French automaker Renault has come up with an interesting way of dealing with its overcapacity in Europe. It will boost output and produce more cars there. While the idea may sound crazy, particularly knowing that 1) Europe has plenty of excess auto production capacity, and 2) Europe is, to say the least, a high-cost place to build a car, Carlos Ghosn has an ace up his sleeve.
What’s Renault’s grand plan? Trading product guarantees and open plants for other concessions from labor. Time will tell if he has charted the correct strategy, but it’s similar conceptually both to what Renault has done with its unions in Spain and to what U.S. automakers have been able to do during the past few recovery years after the auto-sales crash of 2008/2009, and in light of the 2007 master labor agreements that set the stage for jobs-for-wages and productivity tradeoffs.
The choice presented to the French unions by Renault was stark: there is no reason why it should be more expensive to produce cars in France than in the U.K. or in Spain, so why would Renault continue to pay its French workers far more, just because they’re French? The union, seeing the writing on the wall and likely wishing to avoid becoming an unfortunate footnote in France’s industrial history, agreed to many of Renault’s demands.
Among the union’s concessions: a one-year wage freeze, eliminating 7,500 jobs through attrition and retirements, plus boosting working hours by 6.5%, which analysts say will save an average of €300 ($390) per car. That may not sound like much, but it could mean the difference between a profit and a loss. Fundamentally, it lowers Renault’s breakeven level of production.
Renault’s France production has been falling dramatically over the past few years; in 2007, it produced 1.2 million cars in France; last year, the number was less than half that at 532,000.
The union did get some goodies from Renault: a contractual promise of no factory closures in France, plus a plan to invest €1.1 billion ($1.4 billion) to boost automobile production in France by a third.
Renault hopes to get its factories closer to capacity with improved new models, plus it will produce 80,000 cars per year in France for alliance partner Nissan.
As noted earlier, GM used similar tactics, plus a two-tier wage structure (a play that Renault used in Spain, by the way) to enable it to move production of the subcompact Sonic to Michigan from South Korea, where its predecessor, the unloved Aveo, had been built. Lower wages for new hires at the Sonic’s Orion Township, Michigan plant, plus lower healthcare costs thanks to offloading healthcare obligations to the union via the VEBA trust agreed to in 2007, allow GM to profitably build and sell small cars in the U.S. for the first time probably in its history.
If Renault has indeed cracked the code for weathering Europe’s downturn, Carlos Ghosn’s peers may want to study his playbook. Estimates are that there are as many as 20 auto plants in Europe operating at less than half of their capacity today, where it’s nearly impossible to close a plant (and when it is possible, it’s quite expensive). GM’s Adam Opel subsidiary will be closing several plants in the coming years, but European stakeholders (unions and politicians, in particular) seem unwilling to make the tough choices required for their companies’ long-term health.
But, at least one union did. I hope it works out for them.