[lbo-talk] Auto woes signal shift in France's industrial base

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Fri Nov 3 06:19:54 PST 2006


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Auto woes signal shift in France's industrial base http://today.reuters.com/news/articlenews.aspx?type=reutersEdge&storyID=2006-11-02T130710Z_01_L1853431_RTRUKOC_0_US-ECONOMY-FRANCE-AUTOS.xml&WTmodLoc=NewsArt-L3-Reuters+RecommendsNews-2

Thu Nov 2, 2006

By Swaha Pattanaik

PARIS (Reuters) - France's flagship car industry is responding to tough times with strategies that should accentuate an ongoing shift away from labour-intensive manufacturing in the euro zone's second biggest economy. Producing mainly mid-range cars, French automakers are unable to command the sort of premium prices that have allowed firms such as BMW (BMWG.DE: Quote, Profile, Research) to maintain margins and are instead being squeezed by low-cost brands made by emerging market rivals.

Time and again, national business surveys and output reports pinpoint the auto sector as a black spot in an otherwise broadly improving industrial picture, confirming the problem is a national trend rather than being confined to one firm.

Faced with such difficulties, car manufacturers, such as PSA Peugeot Citroen (PEUP.PA: Quote, Profile, Research), and parts suppliers, such as Michelin (MICP.PA: Quote, Profile, Research), are opening factories abroad -- as much to tap dynamic emerging markets as to benefit from lower labor costs in these locations.

Wariness of public outrage and government intervention guarantees such investment is generally not accompanied by immediate factory closures or job cuts at home.

But there is bound to be less new investment in production facilities in France than might otherwise have been the case, according to analysts, who see this as a clear recipe for further de-industrialisation of the French economy.

"In any industry the market is moving to two extremes -- entry level and luxury. For entry-level products you cannot produce in a high cost country like France," said Gaetan Toulemonde, research analyst at Deutsche Bank in Paris.

"To compete in the mass market section you have to move abroad otherwise your business is at risk."

Such a strategy is expected to see a further dwindling in industry's share in French economic output -- a phenomenon that has already taken root in the past two decades.

Industry accounted for about 25 percent of the value added to the economy in 1978 but only about 15 percent last year, according to statistics office INSEE.

The value added by services rose to 55 percent from 45 percent over that period.

HEAVYWEIGHTS SHIFT

The heavyweights of the French automobile industry are well aware of the risks facing their business and are taking action.

PSA Peugeot Citroen -- which already has sites in the Czech Republic, Brazil, and Argentina and plans to triple its production in China -- opened a new plant in Slovakia in October which can turn out 55 cars an hour. While the vehicles are mainly destined for the fast-growing eastern and central European markets the plant is also within striking distance of Germany and Italy.

"It is true that the wages here are a third or a quarter of what they are in west Europe. But the logistical costs are more important," PSA Peugeot Citroen Chief Executive Jean-Martin Folz said at the opening of the factory. Folz was referring to the costs involved in supplying auto parts to factories and distributing assembled cars to market.

Michelin, the world's biggest tire group, plans to step up production in Asia for local markets and cut costs based on the expectation some 20,000 people will leave the firm between 2006 and 2010 due to retirement and other social circumstances.

"Crudely put, the question is are French workers being replaced by Chinese workers or machines," said Paul Seabright, a professor of economics at the University of Social Sciences of Toulouse.

"The answer is both. So far it has been rather more technical change than globalisation but China's extraordinary export performance has shifted the balance a bit."

KEY INDUSTRY

These are not the only firms to go down this road and the impact of their decisions is likely to be felt keenly given the importance of the auto sector in the French economy.

The auto sector and the companies that depend on it employ about one in 10 French workers, according to a report in July by the Economic and Social Council, which estimates the industry accounted for over 11 percent of industrial production in 2004.

About 10 percent of world automobile production is by Renault (RENA.PA: Quote, Profile, Research) and PSA Peugeot Citroen, the report said. It estimated one out of four cars sold in Europe for private use is French and 1 out of 10 worldwide.

"Between now and 2010 we will probably top the 1 million mark for French branded cars made in central and eastern Europe," said the consultative body, which includes workers' and employers' representatives.

"Czech, Romanian, or Turkish factories will from now on have a global industrial base which will allow them to produce cars for the continent. In this way, almost 20 percent of cars with French brandnames will be produced in eastern regions only to be sold in continental Europe, France included."

That is not to say that France is going to lose its industrial base completely, not least because governments of all political colors have shown their determination in the past to promote national champions, for example taking on the European Commission to bail out engineering group Alstom (ALSO.PA: Quote, Profile, Research) two years ago.

But the nature of France's industrial base will evolve, analysts said. "There is a modification of the industrial structure," said Christian Parisot, economist at Aurel Leven in Paris.

"Industries like the semi-conductor industry, or anything that needs a lot of capital and research and development, will not shift abroad. By contrast, what will be affected are industries which have high labor costs or are not capital intensive."

(with additional reporting by Marcel Michelson)

© Reuters 2006. All Rights Reserved.



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