France is Europe's second-largest car manufacturer. And yet the slowdown in French car output over the past three years has dragged down the country's GDP growth, its external trade balance, and employment. This retreat primarily reflects changes in French car manufacturers' production arrangements in response to globalisation.

While demand is stagnant in the developed countries, car manufacturers have sought to respond to fast-growing demand in the emerging countries in order to sustain their activity. In their view, moving production closer to these markets is making it easier to sell to them. Lower labour costs in these new markets are pushing the production of cheap vehicles abroad, whereas the higher-end vehicles continue to be made in France.

The renewal of mid-range and high-end models is stimulating production in France, as was the case in the second half of 2007. This upturn, fuelled by the commercial success of recent innovations introduced on the market, is still fragile, however. French carmakers have benefited from the "éco-pastille" (green bonus-penalty system) instituted at the end of 2007, since they have a major presence in the low CO2-emissions vehicles category. In fact, though, the system has supported sales of low-end cars, for the most part manufactured abroad even when carrying a French brand.

The car industry is the leading sector in terms of the volume of R&D in France, and will benefit from the significant increase in aid provided by the reform of the Crédit d'Impôt Recherche (research tax credit) adopted at the end of 2007; for a given level of R&D, the amount paid to the sector is expected to more than double, which should serve as an incentive to step up its efforts in this area and enhance France's attractiveness to business, with resulting benefits for jobs.

The car industry is heavily involved in three competitiveness clusters, and through these it should benefit from improved synergy between research or training centres, business and government, in the service of technological innovation.

Trésor-Economics No. 43