For the big two French vehicle makers - Renault and PSA (Peugeot-Citroën) - current developments carry significant positives. For both makers, production levels are high, boosted by strong European demand (with the French market itself an important positive) and favourable product cycles. Moreover, their financial performance has been better than expected. For Renault, there is the added satisfaction that the tie-up with Nissan leaves the company with the lynchpin of a globalisation strategy in place. This week, Renault and Nissan have unveiled plans to combine their European sales and marketing operations. There are also plans to selectively utilise Nissan's global manufacturing plants as a base for expanding Renault operations. The cross-supply of product for re-badging is being actively investigated.

For PSA, the future looks more uncertain, with the absence of a strategic partner likely to become an increasingly pressing issue as time goes by. Nevertheless, the company can boast that it has a number of selective collaborations with manufacturers in place. The joint manufacturing of vans and MPVs with Fiat under the Sevel accord is one example. PSA has also recently announced plans to acquire gasoline direct injection (GDI) technology.

Recent product introductions positive

Both makers have a good recent record on new product introductions. For Renault, the Scenic has been an outstanding success, defining a new 'compact minivan' segment in Europe. Less visibly, the new Clio has performed well and the Twingo has held up well in the face of increased product competition in the City Car sector. The company's reputation for product innovation will certainly be tested again with the upcoming Avantime 'coupespace' which will be launched in 2000. For PSA, the introduction of a true 205 successor, the 206, appears to have filled a substantial gap in its line-up. The strong incremental growth of sales since its introduction suggests that the 106 and 306 had never properly covered the market segment vacated by the 205.

Big challenges ahead

Looking ahead, the big challenges facing the two manufacturers are the same as those facing the industry generally. Margins will be under increasing pressure in Europe's mature and increasingly competitive marketplace. Efforts to expand operations outside of Europe - especially in regions with good growth potential - will come under ever-closer scrutiny.

Car market still on growth path

France's car market expanded again in 1999, continuing its recovery from the post-scrappage incentive low of 1.7 million units recorded in 1997. The market recorded a total of 2.15 million units - a gain of some 10.5% on the 1998 market. Market growth was driven by a positive replacement cycle, the on-going impact of new model activity (led by the major importers - VW, Opel and Ford) as well as a favourable economic environment. The French economy benefited from low interest rates in particular. Domestic demand picked up during the course of the year, employment grew also and consumer confidence showed a positive trend. The car pricing and financing environment was highly competitive and beneficial to consumers, helping to push sales volume up further. All of these positive factors have continued to drive the market ahead in 2000.

Renault's brand leadership under attack

Renault continued to stoutly defend its brand leadership position in the face of considerable product activity affecting key volume models, such as the Clio and Megane Scenic. Ultimately, a share decline for Renault was almost inevitable. Peugeot's 206 was very keenly received, while Volkswagen, Opel and Ford all managed increases to share based on new model introductions in the key lower-medium segment (Golf, Astra and Focus respectively).

Renault's share of the French car market declined in 1999 by one percentage point to stand at 28%. Given the level of competition that the company faced in key segments and the fact that 1998's figure represented something of a peak that was not a bad performance in a growing French market. The Megane and Clio were number one and number two in passenger car sales in France in 1999, repeating their performance in 1998, although in reverse order. The Megane recaptured the first place position in 1999, with a market share that improved from 8.3% to 8.7%, edging out the Clio, whose market share eased from 8.6% to 8.4%. As a result of heightened competition, particularly from the Peugeot 206 and the Opel Zafira in the small car and compact minivan segments, Renault took a 28% share of the car market, down from 29% in the previous year.

206 provides boost for Peugeot

For PSA, 1999's market performance showed a divergence between the performances of the respective marques, Peugeot and Citroën. The net result for PSA was a share gain to 29.1% from 28.2% in 1998. For Peugeot, market share was up strongly at 18.2% from 16.6%. That growth was led by the impact of the 206 model. It is becoming clear that the 206 has resulted in an incremental gain to Peugeot sales, filling a market gap that was vacated by the old 205. For the 106 and 306 model ranges, the sales picture is depressed as the models are at a late stage in their cycles and the 206 is undoubtedly cannibalising from the ranges (mainly the 106).

Volkswagen is leading importer marque

Taken together, the French marques managed a flat share position in 1999. For the importers, the flat overall position hides some interesting variations in performance for the manufacturers. While Ford had struggled in 1998, the Focus at least had a positive impact in 1999 and share stabilised at 6.9%. The company should benefit from the impact of upcoming model changeovers over the next two years to the Fiesta and Mondeo ranges, which are struggling at this late stage in their model cycles. Opel gained from the impact of the current Astra range as well as from the impact of the Zafira, which is a direct competitor to the Renault Scenic. Similarly, full year impact of the current Golf model (and the Bora saloon) brought a net gain to VW share to 7.4% - a record level for the marque in France. For the VW Group as a whole, share was up too, boosted by especially strong sales for Seat in 1999 reflecting the impact of the new Toledo. Fiat dropped off considerably (losing a full percentage point share), hampered by the impact of the model changeover on the Punto as well as tough competition for its other main models.

