[su_pullquote align=”right”]By Pierre-André Buigues[/su_pullquote]
Despite significant state aid, the French meat sector is losing ground against other European countries which are also in the Eurozone. Indeed, it’s the European market which has caused the deterioration of France’s position, and not globalisation, China, or other emerging economies.
No matter which sector we look at – poultry, pork or cattle – French meat farmers are in difficulties compared with their European competitors.
– The French pork market : Production is markedly down, from 25.5 million pigs a year in 2000 to 21 million in 2016. Over the same period, it went up in several other European countries. In 2000, France and Spain were producing pigs at the same rate, whereas today Spain is producing 46 million pigs a year. France is now a net importer of pork products. The sector’s competitiveness has been eroded due to high costs and lack of investment.
– The French cattle industry : France was the biggest European producer of beef in 2015: 1.49 million tons compared with Germany’s 1.12 tons and the UK’s 0.9 tons. 79% of the meat consumed in France was also produced there. Imports are essentially European. However, the average income of cattle farmers is among the lowest in the farming sector and is projected to decline steeply. In 2014, a typical cattle farmer’s earnings after tax were 22% below the average over an extended period (2000-2013).
– The French poultry sector has also seen a drop in production over the last decade. France used to be the second biggest exporter of poultry in the world, but today it imports 40% of the poultry it consumes. The country has a trade deficit with other European countries in terms of both volume and value, and this deficit continues to deepen. The majority of French imports come from other European countries, with far less coming from non-European countries like Brazil or the USA.
Why are we seeing such a serious deterioration in the French meat sector?
We will look at the two main factors behind the decline: Le refus français d’une industrialisation de la filière viande, d’où des économies d’échelle insuffisantes.
France’s resistance to the industrialisation of its meat sector, and hence insufficient economies of scale: France has always supported family farms but the international meat markets are high-volume markets where price is the determining factor. Unlike the French domestic market where quality is highlighted by labels (red label – farm quality) and constitutes a competitive advantage, on the international market, price is key. While Germany has positioned itself as a producer of cheap and standardised meat products with an “industrial” image, France has a “gourmet” image and premium products. Unfortunately, at this stage in its development, the international meat market, whose growth is being powered by emerging countries, has little interest in quality. Cost is therefore the strategic variable for success on the international markets, so the French sector is paying the price for high costs and an absence of economies of scale.
In the pork production sector, the average size of a pig farm in France is between 1,000 and 2,000 pigs, as against Denmark and Holland, whose farms average 2,000 to 5,000 pigs. Moreover, between 2000 and 2010, the average size of a pig farm has grown by 98% in Denmark, by 37% in the Netherlands, by 29% in Spain and by only 16% in France. Finally, German abattoirs often exceed 50,000 pigs slaughtered annually. In France, what is needed is far fewer abattoirs and comprehensive modernisation.
In the beef and lamb sector, France is likewise suffering from the small size of its farms. The lawsuit taken against the only French farm with 1,000 cows (ultra-modern farm with a giant facility to produce energy from cattle waste via a methanizer and fitted with solar panels), shows how hostile French public opinion is towards industrialised farming.
In poultry production, French farms are far more numerous and also far smaller than German ones: German, Dutch and British poultry farms are the biggest in Europe, with an average volume above 60,000. In France, more than half of all poultry farms have a capacity of between 1,000 and 10,000, because of the importance of quality and origin labels (Red Label, organic, Appellation d’Origine Contrôlée), whose product specifications limit the size of buildings.
With farm sizes which don’t allow for economies of scale, and with labour costs well above some of its European competitors, the French animal agriculture sector is in great difficulty and is losing market share.
An avalanche of costly production standards and over-regulation compared with European norms
Stringent regulation is an indisputable factor in the economic difficulties facing the French meat sector. (2)
Often complicated and sometimes incomprehensible, these regulations place a very heavy administrative burden on farmers. A Senate report estimated that an average farmer spends 15 hours a week on office work. There are two main reasons for the relatively high cost of these production standards in France.
First and foremost, farms in France are, as we have seen, smaller than in European competitor countries. They therefore don’t possess the human or financial means to assimilate and implement these standards. Second, regulations often change in this sector, environmental standards are more and more exacting and require significant investment.
What does the future hold for French meat farming?
