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  1. Analysis
November 9, 2006

GOLDING’S TAKE: Why get clever when the simple stuff makes all the money?

It has been suspected for some time that vans are very good at bringing home the bacon but finally it has been confirmed. Fiat CEO Sergio Marchionne let the cat out of the bag earlier this week, writes Rob Golding.

It has been suspected for some time that vans are very good at bringing home the bacon but finally it has been confirmed. Fiat CEO Sergio Marchionne let the cat out of the bag earlier this week, writes Rob Golding.

He was speaking at the launch of the new compact van that the company is building in France with PSA Peugeot Citroen: “Light commercial vehicles is the most profitable sector that we have in Fiat Auto.”

Why should that be so? When the product is so simple, differentiation is so limited and power is concentrated in the hands of so few buyers, how can a simple van bring home a better profit margin than a car?

In Europe, rental companies and public utility companies buy vast numbers of the plain vanilla versions of the white van. In Britain, just ten buyers take 50% of the market and the picture is pretty similar elsewhere.

One reason is that the Asian players sit this one out. There is no Korean or Japanese presence in the sector and attempting to break in by selling on price.

And also of course there are not that many competitors when you look at the number of partnerships that exist. The main producers really become four: the Peugeot-Citroen-Fiat partnership is one trio, Renault-Nissan and GM are another; the Germany’s VW and DaimlerChrysler perform a duet and Ford sings a solo. All partners in all groups have freedom on pricing but once producer power has become even more consolidated than purchaser power, things look good for decent returns.

PSA Fiat is the market leader with 18% and 11% respectively, but just to be pedantic Renault claims that it has the market leader honour because vans with the Renault badge on actually sell more. It’s a moot point. The distinction between a Peugeot LCV and Citroen LCV amounts to no more than a grille change, a badge change, changed wheel trims, varying seat fabric and a different steering wheel covers.

Volume and lack of variety is another reason. PSA Fiat will be banging out 125,000 vans  from its Sevel Nord plant near Lille in Northern France from a total of 90,000 last year. That becomes economic production volume from which to amortise the EUR700m cost of the plant and product development. That takes them to a 25% market share and after that every extra van is bunce.

Marchionne, who was on the platform with Jean-Martin Folz, the outgoing CEO of PSA Peugeot Citroen when he revealed the riches in vans, appeared to enjoy being in a position to talk about supernormal profit at Fiat where output and profit have been distant friends for more than four years.

But try to get him or anyone else to own up to the exact contribution of vans is a nightmare, and there is certainly no line in the accounts that will solve the problem for you. In volume cars the average top-of-the cycle operating margin is 2%-3%. Carlos Ghosn, the head of Renault and Nissan rather rashly forecast 6% for his combined operation by 2008. The downturn in French home market sales has put the lid on that for sure.

The luxury car makers do well to make 6% and that is considered as good as it gets unless your name is Porsche. My guess would be that the market leaders in the three van sectors will be making double the norm for the volume car makers. If it were more than that there would be far more players in it.

If the game is so good for the players in plain old vans, why go to all that trouble making so many versions of so many cars? Keep it simple lads and spend more time on the beach.

Rob Golding

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