New product boost for Mercedes-Benz and Toyota

Amongst the smaller volume importers, the picture was mixed. Mercedes-Benz and Toyota-Lexus put in notably positive performances; for both makers model introductions are significant. For Mercedes-Benz, the impact of the A-class was added to by the full year impact of the M-class SUV. For Toyota, a major step-up has come with the impact of the Yaris. Sales of the model exceeded 12,000 units in 1999, a level over three times that of the Starlet model that it has replaced.

Korean makers are gaining from a low base

The Korean carmakers continue to expand volume from a low base. Hyundai managed a 28% increase to its 1999 volume boosted by the impact of the Galloper SUV. Daewoo's sales expanded by some 16%, led by strong take-up of the Matiz City Car.

Rover sales plunge

In 1999, Rover had another bad year in what is one of its more important export markets. Although the 75 changeover explains a significant part of the 9% year-on-year decline (compounded to a 24% decline on Rovers Cars, excluding Land Rover), poor sales of the mainstay 200/25 and 400/45 ranges provides cause for concern. The high value of sterling versus the euro has certainly not helped. On a positive note, Land Rover performed well in 1999 with Freelander sales more than doubled to a level approaching 5,000 units.

Japanese share creeps up

France has historically been a difficult market for the Japanese makers. For a long time they were effectively excluded by French government policy. The creation of the European single market and the agreements between the EU and Miti on the sale of Japanese cars in Europe has eased the position somewhat, along with free access for cars made in the EU area (mainly in Britain). As a result of these relaxations, the Japanese makers experienced a gradual share gain in the second half of the 1990s from 3.8% in 1995 to 5.1% in 1999. The 1999 performance was boosted by a strong Toyota-Lexus performance. Nissan sales were by contrast quite weak, with its main models - especially the Almera - struggling against newer models launched recently by competitors.

