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Can Renault Get Out Of This Ditch? (Int'l Edition)

International -- European Business: FRANCE


Profits are plunging--and murmurs of a merger are back

In Europe's painful march toward competitiveness, French auto maker Renault has offered a beacon of hope. Close to collapse in the 1980s, state-owned Renault went through a cost-and-quality revolution, fended off Japanese newcomers, and became one of Europe's most profitable carmakers by the early 1990s. Memory of the "Renault miracle" makes the current news from the company especially chilling--and sends a strong warning to Europe that corporate turnarounds can be fragile.

On Sept. 10, the company announced a tiny first-half profit--$31 million on sales of $18.3 billion--and said its full-year results will show losses for the first time in a decade (chart). The news cut 8% from the price of Renault stock, now 54% publicly owned. Renault's revelation also set analysts pondering the overall future of Europe's biggest industry, which is beset by overcapacity and sluggish markets.

ONE WAY OUT? Louis Schweitzer, Renault's calm, rather shy 54-year-old chairman, blames the losses on "price wars" with Fiat and Volkswagen in a sickly French market, where Renault sells nearly half its output. In 1997, he says, "I believe firmly that we'll make a profit." He's counting on three new models that premiere at October's Paris auto show: a new Espace minivan, a van version of the small Megane sedan called the Scenic, and a face-lifted Safrane luxury sedan.

The new cars should help. Yet Renault suddenly seems the most vulnerable of Europe's six mainstream carmakers. Company insiders admit their costs now exceed those of General Motors and Ford's European units as well as French archrival Peugeot. Renault's market share has fallen to 9.7%, the smallest of any European major. There may be only one way out. "Merger is inevitable," says auto analyst Christopher Will of Lehman Brothers Inc. in London.

Perhaps, but with whom? A planned deal with Sweden's Volvo collapsed in 1993. Talks with Italy's Fiat went nowhere. Many analysts suggest Mercedes-Benz, whose upscale cars complement Renault's small models. Yet insiders at both companies reject the idea of merger, and Mercedes prefers to move downscale on its own. Some analysts think rival Peugeot might seek a mate after the 1997 retirement of Chairman Jacques Calvet, a fierce critic of Renault's state-oriented culture. A Peugeot-Renault union could achieve big economies of scale.

As for Schweitzer, he insists "merger is not one of our strategic objectives." Instead, he plans to cut manufacturing costs by an average of $600 per car. One method will be "decontenting"--a Detroit euphemism for using cheaper materials where consumers probably won't notice. For example, Renault will use thinner carpeting in the trunks of Lagunas, a sedan that goes for $25,320.

"IT'S NOT ENOUGH." At the same time, Renault has already begun slashing sticker prices to help win back market share. At about $40,000 for a midpriced model, the new luxury Safrane this fall will cost about $6,000 less than its predecessor. The new Espace van, to be priced around $38,000, will also offer better value by packing in more standard features than the earlier model. The Espace, Europe's first minivan when launched in 1984, held more than 50% of the market for years. But as competition has increased, its share has dropped to about 12% this year.

In the midprice range, the new Megane Scenic pioneers a niche: the small van. Renault plans several more Megane models, such as a convertible roadster next year and a station wagon in 1998. Renault will also replace its aging but best-selling compact, the Clio.

Many critics believe that Renault will still come up short. "It's not enough," says Christophe Laborde, auto analyst at DRI/McGraw-Hill in Paris. "Renault is going to have two competitors in every segment." Renault is also late in going global, while other European carmakers rush into Asia and Latin America. The company now sells 85% of its output in Europe. Schweitzer wants to cut that to 75%, and he's building a Brazil plant to produce the Megane.

The French auto maker has shown its resilience before. But a turnaround must come quickly--and could well involve a merger. Without one, Schweitzer's second "Renault miracle" may have to be even more miraculous than his first.By Stewart Toy in Paris, with David Woodruff in BonnReturn to top

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