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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The road ahead for European carmakers is shrouded in fog. Trade tensions, competition from Chinese rivals, a sluggish domestic market and an uncertain transition to electric vehicles have conspired to sink the sector’s profits and share prices. The exception is Renault. Despite its structural challenges, the French carmaker has successfully turned itself around. That makes it an unlikely trailblazer for the pack.
The problem for European autos is that their market is getting smaller and smaller. Total vehicle sales are languishing well below their pre-pandemic peak. In 2024, for instance, 10.6mn new cars were registered in the EU. In 2019, there were 13mn.
The green transition is only going to make things worse. Almost 20 per cent of battery-electric vehicles sold in Europe in 2023 were built in China, a number that includes Teslas and some European brands. As EV sales grow, the market share of incumbents will probably decline.
In this context, strategies based on chasing volumes risk igniting painful market share battles. But, as the rise and fall of Stellantis highlights, yanking up prices and giving up on volumes is, at best, a short-term fix. The likes of Volkswagen have already bitten the bullet and moved to reduce production capacity. But the fear must be that, in a shrinking market, supply will be trailing demand.
The good news is that, in carmaking too, pursuing a shrink to profitability strategy does appear to be possible. Renault has slashed unit sales by 40 per cent since 2018, to 2.3mn last year. In that time, margins have risen from 6.3 to 7.6 per cent, leading to overall growth in operating profits. Its margins are now higher than those at much larger peers Stellantis and Volkswagen. This is all the more surprising because Renault cars have historically been positioned at the cheaper end of the spectrum.
Renault’s strategy has been to cut production so that utilisation remains high, and to make its cars cheaper to develop and produce. The new Twingo, for instance, will have 750 components — less than half what those of traditional Renault models.
There are limits to the benefits of shrinking. Small carmakers may not have the scale to make the investments that new technologies require, be it electric vehicles or self-driving cars. That may explain why Renault has been so keen to propose collaborations. But the fact that carmakers can become smaller while making more money should be of comfort to the beleaguered European auto sector.