Grinding Gears as Automakers Downshift

Renault provides an example to the industry. Profits in 2006 were reduced as a result of lower sales in France and Europe. The product range is aging, with few new models expected before the second half of this year. Nevertheless, profit targets were met thanks to cost-cutting efforts on purchasing and administrative expenses. Renault has invested in launching production of the cheap Logan model in fast-growing markets such as Iran and Brazil and expects to expand further in Russia and India. Analysts were surprised by the loss reported by Ford Motor for 2006. The $5.8 billion loss for the fourth quarter was the worst fourth-quarter result in Ford's history. Company management has admitted that North American operations may not be profitable until 2009. Despite the flood of red ink, Ford has downplayed the role of new models and increased sales in its recovery strategy. This year, incentives have been reduced and sales to fleet users cut back. In January, Ford's U.S. sales were down 20% from a year earlier, and Toyota opened the year in the number two slot.

Peugeot reported a 94% cut in 2006 earnings, to ¬63 million, down from ¬990 million in 2005. The new chief executive warned that further job cuts and plant closures may be required, following the closure of the U.K. Ryton assembly plant last month. In the past four years, the expansion of the company allowed a 10% increase in overhead costs and this cost base will have to re-adapt to current volumes, according to Peugeot. Elements of the new strategy will include deeper partnerships with fellow automakers to develop powertrain and other significant components, building on existing collaboration with Toyota and Mitsubishi. Peugeot also stressed the need to expand in China, South America (Mercosur members), and Eastern Europe (following the investment in the Peugeot plant in Trnava, Slovakia, and the Peugeot/Toyota joint venture in Kolin, Czech Republic).

It remains to be seen how quickly these new strategic directions take effect. Some companies are well advanced in their search for partners to reduce costs. The moves to boost production in developing markets have also begun. The toughest struggle will be acceptance of lower market share in domestic markets. The dynamic of the auto industry has always been growth—successful companies have developed their brand, expanded the model range, and increased production. Looking toward the future, 2007 may see the foundations for long-term commercial success defined in terms of plant closures, large scale layoffs, and lower sales. Indeed, the auto industry's changeover may not be smooth.