Renault CEO bets on 'winning horses' for turnaround

Renault CEO Luca de Meo's turnaround plan for the money-losing automaker, which he calls "Renaulution," re-centers the group around profits and value rather than volumes. That will mean fundamental shifts in regional strategy, in products, in production and in management. De Meo, who started at Renault last July after holding top posts at Volkswagen Group and Fiat, recently spoke with Automotive News Europe Associate Publisher and Editor Luca Ciferri and News Editor Peter Sigal about what to expect from Renault in the coming years.

One of your goals is to optimize Renault's presence in countries outside of Europe -- India, Latin America and South Korea. Could you elaborate on that a bit?
Renault has had a global strategy which in many aspects worked: more than 50 percent of our volumes were outside the European perimeter; we are less dependent on Europe than our neighbors [PSA] were before the integration into Stellantis; and we have seven engineering centers and 16 production sites outside of Europe. This company became much more international in the last 20 years, and I'm not counting the whole impact of the alliance that made Renault a much more global company than when I was here [in the early 1990s].

But if you view it through the lens of profits, the picture looks very different. In fact, we were still doing in 2019, even before the crisis, maybe 50 percent of our results in five European markets, 75 percent in the European perimeter -- and the other 100 countries accounted for 25 percent of the total profitability. So, I think this is a situation we have to correct. Of course, you don't change that overnight, and we understand that structurally your domestic market -- and we consider that Europe -- is always the biggest source of profitability, so we are not naive.

Where can you improve?
As we were looking for volume and market share, we would enter every market in the lower segments to make it easier to reach volumes and to establish a plant that would be big enough to be efficient. But we didn't take the next step. That means, for example, in Brazil we would localize a [budget] car like the [Dacia] Logan and when you reached your 5 to 6 percent market share and filled the plant with 150,000 or 200,000 vehicles, then the right thing to do was introduce a car in a higher segment to "seat" the brand in a position consistent with the position of the brand globally, and also maybe a car that will give you more of a margin. This didn't happen.

So, what we are trying to do, again using Brazil as an example, the team was given a target of a 10 percent market share, so in a 3 million car market we prepared a capacity of 300,000 cars. Then, we sold 200,000, then 150,000 then 80,000. What we have to do in Brazil is, first of all, lower the break-even point. That will mean cutting shifts, unfortunately laying off more than 800 people. Then, because the economy is a little uncertain, we will freeze investment in the short term. But, we will re-purpose the money on things such as the Bigster and Duster [SUVs], in Renault versions, so we can lift the average transaction price, following the examples of Volkswagen and even Fiat, which went from only Fiat products to Jeep and was very successful. And we are not seeking a 10 percent share, but maybe 5 or 6 percent. At that level you are a relevant brand, you are visible, but we will have a better quality business.

What about strengthening Europe, Turkey, Morocco and Romania?
If you look at the numbers and our internal benchmarks, [Renault factories in] Spain, Morocco, Turkey and Romania are the strong point of our industrial system. By allocating products there and filling capacity we will be able to gain 20 points of competitiveness. Remember that many cars sold in Europe are actually built in those places, so we really have an advantage, and we want to leverage that. It's about betting on a winning horse. This is the winning horse of Renault.

How will that affect French plants?
Because of some compromise decisions, some non-decisions, some wrong decisions, we have a problem of competitiveness in the French plants. But this is a different exercise, because it's very sensitive, because it's our country and we can't just close plants, because it will create enormous tension on all levels. What we have tried to do is find a new purpose for some places, finding ideas to use some plants, reinventing some plants, like we are doing in Flins (a center for the circular economy and recycling).

Then you have cases such as Douai, in northern France. Renault invested a billion euros a few years ago [to produce electric vehicles and components in France]. The problem is that we decided to put six or seven models in one plant (including the Talisman, Espace and Scenic model families), which is already very challenging, and said we would sell 300,000 of them, and we sold 70,000 or 80,000. If we find a supplier that helps us get a battery plant close to Douai and if the authorities help us close the gap in cost and competitiveness, we will be able to transform it to one of the biggest EV plants in Europe.

Is it too early to reveal how you plan to reinvent the business model in China?
I think so. We are rebuilding a good relationship with [joint venture partner] Dongfeng. The relations were very tense when I arrived because we were near the exit door [by halting Renault car sales and production], and in a way we created a lot of troubles for the partners there. I found the opportunity to motivate our partners there to build the Dacia Spring [at the eGT factory].

They reacted positively and worked fast to try to get us a car with the right level of quality. Based on that, we can keep the small flame ignited. We have a joint venture [with Brilliance Jinbei] licensed to do commercial vehicles. The JV is having troubles right now. We have a lot of operational issues we need to fix. We also have the JMEV joint venture, which has a license to build an EV in China.

And we have people doing design and technological scouting in China, including purchasing and engineering. What I have to do is recombine all these Lego pieces into something that can serve a purpose in the future, but my feeling is that we will need two to three years. We came too late to the Chinese market, 30 years behind the music, so we will probably need a completely different approach and go beyond the classical China joint venture project.

Could you build a Renault 5 EV for China, with a license to build electric cars there?
You could imagine a lot of things. I'm trying to put myself in the mindset that I need to do something that the others haven't done and that is relevant for the Chinese consumer. It's also true, if we want to take a little bit of larger perspective, that Nissan covers the alliance's presence in China, where they are relatively strong. 

Can you give some details about how you will lower Renault’s break-even point?
In 2021, we will lower it by 1 million units, so 1 million in one year, and we have enough granularity on 2021 numbers, so it's very likely to happen.

