CCFA (FRENCH VEHICLE MANUFACTURERS) CONTRIBUTION TO THE EUROPEAN COMPETITIVENESS DEBATE

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1 Ref. Ares(2014) /01/2014 CCFA (FRENCH VEHICLE MANUFACTURERS) CONTRIBUTION TO THE EUROPEAN COMPETITIVENESS DEBATE CCFA welcomes the European Commission s invitation to give their views on what (and how) would be the more appropriate automotive regulatory framework of the next 10 years. Better results can only come out of a better coordination between all interested parties on the matter. Although everyone agrees on the economic importance of the European automotive sector, it is facing important new challenges (economical, environmental and social): Vehicle manufacturers are operating on a world market and face increasing competition; this implies that they must maintain and improve their profitability in order to keep up with their competitors. Growing resources will be needed to retain their position on their home market and at the same time win market shares on third countries markets. In terms of Environment Protection, for many years now, French manufacturers have responded to the increasing pressure aiming at controlling emissions. The French vehicle manufacturers have engaged complex technical developments in order to offer the appropriate solution to reach the objectives of air pollutants and greenhouse gases reduction. They have always done their best to comply with future standards, proposing innovative solutions. But all these efforts are not costless. To achieve these goals, the industry needs proper lead time to develop adequate solutions but also to ensure their return on investment. Due consideration should be given at political level to the potential of car renewal measures. In terms of Road Safety, French manufacturers are taking their responsibility, and fully accept their part in this issue. In 2002, the results of a survey conducted for CCFA, showed that 84% of interviewed people believe that nowadays cars are safer than they were 10 years ago. Another interesting result lies in the fact that 94% of the interviewed people consider that road safety results mainly from the drivers behaviour. Today French car manufacturers insert complex on-board devices to help the driver, but no technology will ever replace the human being. That is why CCFA strongly recommends a systematic integrated approach while drafting environment and road safety policies. The objectives of the industry s competitiveness, better environmental performances and improved road safety require a strategy based on vehicle technology, road infrastructure and driver s behaviour. In the forthcoming developments, CCFA outlines the strength of the automotive sector, explaining what its specific features are. Through an analysis of its strengths, weaknesses, opportunities and threats, the main issues threatening the French automotive industry s competitiveness are identified and finally, specific actions are recommended. I. Situation and context of the automobile sector 1) The importance of the automobile sector in the economy The automotive industry is a driving force as a significant end market for many industries (upstream suppliers) and due to its effects on the downstream level (distribution, repairs, and maintenance activities). Therefore it is also a leading sector for employment: Direct jobs in Europe: 2 million (1 million in the suppliers sector), that is 7% of the manufacturing industry; 27/04/2005

2 Indirect jobs in Europe: 8 million (distribution network, aftermarket, maintenance, fuel supply, financing operations, logistics ) 1 ; The automobile industry is also a strong net exporter representing 5% of the European manufacturing industries export, and contributing up to 35 billion euros to the trade balance (net profit). The automobile industry is the first sectoral investor in the EU in R&D with 24% of European industrial research. It represents 340 billion euros of tax revenues (VAT, registration taxes, fuel taxes, toll etc.), that is 12% of public resources. The sector is highly concentrated at a global scale. The level of investment, R&D etc. leads to a reduction in the number of operators as shown by the past ten years mergers/acquisitions/alliances. Europe is the first world producer with 34% of the global volume 2. 2) Distinctive features of the automobile product In a comprehensive way, «Automobile» means: passenger cars, but also commercial vehicles. All these vehicles have distinctive features: The passenger car, is a durable consumer good (over 14.9 million cars sold in 2004 in the UE - 25 countries-), of high economic value (important household expenditure). The life cycle of a passenger car is: - Preparatory cycle: 2 to 3 years; - Development: about 30 months; - Lifetime 3 : 6 to 7 years. The heavy commercial vehicle ( heavy trucks - +3,5t - sold in 2004 in Western Europe - 17 countries) is an investment good (B to B), a specific product, subject to the «investor s» demand, but also to the road professional s demand. The classical heavy truck has four phases: - 1 st phase (2-3 first years): optimization, intensive use ( km/year), international routes; - 2 nd phase (2-3 years to 8-10 years): regional routes, engine renovation (the truck may have run 1 million km by then); - 3 d life (10-12 years): local use or exportation (1.2 million km); - 4 th life (up to 20 years): minor use. The light commercial vehicle is a capital good (1.9 million light commercial vehicles - -3,5t - sold in 2004 in Western Europe - 17 countries), but, from an industrial point of view, it is closer to the passenger car (as it often uses the same production techniques/facilities, with volumes similar to those of the car industry). At their design and manufacturing level, these products are high added value goods in terms of research, technology and qualifications. The automobile is a complex product from different points of view: Society: it is subject to strict requirements in terms of environment, energy (consumption reduction), safety ; 1 ACEA source. 2 Regarding the French industry, it represents in Western Europe one car sold out of four, one light commercial vehicle out of three and one heavy truck out of nine. 3 Furthermore, car manufacturers have the obligation to provide spare parts for a period of 10 years after the end of production of the vehicle. 27/04/2005 2

