Innovating to rebound

Does it make sense for a car manufacturer to continue investing in future growth and to increase spending on the research and development of innovations when sales are slumping due to a financial crisis?  It made sense for BMW during the subprime mortgage crisis that hit the United States in 2008-2009. BMW cut production back then but expanded its factory in Spatenburg and added a second factory in China. The gamble paid off: BMW continues to post phenomenal sales growth in China, up 39 percent in the third quarter of 2012, and a more modest 1-percent rise in the United States in the same period.

In the current European debt crisis, BMW has increased spending on R&D to $3.9 billion to pursue the “i” project, which will develop the i3, a four-seater battery-powered car with a body made primarily of carbon fiber and aluminum. BMW is thereby “future-proofing” itself so as not to be blindsided by a technology shift, which has happened so often in the computer and software industries. Sales of electric vehicles (EVs) have been disappointing so far and EVs are not going to take off in one or two years, but BMW wants to be there when they do takeoff. As the global leader in premium car sales, BMW can afford to pursue such an ambitious project.

PSA Peugeot-Citroen, the second biggest automaker in Europe after Volkswagen, may follow a similar path.  Peugeot is in trouble—The demand for new cars in the European Union in 2012 fell to the lowest level in 17 years to a little over 12 million units and could shrink further by 5 percent this year, according to Acea, the European Automobile Manufacturers Association.

NET LOSS. As one of the companies that depend on the mass market and on southern Europe, Peugeot is among the most affected by the steady decline in sales since 2007. Peugeot reported a net loss of 5 billion Euros in 2012.  Management announced plans to close an assembly plant north of Paris in 2014, entailing the elimination of about 11,000 jobs, but has met fierce resistance from workers and in some cases, government officials.

On the other hand, to offset faltering sales in Europe, German carmakers in recent years have diverted tens of thousands of cars originally slated for European showrooms to the United States and China.  After posting a third consecutive year of growth in 2012, US sales of cars and light trucks are   projected to reach about 15 million vehicles this year. These bullish projections are based on the advanced age of the 245 million cars and light trucks on US roads, where the average car on the road is 11 years old and about 20 percent are 16 years old.  Cheap and available bank financing plus significant advances in the fuel efficiency, safety and entertainment technology of new cars compared with cars made four or five years ago, let alone 11 years ago, should spur sales.

But Peugeot and Renault made the mistake of abandoning the US market decades ago.  Now the French automakers cannot counterbalance the stricken European market as it is too late for them to reenter the United States even if they could afford the cost of reestablishing dealer networks.  So it makes one wonder why, after failing many years ago, Peugeot has reentered the tiny Philippine market, where Japanese and Korean brands dominate sales, and where German nameplates reign in the European car niche.

FRENCH CARS. In France itself, consumers do not seem very interested in French cars.  Philippe Houchois, head of European auto industry research at UBS in London, noted that French buyers looking at three comparable and similarly priced cars—a Peugeot 308, a Renault Megane and a Volkswagen Golf—would probably choose the VW because they could finance it at better terms, given the German maker’s stronger balance sheet. Houchois also pointed out that while JD Power, the customer-satisfaction auto research team, does not survey French car buyers directly, its studies of buyer preferences in the German and British markets show Peugeot and Renault ranking below average in customer satisfaction.

Going back to the strategy of increasing spending on R&D when sales are down, following that strategy was key to Mazda Motor Corp.’s rebound.  Last April, Mazda announced that it has made money for the first time in five years, raking in 26 billion yen ($261.1 million) in net profit for the fiscal year through March, after four years of net losses totaling 245.7 billion yen.  While the weaker yen made that recovery possible, Mazda executives said that technological innovations dubbed Skyactiv, which began rolling out in 2011, helped Mazda cars become some of the most fuel-efficient in the industry.  In 2012, Skyactiv CX-5 and Mazda 6 boosted sales in Japan by 16 percent and in the United States by nearly 11 percent.

HYBRID AIR. Peugeot is also innovating to rebound.  Peugeot is developing Hybrid Air, an energy-recovering technology using compressed nitrogen gas and hydraulics that will enable a compact car to get about 100 kilometers per 2.9 liters. Peugeot plans to begin producing Hybrid Air cars by 2015 or 2016, priced below $26,000 to make them a viable option in emerging markets like China and India.

Peugeot badly needs a hit product to return to profit even as it struggles to reduce its dependence on Southern Europe and cut production capacity.  But Hybrid Air will succeed only if it can show a tremendous cost advantage over hybrid electric vehicles already in the market and overcome the big headstart of hybrids like the Toyota Prius.

Good luck, Peugeot!