Friday, 25 June 2010

Companies Focus – The Western 8 : Renault SA – Fighting Hard on the Western Front & Gaining Ground in the East.

Europe has undoubtedly been the focal point of the investment community in recent months. Emergence of the Greek sovereign debt concerns led to a crisis of confidence across much of Southern Europe, with even Ireland's earlier budget tightening providing little protection from the toxic 'PIGS' enclave. Portions of the CEE – most notably Hungary - have also been exposed, over-stretched public balance sheets resultant from rapid expansion over the last decade.

This ironically creates both a short-term problem, yet a long-term opportunity for the French (and German) carmakers. Having played a large part in the formation of the previous economic climb of peripheral Europe, via Renault-Nissan's Spanish manufacturing and its re-birth of Dacia (aswell as VW's SEAT & Skoda), Renault itself must now balance the realities of short-term contraction with the politically-charged tail-wind that is subtly emerging. Now that France and Germany have essentially under-written (to the value of E750bn) much of the EU debt concern via bond issuance assurance from the newly created IMF-EU backstop mechanism, the implicit presumption must be that as France's national champion Renault will benefit from future public and possibly private expenditure from such 'beneficiary' countries.

Furthermoreee, the structural changes regards national labour-force policy required by the EU-IMF essentially dismantles the overtly rigid, socially entrenched 1960s attitude toward national workforces; and that much needed shift toward far greater labour flexibility will both drive labour costs down as closed shops are opened-up and propagates the need for educational improvement: these 2 forces able to be leverage by Renault-Nissan in due course. This efficiency gain will undoubtedly be used to off-set a level of near endemic French operations protection, but does allow portions of its EU operational base to align to realities prevalent across the rest of the globe..

This far-horizon expectation combined with its alliance global footprint, and future efficiency gains from the announced Daimler alliance with Europe, plus sustained sales performance throughout the western economic upturn in recent quarters puts Renault ahead of the remaining mass European car producing pack, even as a strengthening Yen slightly undermines the Nissan bottom line contribution going forward.

Critically for investors, Renault offers both positive FCF looking across the remainder of 2010, the ability to maintain its market share increases and unlike other manufacturers still has substantial implicit government backing as a last resort – whilst remaining a listed entity - something very very far away but there all the same if ever the need arose.

Q1 2010 Performance -

This quarter saw the corporation's sales figures (in percentage terms) beat the global and regional TIVs. Back in late late April CFO Thierry Moulonguet and Jerome Stoll (EU regional head) veritably beamed as Renault reported industry beating sales gains and minimised sales-losses for its passenger cars and commercial vehicles.

[NB Dominique Thormann appointed as Group CFO from July 1st 2010].

Set against a Q1 Global improvement of 19.3% Renault scored +32%. In Europe versus general improvement of 9.7% it scored +37.7%. In the Euro-Med region versus general a decrease of -11.7% it scored -0.5%. In the Americas (Central & South) versus 10.9% general improvement it reached +27.4%. Eurasia saw a -25% decrease, yet Renault improved by +6.5%. In Asia-Africa versus a regional uptick of 33.8 it scored +40.8%. Gains were made in 13 of its top 15 sales countries, with a massive 76% rebound in S.Korea via its 'homeland' Samsung JV.

Comparing Q109 vs Q1 2010, the model mix was much improved with the introduction of new Megane, its Scenic variant the CoG for both the model range and still (as originator and benchmark setter) the star performer for Europe's highly popular C-segment MPVs. Indeed, Renault has comfortably outperformed the YoY EU market's TIV increase across all segments except large/exec cars – the latter as expected.

The Twingo attraction rate was x12 of its class, the Clio x3.2, the Megane x3.8 (it being the best performer in growth, the new range in its variant guises, up 46,000 units (+61%). LCVs in general reaching x4.

Thus Renault remains the EU's #3 car producer and #1 in LCVs.

This translated into the following income:
[NB the details officially provided were very brief, presumably to highlight the 'good news' figures, yet also providing little information from which analysts could construct detailed pictures]

In Q1 2010 the Autos division proffered a Revenue of E8,642m relative to Q109's E6,631m, (so up +30.3%). Of this significant boost, Europe represented 15.6 percentage points, the combined regions of Euromed + Eurasia + Americas + Asia-Africa gave 11.5 percentage points, the remaining 3.2 percentage points from other operations.

