Renault investment spending is at 'high end'

TALK FROM THE TOP

It has been a difficult year for Renault SA. Twice it had to revise downward its profit forecasts on core automotive operations. Sales of cars are flagging, with no major relief in sight before the new Megane arrives in showrooms late next year.

Finally, changes in joint management and shareholding structures with Nissan Motor Co. Ltd., Renault's Japanese unit, have not found favor with minority shareholders and security analysts.

On the positive side, Renault's light-utility vehicles are selling well, and the French company is confident it will increase its share of the combined car and light-utility vehicle market in Western Europe this year. Renault had an 11 percent share in 2000.

Automotive News Europe Staff Reporter Sylviane de Saint-Seine interviewed Renault Chairman Louis Schweitzer on Nov. 15 in Paris.

What makes your sales so buoyant in central Europe?

Our growth owes much to the success of the three-box Clio, known as the Thalia, which is built at Bursa in Turkey. And the Turkish currency has been floating since March.

We reorganized Bursa in 1996 to gear it toward exports. Beforehand, it was totally dependent on the Turkish market. This year, more than 80 percent of its production will have been exported.

When Renault issued its latest profit warning in October, it said non-essential investment would be reduced. Which investment will you cut?

There are many ways to reduce investment spending. Investment spending by carmakers goes in cycles. At Renault, we are at the high end of the cycle, with an increase in 2001 from 2000 and in 2000 from 1999. Our annual objective for capital expenditure is between 6 percent and 7 percent of sales. I say this because it's not the same thing to reduce investment when the starting point is high or when it's low.

First, we are trying to reduce investment costs whether their priority is high or low. Second, we are reconsidering some international investments. For instance, we had a plan to build vehicles in South Africa in CKD (complete knockdown). Instead, we opted for a built-up operation, and it's going very well. In other countries, such as Brazil, we have to adapt output capacity investment to market conditions. We check that investment in mechanical or coach-building capacity is adequate. Outside the manufacturing of cars, we review investments such as e-business. But we are not reconsidering key investments such as, say, the Clio's successor in Flins (France), or things like that.

What about car production in Spain? There have been reports Renault is considering cutting it by nearly 10 percent next year because of a fall in demand in some of its main markets.

At Palencia, we are producing the Megane, except for two versions: the station wagon and the Scenic minivan. Demand for it is not on a rising trend. We adjust production to demand, and, therefore, we review our production objectives monthly. We are introducing greater production flexibility to face either a rise or a fall in demand, through a timely use of days off, for instance.

Is it true you are intending to build 465,000 vehicles in Spain next year, 40,000 vehicles down from 2001?

It's neither true nor wrong. It's perhaps a hypothesis. Palencia's production volumes, for instance, will depend on the sales of the current Megane, and the ramp-up of its successor in 2002.

You cited component supply problems in your October profit warning. Could you be more specific?

There was a well-known and widespread problem with diesel systems. There were also sporadic problems with a number of suppliers who had difficulties keeping up with demand, for technical, financial or capacity reasons. In some cases, those problems worsened because of transportation difficulties. The year 2001 has been a bad one in terms of freight transportation in Europe, notably by road. If you have low inventories, the supply chain is all the more sensitive to these kinds of problems. There may still be some ramp-up problems, but there are no longer recurring supply constraints for new vehicles as there were in the first half. There is still the occasional supply problem for spare parts, though.

Have you solved the problems with the keyless system?

Those problems seem behind us. One had to do with software. Another was that people tended to slip the card inside their hip pocket and sit on it. That twisted the card and damaged the electronic connections printed on it.

The timing of the reorganization of your relationship with Nissan has been criticized, and several rating agencies downgraded your debt. Are you still convinced the timing was right?

If I had not been convinced the timing was right, I wouldn't have done it. As early as 1999, we had planned for a second stage in the alliance with Nissan whereby Renault's share in Nissan would rise to 44.4 percent. Which means we are more responsible for Nissan's debts than we were at 36.8 percent (of Nissan's capital).

We had also planned that there would be a cross-shareholding with Nissan. It seemed indispensable to a balanced relationship but also to create common interests.

Initially, we had planned on a time lag of four years for stage two - it was slated to start in June 2003. But I considered that we could and should accelerate the timetable because the Nissan operation in its two aspects - recovery and cooperation with Renault - was advancing as fast, if not faster, than expected. Thus, the conditions to enter phase two were met earlier than I had anticipated in March 1999 - notably regarding the reduction in Nissan's debt. In March 1999, the level of Nissan's debt was simply terrifying. It has fallen sharply since.

What does it bring you to boost your shareholding in Nissan from 36.8 percent to 44.4 percent?

It is financially clever, because Nissan is a good operation, and the exercise of warrants (on Nissan shares) is a good operation. It would have been unforgivable from our shareholders' point of view not to exercise our warrants. Besides, the threshold of 40 percent is important, because it gives a presumption of control. If this control is confirmed, one can consolidate the results of the company in which one owns 40 percent.

There are many people who, if the left is voted back in power next spring, see you holding a ministerial post in the next government.

I don't.

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