is not quite up to the level of what was written in the "product plans", then, among the manufacturers, the ardour of those in favour of "all agents" will quickly be calmed.

In the network-constructor dialogue in 2022, given the difficulty cited in deciding on the nature of the changes observed, the idea that it is possible to experiment together with the forms of articulation and/or coexistence of the two schemes is a fairly good compromise solution. It is likely to be imposed on the actors at last Tuesday's meeting.

Nevertheless, we cannot ignore the fact that, from the point of view of most manufacturers' representatives and many consultants and analysts, the current situation is destined to continue because everything is being done to ensure that this is the case: the need for the industry to find volumes 'whatever it takes' (or almost) is becoming a memory and nothing will be the same as before. 

Thus, in the past, when a model planned to ensure 150,000 registrations per year and having justified investments in R&D and in the industrial tool as a consequence, reached 'spontaneous' sales of 50,000, then the model was 'supported' commercially so that the factory could nevertheless reach 100,000. All the necessary "commercial anabolic agents" were manipulated for this purpose and, to administer them, the network, which nevertheless carried the stock that it helped to finance, was the most appropriate agent to spread the drug throughout the territory. 

Seen from the manufacturer's headquarters, the lowering of dead points, the flexibility of industrial tools, temporary work, factory 4.0, the compacting of sites..., would make it possible to no longer have to proceed in this way: a commercial crash such as the one mentioned would be managed by letting the volumes go without sacrificing prices and margins. If we had planned three teams, then we would operate in two or, if necessary, in one. In order for this to be possible, allowing the interim workforce to grow beyond 50% so that it becomes possible not to lose money when one only wants to produce 50 or 60,000 vehicles per year should be tolerable where one would have previously tried to push volumes if not to 150,000 at least to 100,000. It is up to the factory owners to manage. For suppliers to adjust. It is up to the trade to find customers for cars that do not spontaneously find takers at the list price.

Simplified ranges, models developed quickly and cheaply on common bases and not needing considerable volumes to be profitable, factories capable of accommodating the whole range of these parent models ... these are all ingredients of this new model which, we are assured, could make it possible to make a lasting break with the cult of volumes in the car industry. If this were the case, "pushing metal", selling off a variable part of the volumes sold, sharing the carrying of a heavy (and variable) stock with the network and leaving it as the ultimate master of pricing ..., none of this would be necessary or even reasonable. 

Thus, the dream world that goes with the agency contract is one in which, in order for the manufacturer to remain in the very enviable situation that it is in today, the employees, suppliers and territories that host the production put themselves at the service of an absolute flexibility that would make it possible to remain indifferent to a production that varies from one to four times. So yes, we can do without salesmen and dealers.