The majority of income was directly related to the major volume increase of 25% YoY, with the weakening Euro providing a 2.5% FX boost, and 3.2% gained from partner company income streams.

Sales Financing via RCI Banque gave a reduced Revenue of E430m versus E436m the previous year, (so down -1.4%). The new customer loan level improved by 27% or so YoY with 227,400 new contracts surpassing 178,700, whilst the outstanding loan book value rose by 1.5% to E20.5bn from E20.2bn a year earlier.

Thus Group Revenues increased overall to E9,072m from E7,068m, (up 28.4%).

Strategic -

Having flailed previously in North America - even with a 1980s Chrysler connection - Renault's global growth ambitions (unlike FIATs) precludes the US and Canada; instead targeted at easier access, less harshly competitive (and arguably value-creating vs value-destructive) EM regions.

As such it appears to wish to strengthen in an 'outward ripple' fashion, from the long-established foothold via colonial French roots in Northern Africa (including a new Moroccan plant due in 2012), across to other typically Muslim states (such as its Iranian JV 'PARS') and throughout Asia Minor. Whilst also obviously recognising the massive potential of the Latin American economic wave and the longer-term picture for Africa; especially so given Nissan's strong regional reputation..

Recent years have seen a global reach strategy which utilises both a JV business model approach where politically necessary with local (under-achieving or strategically placed) auto-companies, and 'go-it-alone' approach where the absence of regulatory limitations or no readily viable domestic 'leap-frog' companies to gain market-share are present.

Having conquered the CEE states and gained ground in W.EU with Dacia, and a slow erratic presence in Iran via the PARS JV (with Khodro & Saipa), Renault wishes to maintain its momentum by exploiting similar opportunities and re-plays elsewhere.

Since 2008, the Russian JV with Avtovaz is used to access the CIS region of Upper Asia. The credit crisis generated temporary friction in the relationship as Russian car sales plummeted, harshly devaluing the company, with demands from Moscow's that Renault contribute more cash to maintain its 25% share. Ghosn rightly stood firm, the troubled waters have been largely eased with a recent show of good faith by Renault In support of the Russian government's Avtovaz's '2020 Plan' Nissan has now become a partner, the tri-alliance designed to expand the members' combined market share from today's 30% to a goal of 40% by 2015. Technical and operational synergies with critical local sourcing and staff training improvements are envisaged that reach across the board from: platform sharing, procurement, production, R&D, sales and marketing, logistics etc.

In the Asian sub-continent, Renault India has been operational, although relatively low key, since 2005, the initial Mahindra distribution relationship giving Renault market access dissolved. Having gained a foothold it grew its own dealerbase and for operational purposes replaced a market-facing Mahindra with a value-chain facing Bajaj, forming a logistics base in Poona and creating an NPD centre in Mumbai. Importantly, moving on from Mahindra production of Logan, its first official Renault-Nissan plant was inaugurated in Chennai in March set to producee 400k units p.a and seeking to provide a full Renault model range in India by 2014 offered from over 35 city-centres.

There is also the promise of an ULC (ultra low cost) car (at $2,500) being formed by Renault-Nissan-Bajaj and to be manufactured in Maharashtra state in a dedicated factory – akin to TATA's Nano. Initial concept renderings suggest the car will be derived from the new Wind model available in Europe, itself derived from the Twingo platform. Thus the ULC business model could be possibly predicated on the fact that much of the capital investment cost has been born by Twingo & (high margin) Wind NPD programmes, this allows the official ULC programme costings to access a largely amortised 'parts-bin' for a locally sourced, piece-part only, low cost BoM and with less 'roboticisation' affords the use of low cost local labour content. Thus the cost – if indeed really $2,500 and not a Nano like publicity stunt – is absorbed in the global platform business case and not created through the ULC's unique NPD process. This highlights the respective TATA vs Renault business positions and demonstrates the kind of industrial economic leverage brought to bare by western players relative to India's domestic firms reliance upon core competence capabilities.

