Should manufacturers prepare for a 'return to normal'?

In the interview with Marc Hedrich, President of Kia France, published by Autoactu on 16 November, we read: "Today, the situation is easy with an insufficient capacity to produce what the customers demand, at some point this will turn around". If we follow this a priori sensible reasoning, then the perception that we can have of the strategic relevance of the new distributor contracts changes significantly.

While the European car world is only interested in the new contracts that the two main manufacturers, VW and Stellantis, are offering to their networks, it should perhaps listen more carefully to the arguments of those who have doubts about these choices. This is all the more important as even the two manufacturers most determined on the surface to take the step of transferring the carrying of their networks' stocks to themselves are giving themselves some time and for the moment reserving the new contractual scheme for the management of only a part of their products.

In addition to the legal and fiscal uncertainties that persist at European and national levels, it is more than likely that this is the result of internal debates and that, in the same way that there are supporters and opponents of agency contracts between manufacturers and brands, there are dissonant voices in the staffs of Stellantis or Volkswagen that seek to temper the majority's reformist ardour.

When we raised this same question in April, we were able to rely on the words of Frank Marotte, President of Toyota France, in the interview he gave to Autoactu at the beginning of March. Describing the status of the agent, he saw him as 'an intermediary who would be disempowered' and feared that 'the customer could be surprised and frustrated to find that his interlocutor no longer has full responsibility for his relationship with the brand'.  

It is the president of Kia France, Marc Hedrich, who, in the interview he granted to Florence Lagarde, gives us our argument at the end of November when he affirms: "The semi-conductor crisis will not last forever. The Chinese will arrive, the volumes produced will increase. It is starting. As far as we are concerned, we have a little more visibility, our volumes are increasing and I am being asked to do more. Today, the situation is easy, with insufficient capacity to produce what the customers want, but at some point this will change.

In other words, the current situation is, quite literally, "extraordinary" and basing a long-term strategy on the findings of the last two years is, if not absurd, at least extremely risky. Marc Hedrich barely hints at this when, in all - false - modesty, he says: "We'll see if our colleagues who are moving towards agent contracts prove us wrong. We are curious to see how the agent system will work.

Olivier Hanoulle of Roland Berger takes up the same argument concerning the electric vehicle in particular and affirms that "the manufacturers are still in a somewhat blessed period" in which demand exceeds supply and allows them to make comfortable margins but, he adds, "in a few years, when we will have returned to a more balanced situation, or even one of overcapacity, their margins will diminish.
He probably does not draw the right conclusions when he claims that it is in anticipation of this foreseeable drop in their margins that manufacturers design agency contracts to have "levers to increase their future profitability". He is undoubtedly right about the ambition, but the whole problem will arise from the ability of manufacturers with agents to manage overcapacity and to provide their factories, their employees, their suppliers and ultimately their shareholders with the volumes they all need to amortize the very heavy investments required by the switch to electric vehicles.

Paradoxically, because of the under-capacity described by O. Hanoulle, manufacturers tend to favour the electric ranges (along with premium and LCV) as the targets of their policies for switching to agency contracts. This is a form of prudence that allows the core ranges not to be asked to wipe the slate clean with new contracts but to test their relevance on fairly small volumes.

In the particular context of 2022, where the electric vehicle has not yet reached 15% of total registrations in Europe, where purchase subsidies are still very important and where orders generally exceed delivery capacities, the laboratory is likely to be the least convincing of all.

Indeed, The concerns that are already being expressed about the European overproduction of batteries from 2030 onwards will rapidly affect the sales of battery electric vehicles (BEVs) and the agent contracts may well not be the "levers for increasing their future profitability" that the manufacturers and Roland Berger are dreaming of, but rather traps for them, who will then have to carry much "sticky" stocks and organise the sale of them themselves without the help of the networks, which they will have disempowered and discouraged from continuing to fight for volumes and market share. They will have to carry much more sticky stocks and organise the sale themselves without the help of networks that they will have disempowered and discouraged from continuing to fight for volumes and market shares.

The battle to impose its brands as legitimate on the BEV is already well underway but it has not yet been joined by a real fight over market share and volumes because no one has the means to fight it given the shortages of components. The behaviour of new entrants such as MG, the cumbersome presence of Tesla and the very powerful offensive of Hyundai-Kia converge to suggest that the dominant brands today in Europe will have to wage a very tough battle in the months and years to come, in a context of overcapacity, to preserve their market shares and - therefore - their ability to amortise the investments to be made.

To make the operational assumption of Stellantis or Volkswagen whose brands will be among the most attacked in this context is anything but obvious. From this point of view, the industrial and economic questions which have traditionally put volumes at the heart of the automobile strategic game are the first to be remembered.

The question of controlling the flow of used vehicles will be added to this very quickly: manufacturers hope to sell BEVs two or three times during their life cycles but, both economically and operationally, they will not be able to carry the whole business alone and will have to let - as seems to be envisaged at Stellantis - their agents or dealers themselves take back a share of the vehicles that their customers will have leased. 

All this seems to indicate that, as we move from the realm of plans or intentions to the realm of operations, and as we look ahead to the months or years when overcapacity will return, the more revolutionary manufacturers are, in fact, beginning to pay a little more attention to the fairly strong arguments that those who make other choices have to put forward.

This summer, Brussels granted the electric car sceptics a 'review clause' in 2026. It may well be that Volkswagen or Stellantis will de facto grant such a clause to their networks, which are well grouped behind their groupings, in order to tackle the systematisation phase of agent contracts with a little less verticality and assurance.

28/11/2022