As Renault and VW move towards major and comprehensive cost-cutting projects, with the squeeze of uncertainties and inefficiencies, is this liable to spread?
In December of last year, (2023 - and happy new year to you all) AMS reported on Renault’s Thierry Charvet, Chief Industry & Quality Officer’s statement concerning the carmaker’s “Re-Industry” plan, where he said: “Re-Industry is a 360° transformation plan. The aim is to build on our strengths and to gather speed in what we already do well, to reinvent our entire industrial base and attain the highest standards in excellence.
“This industrial transformation will make our base more agile, more virtuous and more competitive, while also enabling us to respond more quickly to customer expectations.” But it’s what’s in-between the lines that matters. No doubt, taming the capricious beast of disruption is no easy feat, and the highly complex nature of automotive production means that changes in one area cannot be accomplished without corresponding changes in another. And degree matters. But 360 degrees matter on a magnitude and scale that prompts the question: why?
What lies in-between the lines of Charvet’s statement can be obtained not from the explicit terms, “standards,” and “excellence”, (which are inevitably non-negotiable), nor from “customer” or “expectations,” but more clearly from the revealing thrusts of “transformation,” industrial “reinvention,” and most tellingly, “agile,” and “competitive.”
The Renault Re-Industry regime is, amongst other things, fundamentally a major cost-cutting plan.
AMS divulged that the project is aimed at a 30% decrease in production costs for ICE vehicles, and an even greater 50% reduction for EVs - in the space of just three years. But this large-scale cost-cutting initiative is not an anomaly.
These cost-cutting projects have become particularly relevant as numerous traditional OEMs grapple with the imperative to enhance competitiveness, especially amid the ongoing transition to EVs and the related uncertainties (and apparent sluggishness) in EV demand. Several OEMs have already had to push back their electrification (and related sustainability) targets, as a result of slower-than-expected growth curves, such as Ford ‘scaling down’ its planned Michigan EV plant, and GM scrapping its EV target in the last quarter of 2023.
Adding fuel to the fire, September of last year also saw the United Auto Workers (UAW) union strikes which have since had a massive impact across the industry; setting off a chain of fiscal events which wreaked havoc across automotive production and logistics worldwide. At the time, Dennis Devaney, senior counsel for suppliers of the big three OEMs affected, (Ford, GM and Stellantis), said unequivocally: “This is a potential major economic crisis,” and when the potential became actual, it was only a matter of time until ‘cost-cutting’ at such a major scale was firmly on the horizon.
Cost-cutting: the newest European automotive production trend for 2024 and beyond?
And it seems to be spreading. Again, towards the close of 2023, there was substantial media coverage on forthcoming cost-cutting measures within the VW brand. Although specific details are pending, preliminary agreements have now been reached with the Works Council after some talks of delays in execution. If ratified, VW is about to push for a major cost-cutting project across its infrastructure, but exactly what form this is yet to take, is still being debated.
What we do know is that VW is already employing several far-reaching measures aimed at achieving a massive €10 billion ($11 billion) in cost savings to address the challenges of low returns. These measures are partly focused on workforce numbers, which in the context of the UAW strikes is liable to be perceived as an ironic decision. The OEM is strategically focused on reducing personnel costs by a fifth, with a specific emphasis on administrative roles, and on introducing early retirement options for individuals aged 57 and above, according to a report. The overarching objective is to more than double returns at the VW brand, targeting a 6.5% margin by the year 2026, according to the OEM.
The pressure on VW is particularly evident in China, where the carmaker relinquished its market-leading position to EV manufacturer BYD. BYD also recently announced its European market penetration with a new production facility at Szeged, Hungary.
Back in September last year, a McKinsey report concluded that (contrary to popular opinion), the auto Industry’s shift towards EVs and digitisation could pose a threat to European automotive manufacturing. The same report found that China was in a much stronger position to weather the storm and continue gaining market momentum (both regional and European). The convergence of economic forces, disruptions, unpredictabilities and inefficiencies have left major OEMs open to compromise, and these large-scale cost-cutting projects will likely continue to be taken up across many OEMs, especially in Europe, as carmakers content to stay afloat in - to employ a poignant and all-too-recognised description - uncertain waters.
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