Compared to others Renault arrived relatively late to India, so has had to demonstrate its commitment via a broad-spread of activities reflective of its long-term intention as a 'new domestic' player. Whilst using bridging relationships with local corporations that mirror the likes of Maruti-Suzuki, reading between the lines it seems that Renault will prefer to build as much independent autonomy within the country, so local ties diminishing as it gains strength in the years to come..
[NB. The name Renault-Nissan Private Ltd has been tellingly adopted]. Such advancing steps will be taken in a necessarily slow manner so that Renault can tip-toe through the political terrain, utilising government subsidy/assistance where possible (typically via JV operations) to build its growth base across all upstream & downstream aspects of the full value chain

This EM nation approach was envisaged over a decade ago Renault took the decision to create a dual-aspect platform strategy which reflected the needs (regulatory and consumer) of both advanced and emerging regions, the former recycled into the latter as time passed, so effectively recycling the invested funds of developmental & product testing effort and (amortised) tooling for long-life use and extended revenue generation.

Renault-Nissan China is largely predicated on the back of Nissan's progress in the country, Renault's own manufacturing ambitions set aside to allocate the essentially government allowed increase in manufacturing capacity to go to Nissan. This then set the continued Nissan lead tone, which Ghosn hopes will enable a 10% of the Chinese car market by 2013. Product to date has been imported in relatively low numbers, and adding to its Chinese drag, it has been the victim of copy-cat cloning by Sino players.

As with India, the French firm is relatively late to market with Renault badged cars, but the Renault Board could be using this period to try and re-position itself as a comparatively aspirant offering within the mass-market, given its French origins, its F1 race team and the Chinese predilection for French luxury goods. Essentially as a differentiated alternative to the German and Japanese and of course Chinese domestic players, some with only 'psuedo-British' character.

After a poor Laguna and (last generation) Scenic reception, the release of (Samsung developed) Koleos has attracted attention and sales, its NPD origins presumably adding to unit margins. The Beijing Auto show presented Clio RS, Megane Sport, Laguna Coupe and new Scenic, with the aim that such a high-level shop-window will add a halo effect to the brand's realistically miniscule public persona (at 8,000 units in 2009, 16,000 expected in 2010). However, building recognition amongst a small but socio-demographically important upper-strata city-set, is the undoubted intent. With the upcoming Fluence C-segment sedan (match-manufactured and presumably derived from Samsung) appearing in 2011.

With regard to ecological issues, the company is promoting its 2010 Eco2 Workshop, which showcases the use of various eco-directed powertrain solutions, spanning petrol & diesel ICE, Gas and Electricity, the latter vaulted by the corporate party-line as representing 10% of all new cars by 2020.

[NB. However, investment-auto-motives conjects that projecting the world's annual 2020 TIV as approximately 80 million vehicles – a conservative estimate – some 8 million electric cars would need to be produced. In perspective even after many years of UK government spending promoting and subsidising e-cars, less than 0.1% of the UK's cars are full-electric. To enable such a sea-change major internationally conjoined regulatory change is required to allow for the more tenable NEV type vehicle to emerge en mass. A more realistic prognosis that the 10% will be petrol-electric or diesel-electric hybrid based].

In 'real-world' counter-point to the EV rhetoric, E60m has been invested in expanding and updating the Lardy Powertrain R&D and Test centre outside Paris. This welcome CapEx spend assists in maintaining Renault competitive capability regards the creation of higher-efficiency, emissions leading ICE units and improved efficiency (ie reduced parasitic losses) transmission systems. Although obviously intended primarily for its own use relative to develop new family engines and re-engineer for specific worldwide regional environment demands, its in-house status critically secures any industrial lead Renault may obtain, with reduced reliance on less secure external testing facilities. Furthermore, any spare capacity at the centre will probably be offered to alliance partners Nissan and now Daimler and possibly independent European and global independent engineering companies to gain additional revenue streams from the new asset.

But of course, the headline news of April 7th has been the alliance agreement drawn-up with Daimler, with a cross-share hold of a nominal 3.1% (completed at April end, 1.55% owned by Renault & Nissan respectively). In order to complete the transaction Renault issues 10.78m new shares, simultaneously selling 0.55% of the new share capital base to the French state. The transaction brings E150m in terms of cash supply probably absorbed directly into the working capital budget.

Both Renault & Daimler recognise the detrimental effects of the high cost of capital for CapEX projects, the ever present over-capacity in Europe and their respective operational weaknesses. Thus the announced co-operation on the development of small vehicles in A and B segments (including the Smart & Twizzy joint manufacturing exercise), the development of compact vans and badge engineering & NPD opportunities across the Traffic, Master, Vito, Sprinter and feasibly HGVs, and the cross-selling and contract manufacture of proprietary technologies: a lead example being Nissan's luxury Infiniti division's adoption of Daimler's large engines. Of course, full investigation into the available cost savings made available on a project by project synergistic basis are too many to be examined here, but as previously stated, investment-auto-motives believes that whilst the breadth of inter-connectivity has been presented, the actual depth of resultant value-creation has been intentionally under-played by all 3 parties.