Table 1. French car sales by marque, 1980, 1985, 1990, 1995-1999

Marque

1980

1985

1990

1995

1996

1997

1998

1999

Renault

759,312

507,788

639,440

563,712

566,858

467,914

564,473

602,530

Peugeot

293,461

385,492

498,481

341,723

367,727

282,814

322,330

390,031

Citroën

270,983

226,789

266,822

241,002

258,090

206,542

225,209

235,339

Volkswagen

75,727

86,221

155,971

113,906

144,225

130,131

139,433

158,347

Ford

68,426

133,288

159,575

139,504

163,141

137,550

133,259

148,707

Opel

32,709

87,088

113,490

130,002

154,658

115,050

120,908

140,945

Fiat

53,147

74,447

128,822

103,027

154,590

103,050

114,290

103,976

Mercedes

14,430

20,939

28,605

24,887

27,911

26,276

36,307

40,918

Toyota-Lexus

13,095

11,933

15,839

15,946

17,562

20,543

28,684

40,889

Seat

306

22,010

48,052

35,847

38,747

27,572

31,543

38,249

Audi

17,455

24,513

32,762

21,988

25,586

26,787

32,659

36,920

BMW

17,239

29,347

29,580

25,129

28,177

23,961

28,498

31,016

Nissan

17,700

15,515

25,707

31,418

34,184

25,255

27,878

25,919

Rover

20,927

31,944

44,758

41,583

34,331

27,890

28,009

25,475

Honda

8,293

8,824

14,002

11,879

13,260

12,585

14,095

15,270

AlfaRomeo

25,380

14,907

15,916

10,844

8,392

6,175

10,276

12,324

Skoda

1,636

3,222

1,825

6,978

8,719

8,172

9,344

11,172

Suzuki

0

4

0

2,770

4,173

4,653

7,839

10,966

Volvo

8,207

18,157

12,415

6,821

8,212

7,657

9,417

9,083

Hyundai

0

0

0

5,137

6,673

5,839

6,586

8,448

Mazda

13,021

13,836

18,563

6,711

7,078

6,490

7,572

8,240

Chrysler/Jeep

16

132

7,908

12,639

12,063

8,026

6,652

7,476

Mitsubishi

2,788

3,341

4,298

3,389

3,616

3,740

5,043

6,815

Lancia

6,801

8,508

18,225

10,380

11,980

5,979

5,623

4,462

Santana

0

109

1,746

1,713

3,053

3,196

3,386

4,298

Smart

0

0

0

0

0

0

713

4,064

Saab

179

1,565

2,459

1,976

2,471

2,595

3,913

3,629

Subaru

0

0

0

542

798

1,070

1,581

2,649

Lada

13,069

20,094

15,758

4,607

4,389

944

586

1,730

Kia

0

0

0

1,338

924

598

1,745

1,611

Jaguar

269

266

1,290

742

490

659

769

1,327

Porsche

1,060

1,432

1,297

441

410

619

595

678

Daihatsu

0

0

0

509

402

373

491

631

Others

137,566

14,617

5,524

11,414

19,201

12,325

13,847

14,289

Total

1,873,202

1,766,328

2,309,130

1,930,504

2,132,091

1,713,030

1,943,553

2,148,423

Source: CCFA

Market growth forecast for 2000

Our assessment of the market trend for 2000 sees a slight increase on the 1999 level. The market should expand to around 2.25 million units (implying some significant slowing in the second half of the year). The gain reflects a relatively positive economic situation as well as a rise in France's underlying replacement demand level. Since 1995 some 2.3 million cars have been added to the French car parc taking it to an estimated 27.2 million units and growth of some 9%. That higher base for the turnover of the parc in terms of replacement sales will be acting to increase the 'normal' level of the French car market. Our analysis suggests that the normal level of the market in France has now risen above the 2 million unit level. To fall below that level, an adverse replacement cycle would need to be coupled to recessionary conditions in the economy. Over the medium term we expect that the market will see a shallow decline in line with the replacement cycle, falling to a little over 2 million units by 2002.

Domestics projected to lose share

France's two domestic makers are expected to lose market share in the medium and long term. While the second half of the 1990s has seen a fairly stable share situation, helped by important new model introductions, the actions of a number of manufacturers point to increasing pressures on Renault and PSA. Over 2000 and 2001, PSA gets some benefit from the full year impact of the 206 and also the Citroën Picasso compact MPV. The new 107 and 307 - impacting in 2001 - will also help. After that, product action is relatively subdued and share tails off. For Renault, the short term carries less support from product actions. The Scenic will come under increasing attack from competitor products offered by several manufacturers, of which the Opel Zafira has been the first to make its mark.

Further gains for the Japanese

The Japanese makers look set to see a major increase as an assault on the French market unfolds, led by important product introductions. The Toyota Yaris has already made a significant impact in the French market, achieving sales in excess of 12,000 units in 1999, from a standing start. Although the model is currently imported from Japan, it will be made at Valenciennes in northern France from late 2001. Toyota is known to have aggressive plans for the French car market as part of its strategy to achieve much higher sales in Europe. Other Japanese marques could also be attracted to the French market; Honda for example, will be marketing the Logo for the first time.

Car production stabilising at high levels

French passenger car production grew by 11.9% in 1998 to 2.6m units. In 1999, growth slowed to around 2.7 million units representing a growth rate of around 4%. The slowing mainly reflected model cycles; market geography was broadly favourable, with the French car market growing and sales generally buoyant through the rest of Europe too. The outlook is for the slowdown to continue. Several factors are at work. The French car market is stabilising. The Mégane, and its Scenic variant, will come up against some strong competition and, despite the success of Peugeot's 206, French production will not benefit enormously as PSA has allocated some extra 206 production to the UK. In 2001 however, there will be a considerable impact to PSA from the arrival of the new 107 and 307 models. By 2002, the new Toyota plant will be on-stream, adding to the output of the two main manufacturers. Also, by then, MCC may have added new models to the Smart brand. By that time total output could be rising strongly again, with the possibility that by 2005, car output in France is approaching the 3 million-unit level.

As far as PSA's French car production is concerned, the main positive was higher Peugeot production derived from the 206. Overall, Peugeot car production in France was up by around 17% in 1999. The 206 has been well-received in France and in Europe generally and accounts for much of the production increase. Most importantly, the car fills a market gap between the 106 and 306 that was vacated when the 205 was dropped. The 106 and 306 can be expected to fade away through 2000 prior to the release of replacement models towards the end of the year. For Citroën, the 1999 production picture was flat. A positive factor going into 2000 should be the impact of the Xsara-based Picasso compact monospace.

PSA will reduce its number of platforms further

PSA Peugeot-Citroën aims to reduce its current eight car platforms to three over the next few years, a move which will extend parts commonality-already well advanced for major items-further. The programme includes restructuring the PSA Group and removing formerly separate Peugeot/Citroën company divisional structures. Peugeot and Citroën models have traditionally been built in separate plants, even if they were based on common platforms. Citroën's Rennes plant currently builds four models, but will specialise in the production of the Peugeot 406 and Citroën Xantia and the Peugeot 605/Citroën XM replacement (codenamed Z8). Successors to the Peugeot 306 and Citroën Xsara will be built in Sochaux. Mulhouse has got the Peugeot 206 and Aulnay will build the Citroën Saxo and the Peugeot 106.