European farming is no longer just a sector regulated by the Common Agricultural Policy, but a competitive sector. In order to develop French meat farming, there are two possible strategies:
– Strategic development of a quality-oriented farming sector : How can we find enough outlets for a high-end product with strong export branding to allow small farms to survive with high costs? There is a model in the French wine sector where prices are, on average, twice as high as the competition, and yet which still hold their own. This “high-end” strategy could save French farming. However, it will involve considerable investment in marketing and the international distribution chain.
– Strategic development of intensive, low-cost farming : How can production costs be reduced? By heavy restructuring, and the elimination of uncompetitive “small farms”. Massive investment would also be needed to create ultra-modern farms, with state agencies fostering fully automated mega-farms – a far cry from today’s situation.
Is there a middle way? Xavier Beulin, former president of the FNSEA (the French farmers’ union) has estimated that investment to the tune of 6 billion Euros will be needed “to develop a third way between industrial farming and diversity, high-tech and diversified farming, organic and robotic farming”.
[su_spoiler title=”Methodology”]References: Elie Cohen et Pierre-André Buigues « Le décrochage industriel », Fayard, 2014; and Pierre-André Buigues, « Refonder l’agriculture française » Journée de l’économie, Jeco , Lyon, Novembre 2016 [/su_spoiler]
[su_pullquote align=”right”]By Pierre-André Buigues and Denis Lacoste[/su_pullquote]
French car-makers exported fewer and fewer cars over the course of the first decade of the 2000s. At the start of the 2000s, PSA was exporting 54% of its French production and Renault 47%.
Ten years later, that percentage had dropped by over 20 points for PSA; Renault’s case is even more critical since the company has even started importing vehicles to France. Today, Renault now produces fewer vehicles in France than it registers! And France now has a significant trade deficit in the car sector; the last surplus was in 2004!
Does this mean that French manufacturers have become less international in their reach?
Absolutely not. Indeed, during this same period, French manufacturers invested heavily in building assembly plants abroad. In the early 2000s, the number of cars manufactured by Renault and PSA abroad represented about 70% of domestic production. In 2010, the ratio of foreign production to domestic production was close to 170% for PSA and almost 300% for Renault.
One might think that these developments are related to macroeconomic and monetary conditions in the Eurozone. However, when you look at the development of German car-manufacturers’ strategies over the same period, it is clear this is not the case. Between 2000 and 2010, we can see that Volkswagen’s exports remained stable while Mercedes and BMW’s exports rose.
Why did delocalized production replace export?
Specialists in business strategy generally agree that the choices made for an international development strategy are determined by two key factors: the company’s competitive advantages and the economic conditions affecting production in the home country.
The competitive advantages of French manufacturers. . Basically, industrial companies can choose between strategies based on low production costs or differentiation strategies based on technological innovation. A low-cost strategy drives companies to delocalize a significant part of production to low cost countries. On the other hand, a differentiation strategy generally goes hand in hand with increased exportation, because the competitive advantage is based on R & D and hence on the high-level expertise that is only available in developed countries. Companies that opt for a low-cost strategy will look abroad for cheap labor whereas those who base their strategy on differentiation will be less affected by the higher production costs linked to domestic production and can draw on the positive effects of the interaction between production and R & D.
In the case of the car industry, there are considerable differences between the innovation strategies of French companies – which seek to set up production abroad – and German companies, which maintain a high level of exports. At the start of the 2000s, Volkswagen was already investing more than twice as much as Renault and PSA in research, and in 2010, Volkswagen’s research budget was three times greater. If we specifically look at the R&D content of each vehicle sold, there is naturally a quite significant technology input with high-end manufacturers like Mercedes and BMW (more than €2,000 per vehicle), but this is the case even with mid-range manufacturers; the R&D content in a Volkswagen car is 20% higher than that of Renault and 45% greater than that of PSA. Again, the gap widened during the first decade of the 2000s; the increase in R&D expenditure per vehicle is significantly higher in German-made cars compared to French-made cars.