Lastly within the strategic realm, we look at the broader picture of scenario development for a powerful paper-based asset.....

Renault's 21.3% stake in AB Volvo Truck has been a constant source of speculation with Thierry Moulonguet's mention of possible non-core asset sales in 2010 to maintain positive FCF. This in turn prompted capital market conjecture, investors, analysts and traders alike recognising that “non-strategic” means “available for disposal at the right price”. (However, this could also be a ruse to simply lift Renault's share price, with little ultimate intention of disposal).

Sweden's Industrivarden has shown interest as a potential purchaser, stating that nothing has been informally or formally discussed with Renault, yet interestingly chose the press to avail its apparent interest.

[NB investment-auto-motives conjects that Industrivarden would probably be acting as an intermediary agent or self-positioned 'middle-man' on behalf of another investor group, possibly affiliated to Wallenberg and/or Grimaldi industrial holdings with an eye on Swedish & possibly proto-German truck manufacturer consolidation].

But looked at more closely, it seems unlikely that Renault would dispose with no strategic consideration of its own, given the use/exploitation of the Renault Truck brand – even if only remotely owned by Renault SA via AB Volvo (which itself owns Renault Truck).

Given the fact that VW is slowly seeking to consolidate its truck sector via MAN and Scania, Renault's stake sits squarely between any collaboration possibilities between AB Volvo truck and Daimler truck.

In the face of the growing VW truck threat (MAN & Scania) primarily across Europe and Latin America, it seems unlikely that Renault would willingly relinquish its brand existence within this arena, especially with large receipt, inter-purchase, fleet customers who buy across the full range of its commercial vehicles from small city vans to HGVs; and prefer a single branded fleet, even if the 2 Renault divisions are (unwittingly) separately owned.

Critically its sizable voting rights at Volvo Truck keep it both informed of insider information and provide an avenue by which to repulse any hostile take-over threat to Volvo Truck. Ultimately, its influence in Volvo Truck (& by virtue Renault truck) assists sales compatibility for its own LCV division, and critically allows it a conducting role in the orchestration of any truck sector consolidation. This the case relative to any possible 'hostile' 3rd party interest, and especially so relative to possible later-day alliance agreements between Daimler AG and AB Volvo.

(This especially prescient given the political alliance between France and Germany being strengthened to secure the strength of the EU's economic and industrial base)

[NB to that end, investment-auto-motives tables the idea that if an AB Volvo share disposal were to take place, the natural recipient would be Daimler, however Renault of course seeks best pricing so probably wishes to entertain other non-hostile party interests as 'auction dummies' to in turn lift the asset value].

Operational -

Industry observers will recognise that much of Renault's strong Q1 performance was enabled by its E3bn French government soft-loan. Designed to see it through the credit crisis, enable operational efficiency initiatives and generate French-centric production allocation; the liquidity made available has undoubtedly been a prime element in effectively boosting Renault's standing as the the depth of the recession receded and car buyers re-emerged. Such an arrangement obviously flies in the face of the true economic sense of competition theory, but for the French authorities - in historically typical socialist stance - maintaining Renault's size and stature as a French operational hub is seen as a necessary societal contribution during these wavering economic times.

Renault Cars:
The Renault brand entered the beginning of 'EU Main Street' recession in Q308 on 7.8% EU marketshare, to see share fall and re-ramp to 9.6% by Q409 and slow to 9.2% by Q1 2010. To economic purists in the Adam Smith sense, that increased market share was effectively bought by the French tax-payer.

Although filling French factory space and seemingly directing funds to RCI Banque for consumer credit purposes, Renault has also altered operations down-stream at the dealer-level to its own advantage. Inventory levels have reduced from a June 08 high of 510,000 units to a Sept 09 low of 313,000 units before new model introductions gave a ramp-up to 356,000 by Mar 2010. Expectantly, details highlight that Group owned dealers have been given preferential treatment over stock allocation for the new model Megane relative to independent dealers

As with all car-makers the company has increased its used car buy-back facility in an attempt to both boost new sales and influence the pricing (in)elasticity of used Renault vehicles.