3 Consumer: a motor vehicle must satisfy various expectations, sometimes contradictory, and even among consumers (in terms of mobility, comfort, pleasure, security, performance ). At the same time, all these elements must be compatible with the production requirements, and the price that the client is willing to pay. Technique: it integrates sophisticated materials (new, resistant, light, deformable in case of impact) and on-board electronics 4, but also complex devices allowing to deal with the consumption, comfort, and driving issues; The automotive industry needs to be constantly more innovative: on the one hand, consumers ask for more differentiation, and on the other hand, the legislation is more and more demanding. We estimate that 50% of the products that we will use in 2010 do not yet exist. The investment in R&D is significant and is still higher for commercial vehicles for which the launch of a study on an engine or a body generates higher costs. This is due to technical aspects and to the fact that the volumes required to amortize those costs are smaller than those of the passenger cars. The life cycle of the product consists of various phases: engineering (preparatory works and development), production, sale, after-sales and recycling. Therefore the manufacturer becomes the designer, the producer and is responsible with respect to the customer. The automobile is an economic development factor as it enhances mobility. Its development is linked to that of the infrastructures, and all the more as in Europe, 89% of the inland transportation of travellers and 79% of the inland transportation of goods are done by road. Despite the EU efforts to disparate economic growth from transport growth, in fact, they are still correlated 5. Automobile is a combination of requirements sometimes contradictory between its economic characteristics (including energy consumption), legislation, and the expectations and means of the consumer. II. The issues of the automobile industry 1) Market acceptance Today, the European Community issues a sectoral and horizontal regulation corpus, technical and non technical, that affects more and more aspects linked to the vehicle; emissions, safety, distribution, recycling to which are added a number of non regulatory constraints (e.g.: CO 2 Commitment, Pedestrian Protection). This high level of regulation generates costs that the manufacturers cannot entirely pass on to the consumer, because the market is not ready to accept it. Those costs are therefore borne by the manufacturers; they have a direct impact on their level of profitability, and thus weaken the industry, especially the European industry. Furthermore, the global level of prices is declining in Europe despite major new developments and improvements of equipment and vehicles. This contradiction is due to a weak growth on a highly competitive, price constraint market and mostly composed of medium and low range products. Furthermore, the burdensome regulatory framework contributes to pull the market down and drives consumers to choose between their financial means, needs and obligations, as they are highly sensitive to the vehicle s prices. There is a growing imbalance between the citizen s concerns and the consumer s demands: the citizen demands what the customer refuses. 4 For example, high technology has always been a top priority for heavy trucks, to optimize energy consumption for instance. Thanks to technology, the consumption of those vehicles improved from 60 l/100km 30 years ago, to 30 l/100km today. 5 Commission s DG Transport white book entitled "European transport policy up to 2010: time for choice. 27/04/2005 3