Renault wants to build volume on design innovation

Renault was once the largest vehicle manufacturer in Europe, and has had ambitions to increase production in order to return to the major league for some time. Mainly based on success with new models like the Espace, Twingo and Scenic Renault has re-established its reputation for design leadership. Officially Renault has stated that it aims to double annual production to 4m units by 2010, with most of the increase coming from outside Europe. This seemed highly ambitious until March 1999 when Renault announced it was taking a 38% stake in Nissan, just days before it also signed an agreement to acquire Dacia of Romania.

French car output at Renault actually declined in 1999, by about 2%, to stand at 1.164 million units. The decline reflected an easing of Megane production (especially the Scenic) as well as lower output of the Laguna - which is entering a late phase in its product cycle. Clio production has stayed strong but should weaken in 2000. Renault output is expected to get a lift with the next Laguna from 2001. However, the product focus at Renault has shifted towards executive cars. The Avantime 'coupespace' is released in 2000 and prepares the ground for the radical Safrane replacement, the Vel Satis, which is launched in 2001.

Toyota's French plant to start-up late 2000

After five years of car production in the UK, Toyota announced in November 1997 that it would build a second European factory at a greenfield site in Valenciennes, northern France. Toyota's total investment in France will be approximately FFr5bn ($865m) and in the medium term, it is estimated that 2,000 jobs will be directly created on the site. Grants paid for by the local authorities, due in part to the EU estimated 10.2% "additional costs" for Toyota associated with the plant location, amount to FFr340m. The company will source engines from the UK and a number of other components from a new factory being built in Poland.

Toyota has set itself a goal of increasing its market share in Europe to 5% by 2005. The French car plant will commence output of the small car, the Yaris, in late 2000 with an initial annual capacity of 150,000 units, and plans to expand capacity to some 200,000 units in the future. The vehicle began production in Japan in January 1999, where it is sold as the Vitz, with the 1-litre engines being built by its sister company, Daihatsu, at whose Japanese plants much of the assembly is consigned.

Building the new model in France should help the company improve brand awareness in the country and increases in the number of dealerships and improvements to distribution system will likely lead to a marked improvement to share. However, the lower-B segment is likely to become increasingly competitive, with Honda and Suzuki commencing European output of such models at a similar time, along with a growing number of new releases by the South Korean manufacturers, as well as solid performers by the European manufacturers themselves (egg Peugeot 107 and VW Polo).

Hambach-built Smart car is under pressure

For all the conventional wisdom that city cars have to be seriously contemplated by the vehicle makers as offering sensible transport solutions to growing concerns over the urban environment and problems of road congestion, DaimlerChrysler's Smart offers a salutary tale. The initial market reception-to what was always an ambitious project-was much worse than expected. Market positioning appears to have been a serious problem. Safety concerns dogged the car's initial image, with Avis Europe-which has exclusive rights to handle Smart daily rentals-suspending Smart rentals for a time during the Spring of 1999. At that time also, DaimlerChrysler decided to 'relaunch' the car. This involved a number of elements to boost confidence in the organisation and also increase sales volume. As well as funding new advertising campaigns, prices were cut and equipment levels boosted-this was equivalent to a price advantage of about 10%. Volume has been stimulated with an expanded network of dealers.

New Smart models awaited

DaimlerChrysler is now planning significant investments to the Smart project. A City Cabrio and roadster are in the pipeline (2000 and 2001 respectively). A right hand drive Smart is on the way too, to boost sales in the UK. Even more importantly, work has begun on a bigger future model with four seats. The big question there is whether Smart will 'buy in' a platform for the job or develop one itself-which will be expensive and add to development time. Rumours have persisted of a possible tie-up with another maker to secure a bigger platform for a larger Smart-the most likely candidate being PSA. The new larger model is unlikely to emerge earlier than 2003. Overall, DaimlerChrysler's Smart project can be summarised as troubled. The original founding partner-Swatch-originally went into partnership with VW. But Ferdinand Piech backed out in 1993 and Mercedes-Benz took VW's place. From VW's perspective that now looks like a wise move. VW has now launched a 91 miles per gallon (3 litre per 100 km) version of the Lupo that has twice the seating capacity of the Smart, better economy, performance and a similar price. MCC was initially hoping for special parking and tax concessions for the car, but they have not emerged. The so-called 'mobility concept' involving smart owners being able to hire one when they arrived by air or rail at another city proved highly controversial with Mercedes taxi customers staging a revolt. The concepts associated with the car are certainly very advanced and for DaimlerChrysler to axe the project-even in the light of continued loss-making-would involve a major loss of face. The next bigger car is the key.

Production volume for the Smart was around 87,000 units in 1999 - well below Daimler-Chrysler's initial plans. Whilst the plant has the capacity to produce 200,000 units, output is forecast to be significantly lower than that, until new larger models arrive.