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CCFA (FRENCH VEHICLE MANUFACTURERS) CONTRIBUTION TO THE EUROPEANCOMPETITIVENESS DEBATE

CCFA welcomes the European Commissions invitation to give their views on what (and how)would be the more appropriate automotive regulatory framework of the next 10 years. Better resultscan only come out of a better coordination between all interested parties on the matter. Althougheveryone agrees on the economic importance of the European automotive sector, it is facingimportant new challenges (economical, environmental and social):

Vehicle manufacturers are operating on a world market and face increasing competition; thisimplies that they must maintain and improve their profitability in order to keep up with theircompetitors. Growing resources will be needed to retain their position on their home market and atthe same time win market shares on third countries markets.

In terms of Environment Protection, for many years now, French manufacturers have respondedto the increasing pressure aiming at controlling emissions. The French vehicle manufacturers haveengaged complex technical developments in order to offer the appropriate solution to reach theobjectives of air pollutants and greenhouse gases reduction. They have always done their best tocomply 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 toensure their return on investment. Due consideration should be given at political level to thepotential of car renewal measures.

In terms of Road Safety, French manufacturers are taking their responsibility, and fully accepttheir 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. Anotherinteresting result lies in the fact that 94% of the interviewed people consider that road safety resultsmainly from the drivers behaviour. Today French car manufacturers insert complex on-boarddevices to help the driver, but no technology will ever replace the human being.

That is why CCFA strongly recommends a systematic integrated approach while draftingenvironment and road safety policies. The objectives of the industrys competitiveness, betterenvironmental performances and improved road safety require a strategy based on vehicletechnology, road infrastructure and drivers behaviour.

In the forthcoming developments, CCFA outlines the strength of the automotive sector, explainingwhat its specific features are. Through an analysis of its strengths, weaknesses, opportunities andthreats, the main issues threatening the French automotive industrys competitiveness are identifiedand 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 (upstreamsuppliers) 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;

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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 Europeanmanufacturing industries export, and contributing up to 35 billion euros to the trade balance (netprofit).

The automobile industry is the first sectoral investor in the EU in R&D with 24% of Europeanindustrial research.

It represents 340 billion euros of tax revenues (VAT, registration taxes, fuel taxes, toll etc.), that is12% of public resources.

The sector is highly concentrated at a global scale. The level of investment, R&D etc. leads to areduction 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. Allthese 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 apassenger car is:- Preparatory cycle: 2 to 3 years;- Development: about 30 months;- Lifetime 3: 6 to 7 years.

The heavy commercial vehicle (371000 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 investors demand, but also to the road professionals demand. The classical heavy truck has four phases:- 1st phase (2-3 first years): optimization, intensive use (150 000 km/year), international routes;- 2nd phase (2-3 years to 8-10 years): regional routes, engine renovation (the truck may have run

1 million km by then);- 3d life (10-12 years): local use or exportation (1.2 million km);- 4th 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 closerto 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 vehicleout 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.

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Consumer: a motor vehicle must satisfy various expectations, sometimes contradictory, and evenamong consumers (in terms of mobility, comfort, pleasure, security, performance). At thesame time, all these elements must be compatible with the production requirements, and the pricethat 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 theconsumption, comfort, and driving issues;

The automotive industry needs to be constantly more innovative: on the one hand, consumers ask formore differentiation, and on the other hand, the legislation is more and more demanding. Weestimate that 50% of the products that we will use in 2010 do not yet exist. The investment in R&Dis significant and is still higher for commercial vehicles for which the launch of a study on an engineor a body generates higher costs. This is due to technical aspects and to the fact that the volumesrequired 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 anddevelopment), production, sale, after-sales and recycling. Therefore the manufacturer becomes thedesigner, the producer and is responsible with respect to the customer.

The automobile is an economic development factor as it enhances mobility. Its development islinked to that of the infrastructures, and all the more as in Europe, 89% of the inland transportationof travellers and 79% of the inland transportation of goods are done by road. Despite the EU effortsto disparate economic growth from transport growth, in fact, they are still correlated 5.

Automobile is a combination of requirements sometimes contradictory between its economiccharacteristics (including energy consumption), legislation, and the expectations and means of theconsumer.

II. The issues of the automobile industry

1) Market acceptance

Today, the European Community issues a sectoral and horizontal regulation corpus, technical andnon 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 theconsumer, 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 Europedespite major new developments and improvements of equipment and vehicles.

This contradiction is due to a weak growth on a highly competitive, price constraint market andmostly composed of medium and low range products. Furthermore, the burdensome regulatoryframework contributes to pull the market down and drives consumers to choose between theirfinancial means, needs and obligations, as they are highly sensitive to the vehicles prices. There is agrowing imbalance between the citizens concerns and the consumers demands: the citizen demandswhat the customer refuses.

4 For example, high technology has always been a top priority for heavy trucks, to optimize energy consumption forinstance. Thanks to technology, the consumption of those vehicles improved from 60 l/100km 30 years ago, to30 l/100km today.5 Commissions DG Transport white book entitled "European transport policy up to 2010: time for choice.

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2) Need for a strong and profitable home market

A strong home market is a key condition to support the competitiveness of the European automotiveindustry, to finance innovation and to sustain the industrys international development.

