French carmakers fight to find their footing in China

When French automakers jumped into China, they thought Chinese consumers' appetite for French design and luxury goods would translate into booming car sales. That hasn't been the case.

After several years of growth in China, sales at PSA Group and Renault have dropped sharply. True, the slumping Chinese economy has affected sales at almost every automaker, but Renault and PSA were down 62 percent overall in the first half compared with the same period last year and hold just a 0.7 percent market share.

At PSA, group sales have slid from a high of more than 730,000 in 2014 to fewer than 250,000 last year, and 2019 looks to be even worse, with only 64,000 vehicles sold in the first half. The decline at PSA has been so dizzying that the automaker is reportedly preparing to sell two of its joint venture plants and lay off thousands of workers. The factory it has with Dongfeng Motor is operating at 22 percent of capacity, the Financial Times reported, and its factory with Changan Automobile is nearly idled, the newspaper said.

Renault has done somewhat better, although that comes with a major qualification. Under former CEO Carlos Ghosn, the automaker had set a target of selling 550,000 vehicles in China by 2022, and sales last year rose 200 percent to 216,699. However, all of that growth came as a result of consolidating sales from a joint venture with Brilliance China Automotive, a domestic producer of utility vehicles and minivans. Even so, group sales are down 24 percent in the first half of this year — and sales at the Renault-Dongfeng joint venture plunged by 73 percent through August.

But while French automakers are struggling, French luxury companies are thriving. LVMH, which owns dozens of upscale labels including Louis Vuitton, TAG Heuer watches and Dom Perignon champagne, said it was seeing "unheard of" growth in China.

A strong performance in China — and overseas buying by Chinese tourists — have helped LVMH's main rival, Kering, the parent company of Gucci, Ulysse Nardin watches and Balenciaga, to double-digit growth. Overall, exports of French fashion products to China grew by 21 percent in 2018, a French trade group said.

The French may be fighting against Chinese consumer behavior, said Isabelle Chaboud, a luxury brands expert at French business school Grenoble Ecole de Management. Chinese shoppers "don't consider French cars as luxury brands," she said. Chaboud pointed to the annual Interbrand top 100 list, which ranks brands according to their value. Toyota is seventh, Mercedes-Benz eighth and BMW 13th, with Honda, Ford, Hyundai, Nissan, Volkswagen and Audi all in the top 50. There isn't a single French car brand in the top 100. Yet French fashion brands dominate: Louis Vuitton is 18th, Chanel is 23rd and Hermes 32nd.

"I don't think it's a problem of quality," Chaboud said. "It's more a problem of image, or how they communicate." The larger question, especially for PSA, is whether to leave China, where its JV with Dongfeng lost more than $363 million in the first half, after losing more than $550 million in 2018.

PSA's CEO, Carlos Tavares, may not quite be ready to quit, insisting at this year's Frankfurt auto show that his company is putting a "common sense" and "rigorous" action plan in place, similar to the one PSA instituted in Europe in 2012-13 as it was emerging from near bankruptcy. Nonetheless, a source close to PSA told Reuters in August: "We're just a whisker away from having to withdraw from China. It really is that serious."

Tavares seems to recognize his company's image problem in China. Noting that China was "different from Europe," he said in Frankfurt: "It takes more passion to communicate the values, the history of these brands and all that we have done over the last century."