You are going to cut capacity from 3.9 million units to 3.1 million in 2025, but also increase your utilization rate from 70 percent to 120 percent that year. Does that also mean a substantial growth in volume from 2.72 million units in 2020 to 3.72 million in 2025?
When we say we were going from volume to value, people were assuming that we would shrink the volumes overall. What we are shrinking is the ambition from imagining a company that would do more than 5 million cars [annually]. We tried to do that a couple of times and it never worked.

I have 24 models in the pipeline, so it's clear that we are betting on their success. Each one of the projects was structured with a very cautious volume and pricing assumption. I have reduced fixed costs by 30 percent and kept volumes projections at a realistic level to keep those costs down. Anything that happens favorably, whether it's a market rebound, an unexpected model success, will have a huge [positive effect] on our profitability. To give you a number, in our model, a 5 percent increase in volume compared to the plan means a 0.5 percentage points in terms of operating profit and 10 percent mean one point.

Will you be able to finance such an ambitious plan?
Yes. When [engineering chief] Gilles Le Borgne and I reviewed future product plans over six weeks in July and August, we not only looked at segments and profit but also the technical solutions, the ingredients that we need to restructure the range. An example is the project we call P13X. It includes the Dacia Duster, Dacia Bigster, Lada Niva (two models) and a Renault version.

In total, we will have seven products at four industrial locations, covering three brands, selling more than 1 million cars a year with 85 percent component carryover between the models. Lada, however, won't be in the same market as Dacia. We are trying to be very disciplined on product development. On that project we are reducing diversity 30 percent compared with the current generation.

So the Bigster will be a Renault in Latin America, for example?
Yes. For me the Bigster is exactly the car that can pull Renault up in international markets, where we were only betting on A- and B-segment (minicar and small) cars. Now I can have a B+ SUV and C [compact] SUV that have a better unitary margin, potentially a better image and the ability to conquest new customers. This won't take one generation.

It will take one and a half generations to move Renault up where it needs to be and maybe to find space underneath so Dacia can enter the market, so we have a more coherent offering and allow Dacia to expand globally. 

So about 10 years?
Yes.

In your new organization chart, is engineering meant to be a filter between brands and global, cross-company functions?
I see the functions as facilitating contact between the business side and engineering. I want my engineers to be engineers and not program managers. We have a lot of competence, of course, and I want to reinforce the pride of the engineering community at Renault, but I also want them to be business engineers, responsible for what they do. In that organization [chart] they directly face the brands; that means they face the business, so they will feel the heat of the business.
 

One of the things that is changing at Renault is that we have eliminated the product planning function. This is now on the brands side. They need to decide what kind of cars they want. Of course, they will get an envelope of investment -- for example, we will tell them Dacia can't go to the D-segment, they will have to wait for Renault to introduce some technology and then they will be able to do that with some conditions.

The brands have responsibility for three things: margins; return on capital invested (ROCE), which is a criteria we have rarely used in Renault; and customer satisfaction, so where the customer is -- sales, aftersales and dealer satisfaction. These are the things on which we will be measured, me as the CEO of Renault brand on top of my group responsibility; Denis le Vot as head of Dacia-Lada; Laurent Rossi at Alpine; and Clotilde Delbos at Mobilize.

What will engineering be responsible for?\
Engineering will be responsible for cost, for timing and for the performance of the product. If you see the organization like a four-wheel-drive car, the front wheels (brands) are pulling the machine toward the market; the engineering and rear wheels (functions) are pushing the whole thing; and the rest is like a driveshaft, to enable and facilitate the connection between engineering and brands. Everything is anchored on a solid alliance performance platform.

You said that the margin for the Clio and the Zoe was on par in 2020, and that the Zoe margin will accelerate substantially starting this year. Is this in terms of percentage points or absolute money?
It is in absolute terms. In percentage it's not the case because Zoe is much more expensive. So electric cars are still dilutive when it comes to operating margin. The good news is that in absolute terms we are not losing money on electric cars. We are doing a little bit more money than on the comparable combustion car. I think that there will be a moment -- because combustion engine cars will become more and more expensive because of regulation -- where the two will cross. And the whole race is about who is doing that first. The moment we prove that our electric powertrain technology is not dilutive in terms of operating margin is very important because it means the company can switch to electric products without threatening our profitability and the level of our business.

You have said your E-Tech hybrid solution will take 18 to 24 months to gain volume and thus economies of scale. Is this the reason that you see the tipping point between the contribution margin of hybrids and combustion engine happening in the middle of 2022?
Yes.

Does that mean it's making money or margin now?
No, we are making a margin for sure, but you always have costs at the beginning, and we launched E-Tech in September. We use a curve to reduce the costs from suppliers etc., so every year you have savings and technical improvements. But our focus is still to reduce [absolute] costs. For example, we are going to localize production of electric motors that are now coming from Japan. This is part of the technical roadmap that puts us in position to make a very competitive product, because [E-Tech] doesn't have a conventional gearbox. If you look at the gearbox on hybrid cars from some German manufacturers, it's a huge complication, and we don't have it.

Will the R5 be the first model to benefit from accelerated development time, from four years to three?
No, it will be a sporty, C-segment SUV [that is due to appear after the Megane EV].

Will the R5 replace the Zoe?
Yes.

And the Renault 4 -- or "4ever," as it is called in the French press?
A nice car. Let's just say that I have a passion and appreciation for automotive history.