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Will the $8.8B Bailout Bring France Auto Sector Back on Track?

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The France auto industry has been gradually grinding to a halt amid production cuts, factory closures, faltering demand and weak consumer sentiment in the wake of the COVID-19 pandemic. To revive the country’s distressed auto industry, the French government announced an 8 billion euros (or $8.8 billion) aid package.

Auto Sales in France Collapse Amid Coronavirus Crisis

Car sales in France during the month of March and April tanked 72% and 88.8% year over year, respectively, thanks to coronavirus-induced lockdown. New plug-in car registrations also fell off the cliff. President Emmanuel Macron said that 400,000 unsold cars are sitting idle in factories and parking lots. By the end of June, there would be 500,000 unsold vehicles, which is unprecedented for the sector. Around 4,000 of the 400,000 workers employed directly in the auto sector have been affected by the pandemic. The number of affected employees would almost double if associated services are taken into account.

The auto industry in France has been badly hit by the deadly virus at a time when it was already grappling with challenges related to the rollout of EVs and detrimental effects of trade wars. Carmakers were already caught in the crossfire of the U.S.-China trade tiff, as the auto industry is complex with supply chains crossing borders. As we know, Europe is heading toward a material tightening of carbon emissions in 2020 and 2021. Switch to electro mobility will require high capital investments but the trade tussle worsened the cash position of various premium manufacturers. As if these concerns weren’t enough, the coronavirus outbreak further ripped apart the auto market, in turn denting customer traffic in showrooms and causing supply chain disruptions. 

Aid Package Set to Reboot the Sector, EVs in Focus

The $8.8-billion financial stimulus aims at boosting a sector brought to its knees by the coronavirus. Ramping up production and sales of electric vehicles (EVs) is central to the plan. President Macron wants France to become the leading producer of clean cars in Europe, with production of more than 1 million electric and hybrid cars per year over the next five years. The plan is aimed at ensuring that the nation’s automotive assemblers and suppliers emerge strong from the coronavirus crisis to become leading global manufacturers and exporters of clean vehicles in the future. 

The stimulus also aims to ‘relocalise’ manufacturing in the country and boost a scrapping program to get high-polluting older models off the road. The plan will support for research into hydrogen power and self-driving cars. Macron’s plan includes a €600-million fund to acquire stakes in struggling suppliers and consolidate them for strengthening the industry as it invests in automation. In an attempt to rev up the EV market, the country targets to install 100,000 charging stations by 2021.

The plan also includes 1 billion euros in subsidies to stimulate EV purchases. In a bid to boost flagging demand, Macron announced that the consumer incentives for buying EVs will rise to 7,000 euros from 6,000 euros. There will be a 2,000-euro bonus per hybrid rechargeable car. Business customers would get a 5,000-euro bonus. Effective Jun 1, an incentive of 3,000 euros will be offered for converting from a petrol-fueled car to a lower-emission model. Around 5,000-euro bonus will be offered to those who will upgrade to an EV.

Lifeline for French Carmakers, Renault Revamp

French auto bigwigs including Groupe PSA and Renault S.A. (RNLSY - Free Report) , along with several auto suppliers have welcomed the government’s move to rescue the country’s ailing car industry, which is critical to the French economy. Renault currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Per various media sources, the €8-billion package includes state loan worth 5-billion euros slated for the troubled carmaker Renault. The automaker, in which the French state holds a 15% stake, is reeling under financial crisis. Even before the virus eruption, Renault had been crippled by the departure of CEO Carlos Ghosn, who was arrested in 2018 over allegations of financial misconduct. The firm delivered its worst financial performance in a decade in 2019 and the coronavirus further added to the woes. Renault’s factories in France had been shuttered since mid-March, with operations resuming only this month. The financial incentive comes as a breather for the company, which is set to announce the details of a sweeping cost-cut program of €2 billion later this week.

PSA and Renault have pledged to increase local production of EVs and components. Notably, Macron announced that Renault will join PSA and energy giant TOTAL S.A. (TOT - Free Report) in an all-French venture to develop batteriesfor the rechargeable auto industry.Renault is likely to develop a 100 kilowatt-hour electric motor for Renault-Nissan alliance vehicles at its site in Cleon, France. Notably, PSA — which is likely to soon merge with Fiat Chrysler (FCAU - Free Report) to create the world’s fourth-largest automaker — would be producing a full-electric 3008 compact SUV at its plant in Sochaux. PSA plans to increase the production of green vehicles from zero last year to 450,000 annually, while Renault intends to triple output by 2022.

Final Thoughts

Indeed, the injection of $8.8 billion will provide respite to the embattled auto industry of France. The package certainly sets out a new ambition for the nation’s auto sector. However, France will indeed face fierce competition from Germany in its quest to become Europe’s top producer of green vehicles. As Europe takes a global lead in EVs due to stringent emission regulations, German auto giants including Volkswagen (VWAGY - Free Report) , Daimler (DDAIF - Free Report) and BMW AG (BAMXF - Free Report) are fast stepping up their electrification efforts. Volkswagen alone intends to invest 60 billion of euros in e-mobility and digital tech by 2024. Agreed, the package brings a sigh of relief but only time will tell if France will be able to achieve its aim of becoming Europe’s EV leader.

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