4 2) Need for a strong and profitable home market A strong home market is a key condition to support the competitiveness of the European automotive industry, to finance innovation and to sustain the industry s international development. In Europe, the manufacturers clearly operate on a renewal market. Nevertheless, even if these markets only know weak growth rates, they are still the basis of the French manufacturers activities contributing to the resources required for the financing of their strategies 6 (e.g.: in 2004, Renault and PSA Peugeot Citroën made 72% of their sales on the European market - Europe of 17 -, Renault Trucks made 85% - Europe of 25 -). The European vehicle manufacturers profitability on their home market is structurally weaker than that of their competitors on their own referential market (3% in Europe, 8 % 7 and 5-6% in the United States and in Japan). This can be mainly explained by the highly competitive intensity, of the mix 8 product less profitable in Europe and of the regulatory burden. In Europe: The market is still unachieved (internal factors) because of: - Penalizing automotive tax system due to the lack of harmonization (tax on acquisition, registration taxes, VAT, plus user charges- toll, fuel -); - Conditions increasing the costs of mobility (e.g.: discrepancy between costs for the use of the infrastructures from a member State to another); - A deterioration of the rules of intellectual property which makes the industry more sensitive to counterfeiting (especially for parts); - The regulatory burden in general; A growing competitive intensity (external factor), because of a strong presence of all the global manufacturers, fostered by a wide opening of the European market (in 2003, on a sluggish market, only the Japanese and Korean manufacturers managed to increase their market shares). 3) Third market access European legislation is too self-centred, and does not take into account the evolution of third countries whose objectives are different (example of the Kyoto protocol aiming at the reduction the emissions of dioxide and other greenhouse gases that the United States did not ratify, which leads to very strict environmental policies in Europe). Due to the high number of contradictory and restricting EU regulations, genetically European designed products are created, with numerous specific and costly features, which make the European vehicle unsuitable with regard to: Third countries legislations; The demand of third markets whose customers do not always value the European characteristics (EuroNCap does not mean much outside Europe); Local capacities, for example: manufacture (lack of raw material, complex processes, suppliers ) and repair (complex electronics, sensible components - airbags etc.-). The lack of global harmonization contributes to third markets protection and limits the access of European products to these markets (e.g.: the cost of adaptation of the product to the local regulation and the costs of the test). Additionally, European exports on third markets are negatively affected by the exchange rates. 6 Even the Chinese automotive market fell (prevision for 2005: 7%; against 17% in 2004 and 56% in 2002). 7 All manufacturers established in the zone (including Japanese). 8 Part of each segment in the market. 27/04/2005 4

5 As a conclusion, to remain competitive, the vehicle manufacturers must be able to meet the political pressures, the customers demand on their own market and on third markets. III. Analysis of the Strengths and Weaknesses/ Opportunities and Threats for the French Automotive industry Internal External STRENGTHS The French automotive industry, a strong economic driver: Leading job sector; Strong net exporter; 1 st sectoral investor in R&D; Economic development factor. The French vehicle manufacturers: Value and brand recognition; Strength of the groups (alliance/partnership strategy); Product creativity. The market/the resources: Wide internal market (450 million / 1 st world market); Various/sophisticated demand; Modular value chain; Skilled labour (low-cost in the new member States); Strong innovation capacity / strong potential in R&D; Quality of the infrastructures (transport and telecommunication networks). OPPORTUNITIES Growing internationalisation of the French vehicle manufacturers; Extended opportunities due to the good results of the French groups; Opportunities in emergent countries: China but also other growing markets (Argentine, Brazil, Turkey, Iran); Tendency to improve market access (WTO); Technical harmonization in progress (WP29). WEAKNESSES Complex automobile product, submitted to strict and growing demand: Society: environment / energy / safety; Consumer: mobility/comfort/pleasure/security/performance; Need of competitive prices (market acceptance problem: the citizen demands what the consumer refuses); Steady real prices despite the subsequent acquiring of wealth of the equipments and the vehicles. The market: European Market (UE 15) is mature / renewal / weak growth / low margin vehicles; The manufacturers profitability on the European market is structurally weaker than that of the third markets, notably because of the competitive intensity; The structure of the market is still fragmented: different demand from a member State to another and single market unachieved (e.g.: non harmonized automotive tax system); Strong foreign penetration in Europe; Rigidity and costs of labour; Inadequacy of public expenditures in R&D: lack of integration between national expenses and European expenses; Inadequacy of public expenditures in education / training; Abundant, complex and sometimes contradictory regulation, + lack of visibility for the industry (lead time). Legal basis (art.95 VS art.175). THREATS Absence/low market share of the French manufacturers on the profitable developed market (United States and Japan); Growing tendency to over-regulation affecting profitability in Europe but also disqualifying the European products on third markets (third markets legislation is often less restrictive, absence of appreciation of the European characteristics); e.g.: Hardening of the CO2 emissions norms; Technical harmonization still insufficient; Lack of forthcoming investment in road infrastructures + congestion problems not yet entirely resolved; Euro/Dollar s exchange rates; Jamming of the international negotiations (WTO, Mercosur etc.); Multiplication of the non tariff barriers; Potential capacity problems of some markets. 27/04/2005 5