In Europe, the manufacturers clearly operate on a renewal market. Nevertheless, even if thesemarkets 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 strategies6

(e.g.: in 2004, Renault andPSA Peugeot Citron made 72% of their sales on the European market - Europe of 17 -, RenaultTrucks made 85% - Europe of 25 -).

The European vehicle manufacturers profitability on their home market is structurally weaker thanthat of their competitors on their own referential market (3% in Europe, 8 % 7 and 5-6% in the UnitedStates 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 moresensitive 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 sluggishmarket, 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 thirdcountries whose objectives are different (example of the Kyoto protocol aiming at the reduction theemissions of dioxide and other greenhouse gases that the United States did not ratify, which leads tovery strict environmental policies in Europe).

Due to the high number of contradictory and restricting EU regulations, genetically Europeandesigned products are created, with numerous specific and costly features, which make theEuropean 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 regulationand 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.

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As a conclusion, to remain competitive, the vehicle manufacturers must be able to meet the politicalpressures, the customers demand on their own market and on third markets.

III. Analysis of the Strengths and Weaknesses/ Opportunities and Threats for the FrenchAutomotive industry

STRENGTHS WEAKNESSES

Internal

The French automotive industry, a strongeconomic driver : Leading job sector; Strong net exporter; 1st 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).

Complex automobile product, submitted to strict andgrowing 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, notablybecause of the competitive intensity;

The structure of the market is still fragmented: differentdemand from a member State to another and single marketunachieved (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 Europeanexpenses;

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).

OPPORTUNITIES THREATS

External

Growing internationalisation of the Frenchvehicle manufacturers;

Extended opportunities due to the good resultsof the French groups;

Opportunities in emergent countries: China butalso other growing markets (Argentine, Brazil,Turkey, Iran);

Tendency to improve market access (WTO);

Technical harmonization in progress (WP29).

Absence/low market share of the French manufacturers onthe profitable developed market (United States and Japan);

Growing tendency to over-regulation affecting profitabilityin Europe but also disqualifying the European products onthird markets (third markets legislation is often lessrestrictive, absence of appreciation of the Europeancharacteristics); e.g.: Hardening of the CO2 emissionsnorms;

Technical harmonization still insufficient; Lack of forthcoming investment in road infrastructures +congestion problems not yet entirely resolved;

Euro/Dollars exchange rates; Jamming of the international negotiations (WTO, Mercosur

etc.); Multiplication of the non tariff barriers; Potential capacity problems of some markets.

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IV. Recommendations

As regards the Lisbon objectives, and within the sustainable development framework, the balancebetween 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

industrys competitiveness and take into account the cost efficiency approach.

While drawing up the regulatory framework, economic impacts should be taken into account tomaintain 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, systematicimpact assessments 9 must be a prerequisite for launching any major new policy or regulatoryinitiative. 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 notthe only parameter to be taken into account, the drivers behaviour and the quality of theinfrastructures should also be taken into account).

The technological neutrality of the legislation principle should be kept in mind whileelaborating EU legislation. To maintain competition between the manufacturers, regulationsshould be drafted in terms of goals to be reached instead choosing the best available technologysolutions.

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 theautomobile product and the international operations of the industry when setting up the variousEuropean policies (for example in terms of environment - CO 2 /missions - and safety). In theharmonization 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 ACEAs position on Integrated Impact Assessment: impact assessmentapplies essentially to major EU regulatory proposals and should be extended to technical updates, including adaptationsto technical progress.The impact assessment should be objective and transparent. A specific formation within the Commission, independentfrom the lead DG, should be created to carry out impact assessment in a scientific, balanced and objective way. Thisformation should assess macro-economic and sectoral aspects of proposed EU legislation, providing the EU institutionsand industry with a fact-based cost-benefit assessment, taking into account the existing regulation. It should also carryex-post impact assessment on existing legislation.The impacts should as far as possible be expressed in economic, social and environmental terms: assessments should notonly 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 outwith a global perspective: proposed policy should also, where relevant, be assessed in terms of their internal (within theUnion) 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 acoherent, well-established and predictable consultation process.

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objective pursued; the public it is aiming at is not well-targeted, and the simple counting of theanswers 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 3billion euros (4 billion dollars) per year are invested; the member States are not yet meetingthe EU objective of spending 3% of their GDP in R&D by 2010. But, if Europe wants toreach that goal, the volume of these spending should raise by 10% per year that is 4 timesfaster than the possible GDP growth 10.

Even if the efforts granted by the manufacturers are the most important of the whole Frenchindustry, the public contribution, national and European, is still insufficient. With an annualinvestment of more than 24 billion euros, the automotive industry represents the largestsectoral R&D investor in Europe (24% of total R&D spending). Therefore the industryneeds a adequate Intellectual Property protection to preserve a return on their investment.

The automotive industry welcomes the proposition of the Commission on land transport inthe 7 th Framework programme but would highly recommends the creation of a specificprogramme devoted to R&D and innovation needs of the road transportation sector.

Develop and improve the infrastructures, especially EU road infrastructures, to promotemobility. Due to the importance of the mobility factor in economic growth, it is essential tomaintain 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 alsoallow 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 emergingmarkets 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 isessential to open up, and eventually take as an example what is being done in the field of industrialpolicy in other areas. In the United States for example, industrial policy is a major political concern.

10 Source : Institut Montaigne 2004 report.