[NB. Renault has been historically prone to “auction-house drag-down” (in the UK especially)]

The Gordini performance sub-brand was introduced on Twingo and will be applied to Clio, thereby promotingg a 3 tier performance capability/price ladder of: RS, RenaultSport & Gordini. However, given that Gordini is supposed to compete against the likes of Mini and Abarth the level of marketing effort appears lacklustre, with the once legendary name simply given a single page on Renault's main website (in the UK at least). To truly have an impact, a hyper-link should have been used to direct potential clients to a dedicated website that reflects the supposed premium quality of the marque. Although the domains name and are respectively already taken by a ski sportswear company and Gordini enthusiast club, Renault should be dedicating much more web coverage in one manner or other to generate traffic and interest. This lacklustre effort stands in contrast to the obvious time, effort and expense of the 'VeryGoodTrip' Pan-European campaign for Megane & (new) Wind coupe-cabriolets. The opposite approached
could be intentional, Renault possibly viewing that high-profile Gordini advertising may cannibalism sales of the the larger margin Wind, in which case a better psycho-graphic understanding may have improved the marketing strategy, very simplistically directing Gordini to younger men and Wind to younger women and retired couples.

Dacia Cars:
Alongside the Dacia brand has expectantly gained from the recession, seeing EU market share rise from 0.9% in Q408 to 1.6% by Q409 and Q1 2010. Beyond Logan and Sandero, the new Dacia 'soft-roader' is being introduced to expand the brand's coverage and build credibility. It is the 4th model derived from the Nissan Qashqui, Samsung QM5 and Renault Koleos platform, and should be well received by both private and municipal (typically Police) buyers in the CEE and generate stiff competition against entry level SUVs (eg Chevrolet Captiva) in W.EU markets.

Nissan Motor:
Beyond the obvious Group income contribution to Renault from its share-hold in Nissan, the Japanese partner has previously provided lead platform development for in large car and SUV products. It also provides the technical lead for R-N in the development of hybrids and EVs.

As a precursor to Renault's supposed (but to investment-auto-motives, little believed) e-car revolution, Nissan's new compact car sized Nissan Leaf EV is introduced in relatively small numbers in Japan, the US, UK, Netherlands, Portugal, China & Australia across late 2010 to mid 2012. Thus having gained LoI's with various national and state authorities, Leaf will essentially 'test the waters' of the (innappropriate) steel monocoque packaged EV practicality, durability, cost and ultimately credibility.

Of course much depends upon the continuance of a publicly funded high cost charging infrastructure, which given the perilous condition of western governments' balance sheets, looks increasingly unlikely; unless a form of credible PPI is truly instigated; national Treasury departments noting that many PPI transport projects have a reputation for being overtly biased to protecting and over-rewarding the private funding party.

[NB Given even today's level of macro and micro-levels headwinds spanning consumer resistance, regulatory requirement, rightly cautious private investment attitudes, the high cost of capital, still unproven EV business models versus overtly optimistic tech disruption 'game-changing' rhetoric from instigators (etc etc) the level of endemic value-creation already prevalent in today's auto-sector business model, investment-auto-motives believes that the investment community should not be bowled over by the ongoing mass reporting of supposed 'world saving EVs'.

Ultimately they serve only a tiny fraction of the world's true rationally and emotionally driven transportational needs, and to be sustainable the EV requires a business model by which true typically limited functionality is reflected by (parallel) low pricing to the consumer

At present in the UK the Leaf EV is due to cost £28,350 (before a 2011 £5,000 government rebate which will probably be of limited time-span and deleted as part of necessary budget savings) as compared to £19,500 for the more practical and proven hybrid Toyota Prius].

Thus whilst Nissan provides Renault with a 'good news' story, investment-auto-motives believes (as do Toyota and Honda) that its EV R&D is presently mis-directed, and if integral to its strategy aligned only to Smart ForTwo & Twizzy sized personal city micro-vehicles.

Samsung Motor:
Though Hyundai-Kia and GM dominate the S.Korean small and mid-size car market, Samsung managed to enjoy a level of historic success thanks essentially to its offering of cut-price Japanese technology – cars adapted from durability-proven Nissan's large and medium car products.

New SMC5 and SMC3 have managed to enjoy rapid consumer adoption thanks to the positive economic fortunes of S.Korea resulting from export demand pull for its high-tech products, a weaker Won and ongoing progress regards industrial reform. Strengthening the model range will be 2 new models lightly adapted from Renault Scenic and Clio.

