Volvo And Renault: Marriage May Be The Only Answer

France's Renault and Sweden's Volvo, two of Europe's leading carmakers, are in the throes of change, as they adjust to recession, market opening, and rising costs. With sales plunging, Volvo is undergoing major surgery. Buoyed by new models, Renault is on a profitable course but must reduce costs even more. The two companies now own stakes in each other, and the answer to their problems may be in a merger.



Chairman Louis Schweitzer of French auto maker Renault is remarkably serene, given the times. After all, the witching hour for Europe's car industry is finally here. This fall, Honda and Toyota are starting to roll cars out of spanking new plants in Britain, joining Nissan, which arrived earlier. The transplanted production frees the Japanese powerhouses from import quotas and will touch off a furious battle for market share. For most Europeans, the timing couldn't be worse. Car buying has been falling for two years and may plunge even faster next year.

That doesn't faze Schweitzer, 50, a former civil servant and grandnephew of humanitarian Albert Schweitzer. "The Japanese are not going to grow at our expense," he vows. Amazingly enough, he may be right. Once regarded as Europe's automotive basket case, Renault has cut costs and dramatically improved quality. It is now the top import in Germany, where an independent customer-satisfaction survey ranks Renault ahead of all German makes and second only to Honda. In this year's first half, Renault's profits quintupled, to $1 billion, while its EC market share rose from 9.8% to 10.5%.

HEAVY BURDEN. But while there's no doubt Renault has begun a Chrysler-like turnaround, it still needs to catch the Japanese on production costs. Schweitzer figures Renault's costs are still 30% above the most efficient Japanese factory outside Japan, Honda's benchmark plant in Marysville, Ohio. "It takes time, but we'll get there," he says.

Another problem is debt. In five years, Schweitzer has trimmed it to $3 billion, from $10 billion. Yet the burden is still too heavy to allow Renault to build new plants to fight the Japanese, as Volkswagen and Fiat have done.

Instead, Renault has been imitating Japanese management methods to remake itself. Product planning, for example, is now tightly coordinated, speeding work and cutting glitches. The result: sexy new cars. One was unveiled last month, a tiny van-like car called the Twingo, which goes on sale in March for about $10,000. This rival to Japanese minicars is "brilliant, it could become a cult car," says Daniel P. Jones, professor of automotive economics at Britain's Cardiff Business School. Previously, he says, "Renault's cars were boring, and quality was terrible."

Another winner is the Safrane, a $40,000 luxury model that is a larger successor to the R25. Launched just last May, it now has a waiting list. Germans are snapping up the compact R19 and smaller Clio. Next year, Renault will unveil a new sport sedan, and it's working on a midsize entry in Europe's booming van market--now dominated by Renault's big Espace.

In assembly operations, Schweitzer, who joined Renault in 1986, has copied the Japanese. Workers maintain their own machines and fix their own mistakes. Renault has tightened quality rules for suppliers and set up just-in-time delivery, cutting inventories from 10 days to 2. These may seem modest steps, but the results are big: Productivity has jumped 50% since 1985. This year, Renault will build 12% more cars than last year--with 6% fewer workers.

But unless costs can be cut considerably more, Renault's fate might still be decided in Tokyo's boardrooms. "If the Japanese decided to flood Europe, they could easily undersell us," admits Philippe Gamba, Renault's marketing director. An executive of a U.S. auto company in Europe thinks Japan's market share will double, to 22%, by decade's end because of transplants.

Meanwhile, Schweitzer will try to close the cost gap further. Teaming up with Volvo was intended, in part, to achieve this goal. The partners have merged purchasing and quality control. They're cooperating in other areas, ranging from engines to development of a new luxury car. But given Volvo's problems, some observers think Renault could face some nasty surprises. Schweitzer, however, is sold on the alliance.

He has a good reason to feel confident. But while France's struggling carmaker may be firing on all cylinders at last, it still needs some tweaking to keep up with the Japanese.