The economic conditions in France The more or less favorable domestic business environment, particularly in terms of cost, also has an impact on their choices in terms of international development. What about the French car industry? What are the differences between the French and German environments? If we look at things on a very general level, we see that the hourly labor costs for manufacturing in general increased by 38% in France, compared with only 17% in Germany, during the first decade of the 2000s. If we look closer at the car sector, we can note that productivity per employee was lower in Germany than in France in 2000, but that productivity increased sharply over the decade in question, while it decreased in France. In 2008, employee productivity was 25% higher in the German car industry compared to France. This can be explained by the fact that French car manufacturers have made little investment in France, their priority being their overseas factories.
Even though we may bemoan the extremely negative consequences in terms of employment and the creation of wealth in France, French car manufacturers made strategic choices that are coherent in terms of international development in view of their low R&D expenditure, their medium- and low-end positioning and the unfavorable domestic production conditions in terms of cost. However, it is not surprising that French manufacturers’ profit margins are lower than those of their German counterparts. For example, over the period 2000-2010, the operating profit per car was €635 for VW and around €250 for Renault and PSA.
Is this specific to the car industry in France?
Unfortunately for French international trade and the employment market in France, the car sector is not an isolated case. France has far fewer companies that export than Germany, and the share of exports in French GDP is almost two times lower. On the other hand, France has more large multinationals than Germany (14 companies in the world’s top 100 compared with 10 for Germany) and these French multinationals have a larger proportion of their workforce abroad than their German counterparts.
Consequently, for France to become an “export country” once again, it would take a radical change in the strategic positioning of companies located in France as well as more favorable production conditions in the country.
[su_note note_color=”#f8f8f8″]Written by P.A. Buigues and D. Lacoste. The information in this text is taken from the following articles: “Les déterminants des stratégies internationales des constructeurs automobiles européens : exportation ou investissements directs à l’étranger” (Determining factors in the international strategies of European car manufacturers: exportation or direct investment abroad? ”), published in 2015 in the magazine “Gérer et Comprendre”, written by the authors in collaboration with M. Saias M, and “Les Stratégies d’internationalisation des entreprises françaises et allemandes : deux modèles d’entrée opposés” (International business development strategies of French and German companies: two opposite input models), written by the authors and published in “Gérer et Comprendre” in 2016, as well as their book “Stratégies d’Internationalisation des entreprise” (International Business Development Strategies), published in in 2011 by De Boeck. [/su_note]
[su_spoiler title=”Methodology”]The database was essentially built using information published by the manufacturers in their annual reports, as well as data provided by the French Automobile Manufacturers’ Committee (CCFA), the International Organization of Motor Vehicle Manufacturers (OICA) and by Eurostat. The data relating to international business development, strategies and economic conditions were analyzed over the entire 2000-2010 period. [/su_spoiler]
[su_spoiler title=”Practical applications”]This study shows that any assessment of a company’s choice in terms of international development cannot be cannot be conducted without analyzing other aspects of its strategy (particularly in terms of positioning) and the economic conditions in the company’s home country. The study also suggests that foreign investments are not necessarily the best way forward in terms of international development. The case of the car industry shows that it is possible for a company to keep a significant part of its production in its home country while remaining efficient, even in a global industry. [/su_spoiler]
[su_pullquote align=”right”]Par Pierre André Buigues[/su_pullquote]
France’s has had a foreign trade deficit since 2003 and the country’s share of the world export market is continuing to drop. France’s share of the export market went from 6.1% in 1995 to 5.1% in 2000. It then fell to 4.2% in 2006 and stood at just 3.5% in 2013. The automotive sector provides a good example of this French industrial decline. In 2003, France’s automotive sector had a trade surplus of €12.6 billion but this had turned into a €6.9 billion deficit by 2014!
Economists put the decline of French foreign trade down to a lack of competitiveness, due to both price and other reasons. In France, costs have tended to increase faster than productivity and the products are not perceived as giving sufficiently high ‘value for money’, particularly compared with products “Made in Germany”.
The French aeronautical sector is an exception to this trend; indeed, the sector has prevented the balance of trade deficit from plunging further. The aviation sector – both civil and military – and the space industry have posted a foreign trade surplus in excess of €23 billion over the last few years, representing the largest surpluses in the overall French balance of trade. France is the world’s second largest exporter in the aeronautical field, with 22% of the worldwide market, after the United States (35 %). Germany is the third largest exporter with 14% of the worldwide market. France has seen its market share increase by 8% in ten years, unlike the agri-food and automotive sectors.
