Renault Chairman Schweitzer is worried about rising steel costs.
Renault Chairman and CEO Louis Schweitzer warned that 2005 will be difficult. He said that Renault's profit margin will be squeezed by falling sales in key foreign markets, rising raw materials costs and new accounting rules.
Schweitzer, 62, who will relinquish his CEO title to Ghosn on April 29, said there are five key factors that will take their toll on Renault's performances in 2005.
1. A further dip in new-car sales in new EU member countries in eastern Europe, particularly Poland, where it is now easier to import second-hand cars from western Europe.
2. A fall in new-car sales in Turkey -- where Renault is the market leader -- because a government incentive given for scrapping old cars ends.
3. A further rise in raw material costs, as Renault must renegotiate its multiyear contracts for steel. Due to the rising cost of steel, Renault expects to pay between E150 million and E200 million for the material this year compared with E50 million in 2004.
4. The Euro 4 emissions regulation that will force carmakers to make their diesel engines pollute less. Schweitzer said the improvements needed to meet the higher emissions standards would cost Renault more than E100 a car and that the cost can't be passed on to customers in 2005. Analysts estimate that the Euro 4 change will cost Renault between E150 million and E200 million in 2005.
5. The implementation of new accounting rules known as International Financial Reporting Standards, or IFRS, which will reduce Renault's operating profit by about E300 million.
All these elements suggest Renault's operating margin -- operating profit in relation to sales -- will be substantially weaker this year than in 2004, when it reached 5.9 percent, its highest since 1999.
Renault had an operating profit of E2.4 billion on sales of E40.7 billion.
Schweitzer said the 2005 operating margin would be "above 4 percent."
This target may sound modest, but London-based Commerzbank analyst Adam Collins said: "We see it as realistic. The challenge for Renault will be to offset those head winds through sales growth or cost reductions."
Schweitzer was particularly proud of Renault's operating margin -- "the highest of all European volume carmakers this year," he pointed out -- because it is based on the company's own performance, not on contributions from outside companies, such as Nissan or truck maker Volvo, in which Renault has stakes.
The highlight of 2004 for the company is the increase in Renault's own performance, he said.
Renault's 2004 net profit, which includes contributions from Nissan and Volvo, reached a record high of E3.5 billion, up 43 percent. The increase was partly due to the one-off addition of an extra quarter of Nissan profit.
"Records are meant to be broken," Schweitzer said, "and I wish my successor will break those records as soon as possible."