Having proven itself to the S.Korean consumer in the past, and now riding a wave of purchase confidence, Samsung must attend and contain to any emerging problems regards product quality if it is to sustain its market position between its prime bigger domestic rival of Hyundaii-Kia, psuedo-domestic GM-DAT and Japanese imports. This especially so on the new B & C segment cars given GMDAT's recall of 60,000 vehicles for safety-critical steering and fuel storage concerns on Cruze and Captiva. This reputational hiccup for GM could be of near and long-term advantage to Samsung if it attends to quality to maintain a difference between itself and peers.

Countering this opportunity is the challenge that the US Congress is pushing the S.Korean administration to better open its doors to US made cars, so as to close the massive chasm between the 2 countries' mutual automotive export volumes : the US takes 350,000 Hyundai-Kia cars vs S.Korea in-take of 7,000 US vehicles. Given that imported vehicles would typically consist of mid and large cars, this could pose a threat to Samsung's SM5, QM5 & SM7.

However, the company is taking the opportunity to slowly grow its presence felt in Latin America, via Chile, yet will need to somehow demonstrate its consumer resonance there so as not to be swallowed by the Latin market's Big 3 players.

Renault LCVs:
The new Master van and chassis-cab is introduced, maintaining its (competition) declined but still potent offering of product permutations: 4 lengths and 3 heights, and FWD (low flat cargo floor) in 2.8T/3.3T/3.5T GVW guises, RWD in 3.5T & 4.5T guises (and eventually possibly 4WD, as has been the norm. Though the availability of an LSD on RWD vans theoretically reduces 4WD demand, and so the heavy overhead cost typical to SV (special vehicle) operations that re-engineer for 4WD and specialised custom order requirements.

Though not revolutionary as such, and less well engineered than most (besides LDV) it typically achieves enough to sell well to large fleets and SMEs due to lower initial purchase price, flexible lease deals, low 3-year running costs for the user (MPG/KmL, insurance etc). Warranty costs to Renault are typically higher than VW, Daimler and PSA-FIAT, highlighting durability issues. But the slow evolution in van design relative to changed engineering hardpoints requires typically lower investment spread over greater model changes, which in Renault's case is amortised over high capacity production given that it also serves Nissan and Opel/Vauxhall besides itself.

Thus whilst the vehicle models themselves are not 'best in class', the relatively light CapEx demand together with leveraged economies of scale underpin a business model which arguably is BIC, so a core activity that promotes shareholder reward.

Renault Truck:
[NB Owned by AB Volvo since 2001].
See previous Strategy commentary.

RCI Banque:
The division offers funding to the general car-buying public, the R-N retail network (group held and independent) and to corporate fleet buyers, and funds over a third of R-N vehicle sales.

Although Net Revenue reduced YoY for Q1 2010 to E430m from E436m, a closer look at RCI operations shows that 2009 efforts to find cost savings, improve efficiencies and de-risk the loan book led to an improvement in RoE to 16.3% from the previous year's 14.5%. A reduction in loans outstanding by end 2009 and the level of new contracts generated suggests that management were keen to create a steady credible (credit rating) footing for the division. This action no doubt an edict from above given the finance division's importance in assisting the dealer-base and the Group en mass, and seen by Dominique Thormann's promotion from CFO of this division to that of Renault Group. Ghosn wants to demonstrate that the financial discipline shown at RCI will be applied to Group from mid-2010 onwards.

Financials -

The assistance of the French government's E3bn soft-loans to both Renault and PSA is well documented.

However recognising the modern era's capital markets' volatility, in a bid to maintain liquidity in the face of its deteriorating credit rating (Moodys rated Ba1), Renault wisely decide to access the capital markets' 2010 window whilst open.

Hence, has had RCI Banque issue three sets of bond issuance (maturing within 2, 3 & 5 years) providing an income of E1,700m and seen Renault SA itself issue a E500m value bond (maturing in 7 years at a paying a coupon of 5.625%). Revolving credit lines available were at 31.03.2010 to the value of E4.1bn for the Autos division and E6.8bn in available liquidity from internal sources, banking agents and the European Central Bank.