Airbus’ exports represent the lion’s share of French exports. Airbus accounts for roughly 50% of French exports in the aeronautical sector. Table 1 below shows direct sales of new French-built aircraft to foreign airline companies and the shipments of turnkey A380 aircraft from France to Germany for subsequent deliveries from the Hamburg site, as well as the value in euros (€M) of these exports.
Table 1 – Airbus exports in terms of value (€) and numbers of aircraft
|Value in M€||Numbers of aircraft|
How has the French aeronautical sector remained successful amid the overall decline of French industry?
The aeronautical sector is an oligopoly characterised by heavy capital investment and products with advanced technology . As such, the cost of entering the market is extremely high. In France, the aeronautical sector represents around 4,000 companies and employs 320,000 people directly. The success of the French aeronautical sector is the result of an industrial strategy built on strong technological assets, strategic European alliances and strong political support:
- R&D and technological expertise which is among the best in the world thanks to the quality of engineering training in France (mastery of systems design and production, design offices, tests, assembly lines).
- Integration within a European consortium with international partnerships and added value resulting from the blending of industrial cultures.
- An efficient, well-structured national sector built around a limited number of aircraft manufacturers (Airbus, Dassault, Eurocopter), engine makers (Snecma and Turbomeca, belonging to the Safran Group), equipment manufacturers that supply complete sub-assemblies (Safran, Zodiac Aerospace, Thales, etc.) and major Tier-1 sub-contractors (Latécoère, etc.): Cf.:Strategic Committee for the Aeronautical Sector, July 2014.
However, a certain number of challenges lie ahead for the French aeronautical industry.
1- Asia accounts for an increasingly large part of the global air-transport market and a new manufacturer could enter the market to compete with the two powerhouses, namely Airbus and Boeing. Airbus forecasts that passenger traffic in China will exceed that of the United States within 20 years and China aims to take a share of the aeronautical sector. To develop its sales in China, Airbus decided to increase its purchases of Chinese components and to set up an A320 assembly plant in the country.
2- France plays a pivotal assembly role in Europe. The country imports parts and aeronautical equipment, essentially from Europe (foreign trade deficit) and exports complete aircraft (large foreign trade surplus). Complete aircraft account for over two thirds of French aeronautical exports. Delocalising the assembly of Airbus aircraft therefore has a negative impact on France’s balance of trade. At the same time, Germany is taking an increasingly important position in the European aeronautical sector, with a growing number of A320s being assembled on the site in Hamburg. This is Airbus’s best-selling aircraft, already assembled on several sites, in Toulouse, Hamburg, Tianjin (China) and, since 2015, in Mobile (USA).
3- Aeronautical R&D accounts for over €3 billion of investment in France every year. However, within Airbus itself, the question is being asked as to whether R&D leadership has shifted from France to Germany. At the beginning of the 2000s, the R&D expenditure of Airbus France was one and a half times greater than that of Airbus Germany. Ten years on, the R&D expenditure in Germany was 10% more than in France. To be more precise, Airbus Germany is responsible for a significant section of the fuselage of Airbus planes and for the cabins. In addition, Germany is the leader in terms of materials R&D, although France is still the R&D leader for certain key components, such as the cockpit, flight controls, navigation and traffic management.
4- The aeronautical and space industry is also one of the rare industrial sectors in which jobs are being created, and in which skilled jobs are predominant. Engineers and managers account for approximately 41% of all the jobs in the sector. However, the French education system is not able to supply the aeronautical sector with all the technicians, welders, and metal workers that it requires. For instance, small-and-medium-sized aeronautical sub-contractors have much greater problems recruiting the staff they need than Airbus.
5- Finally, the industry also carries significant risks, considering the investment required to launch a new aircraft. Indeed, there was a fear the A380 would not be a commercial success. Each new aircraft brought onto the market can also run into serious problems, as in the case of the A400M. Consequently, there is no guarantee of success.
[su_note note_color=”#f8f8f8″]By Pierre André Buigues, based on research by Elie COHEN and Pierre-André BUIGUES (2014) “Le décrochage industriel”, Fayard, pp 439, [978-2-213-68188-7]; Pierre-André BUIGUES and Denis LACOSTE (2011) “Stratégies d’Internationalisation des Entreprises Menaces et Opportunités”, De Boeck, pp 376. [978-2804162917][/su_note]