6 IV. Recommendations As regards the Lisbon objectives, and within the sustainable development framework, the balance between the competitiveness of the industry, the protection of the consumer and the preservation of the environment must be restored. 1) Improve the regulatory framework EU regulations must always be thought, elaborated and applied within the framework of industry s competitiveness and take into account the cost efficiency approach. While drawing up the regulatory framework, economic impacts should be taken into account to maintain the conditions in which the industry operates and to promote its competitiveness. «Over-regulation» must be avoided as much as contradictory effects. In this respect, systematic impact assessments 9 must be a prerequisite for launching any major new policy or regulatory initiative. The predictability of regulation must be improved. An integrated approach should be systematically implemented while drafting the EU legislation, so that all interested parties are involved (e.g.: with regard to road safety, the manufacturer is not the only parameter to be taken into account, the driver s behaviour and the quality of the infrastructures should also be taken into account). The «technological neutrality of the legislation» principle should be kept in mind while elaborating EU legislation. To maintain competition between the manufacturers, regulations should be drafted in terms of goals to be reached instead choosing the best available technology solutions. To ensure uniform application of EU legislation in the 25 member States, article 95 of the Treaty (Internal Market) should be the legal basis, instead of article 175 (Environment) (e.g.: ELV). Global harmonization of regulations is necessary to take into account the global dimension of the automobile product and the international operations of the industry when setting up the various European policies (for example in terms of environment - CO 2 /émissions - and safety). In the harmonization process, preference should be given to the existing European regulations. Harmonization is a strategic issue as regards third market access. About the consultation process : electronic consultations, doubtful on a methodological point of view, cannot legitimate future European policies as the way it is formulated does not meet the 9 The French vehicle manufacturers fully support ACEA s position on Integrated Impact Assessment: impact assessment applies essentially to major EU regulatory proposals and should be extended to technical updates, including adaptations to technical progress. The impact assessment should be objective and transparent. A specific formation within the Commission, independent from the lead DG, should be created to carry out impact assessment in a scientific, balanced and objective way. This formation should assess macro-economic and sectoral aspects of proposed EU legislation, providing the EU institutions and industry with a fact-based cost-benefit assessment, taking into account the existing regulation. It should also carry ex-post impact assessment on existing legislation. The impacts should as far as possible be expressed in economic, social and environmental terms: assessments should not only evaluate the cost-benefits but also the cost-efficiency of the EU regulatory proposal. Furthermore, in a world characterised by continuous globalisation, it is essential that impact assessments are carried out with a global perspective: proposed policy should also, where relevant, be assessed in terms of their internal (within the Union) and external impacts (outside the Union). Involvement of stakeholders in the assessments at as early a stage as possible should be systematic, and according to a coherent, well-established and predictable consultation process. 27/04/2005 6

7 objective pursued; the public it is aiming at is not well-targeted, and the simple counting of the answers give rise to demagogic interpretation (e.g.: recent consultation on air quality). 2) Strengthen the home market Proceed to the achievement of the single market with the harmonisation of the European policies, especially in terms of taxation (example of the automobile tax system: French manufacturers support the principle consisting in replacing tax on acquisition by tax on use). Increase the R&D budget and promote innovation: Generally speaking, national and European subsidies are still compartmentalized, which leads to a poor efficiency of the public funds. In the United States, 127 billion dollars per year are devoted to research, and the innovative sectors contribute up to 50% to the economic growth. For the European Union, less than 3 billion euros (4 billion dollars) per year are invested; the member States are not yet meeting the EU objective of spending 3% of their GDP in R&D by But, if Europe wants to reach that goal, the volume of these spending should raise by 10% per year that is 4 times faster than the possible GDP growth 10. Even if the efforts granted by the manufacturers are the most important of the whole French industry, the public contribution, national and European, is still insufficient. With an annual investment of more than 24 billion euros, the automotive industry represents the largest sectoral R&D investor in Europe (24% of total R&D spending). Therefore the industry needs a adequate Intellectual Property protection to preserve a return on their investment. The automotive industry welcomes the proposition of the Commission on land transport in the 7 th Framework programme but would highly recommends the creation of a specific programme devoted to R&D and innovation needs of the road transportation sector. Develop and improve the infrastructures, especially EU road infrastructures, to promote mobility. Due to the importance of the mobility factor in economic growth, it is essential to maintain a competitive access to these infrastructures. A consistent flow of all modes of transportation should be provided as they account for the European prosperity, and they also allow meeting the environmental targets set by European policies (emissions reduction). 3) Promote third market access Promote third market access by reducing the tariff and non tariff barriers in major emerging markets as regards vehicles, spare parts and components. Develop the technical harmonization efforts to limit the costs due to adaptation to the local regulation for vehicles sold on third markets. Benchmarking with other regions. In a world characterised by continuous globalisation, it is essential to open up, and eventually take as an example what is being done in the field of industrial policy in other areas. In the United States for example, industrial policy is a major political concern. 10 Source : Institut Montaigne 2004 report. 27/04/2005 7