Even though 'back-stopped' by the French government, and timely in its bond issuances, Renault's highly Euro-centric stance still leaves it exposed to possible extended volatility regards access and costs of capital markets' wholesale funding from the region into the future. A critical benefit of the Nissan alliance has been the ability to tap highly liquid, low cost Japanese capital markets, but an eroded Euro and strengthening Yen has constrained both the cost of Japanese capital and the FX arbitrage previously enjoyed.

Thus Renault must continue to seek out additional worldwide financing sources, especially so in Asia, Latin America and Africa through RCI Banque's 39 country foot-print and beyond, to both fund local operations and provide a chain-link between EM sourced funds and the Bolougne-Billancourt Headquarters. This real challenge to the group suggests (at least in part) why Samsung Motor was directed to launch in Chile, so as to in turn bolster RCI Banque presence within the Americas beyond Brazil, Mexico, Argentina & Colombia.

As credit rating agencies such as Moody's have illustrated, Renault previously typically ran with an EBITA Margin of between 6.3% and 7%, but the effect of the credit-crunch from 2007 through to 2009 was to drag that number down dramatically, to 1.2% in 2008 and -6.8% in 2009. Likewise over the 4 year span between 2005 – 09, EBIT/Interest Expense markedly declined from 7.3x to -3.5x. In the same period FCF/Debt rose due to the state's massive 'soft-loan'. That cash cushion also re-orientated the EBIT/Debt relationship.

However the 30% or so rise in Q1 sales YoY demonstrates Renault's relatively strong position in Europe (along with VW & Ford). Portions of the substantial cash reserves will undoubtedly be used to undercut its mainstream peers in major EU markets to buoy market share, so that Renault is better position come the (slow) economic upturn to enjoy improved margins on larger TIV slice.

Conclusion -

Renault is ultimately an entity that has evolved to arguably incorporate some of the worst and best traits of what should be a free-marketeering multi-national; yet this is simply the industrial structural outcome of a previously entrenched French economic stance. Yet both state and company are slowly shifting as global and regional macro-economic pressures demand their change.

Carlos Ghosn has carved a path which because of its national champion status manages to leverage both the goodwill of French government and the technical competence and global reach of a Japanese partner, combining these dual 'backer' and 'reach' strengths with a far-sighted passenger car platform/components strategy which recycles amortised tooling to cost-effectively enter price-sensitive, yet expectational EM markets. The attitudinal overlap between Car and LCV business models is apparent, and has created cost efficiencies that can be re-injected back into tactical product actions aswell as overall investment strategy.

Given its historical socio-economic historical context as the national lead player in smaller vehicles and commercials, it is no surprise that Renault has orientated its business model around the segments it knows well, its long-life platform strategies core, whilst 'bolting-on' the strengths from partner and alliance capabilities as deemed necessary.

The relatively demise of the Euro due to 'PIGS' sovereign debt concerns over the last 7 months or so has given EU exporters an FX lift. Renault, whilst not a major exporter compared to other EU players by value, does gain significant sales from the UK, Turkey and elsewhere, with far-shore operations outside of the EU ramping up volume, the income of which is aided by the inflationary character of such regions and currencies, thus providing an FX counterpoint to deflationary EU, so providing the continued FX tailwind into H2 2010. Furthermore as mentioned in the introduction paragraphs, the ever strengthening Yen – 16% higher now than at the beginning of the year - provides a large, secondary (FX) contribution from stock apportioned income from Nissan.

As with General Motors North America, the provision of 'liquid' government assistance prohibits typical YoY comparisons of the usual profitability ratios, liquidity ratios and activity ratios, and in Renault's case by end 2009 a constrained FCF key metric was over-shadowed by a strong FOCF (Funds from Operating Cash Flow). FOCF levels through Q1 were maintained and although the end of EU state scrappage schemes will have an effect on private car sales (-10% being Renault's the industry's general consensus) investment-auto-motives believes that Renault will hold and possibly gain market share as sales levels decline (by 7% to investment-auto-motives forecast).

Thus a more easily adaptable production and inventory re-orientation and good market (ie consumer share of mind) positioning with a strong product mix and more customer amenable dealer-base – in supporting used car price trade-ins on new sales – indicates that Renault is better positioned than the likes of FIAT-Chrysler and PSA in what will be a reduced but relatively stable European sales environment.

And beyond its Euro-centricism and Nissan worldwide reach, though still of limited penetration from a RoW view, its web-like regional JV strategy and market positioning flexibility gives it an advantage to be exploited in the mid and long term horizon.

H1 2010 results to be announced on 30th July.