Cutting costs, Renault builds cheap car for masses

Cutting costs, Renault builds cheap car for masses
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First Published: Mon, Mar 05 2007. 03 44 PM IST
Updated: Mon, Mar 05 2007. 03 44 PM IST
Bloomberg
PARIS: At France’s Renault SA, designing the people’s car of the 21st century was an exercise in cutting costs, part by part and euro by euro.
After eliminating the radio, air conditioning and power steering from the base-model Logan sedan, superfluous angles in the windshield had to go too, saving as much as 10 euros (Rs585). Another 2 to 3 euros went by using identical side mirrors rather than the asymmetric pair found on most new cars. The final price tag is 4,790 euros before sales tax.
“We would fight for even one euro,” says Luc-Alexandre Menard, a Renault executive who oversaw the final stages of the Logan’s development and attended meetings with the project manager, designers and engineers. “The only question was: ‘Are we respecting the price target?’
Renault chief executive officer Carlos Ghosn said last month that the next generation of Logans will be even cheaper. They’ll have to be. Toyota Motor Corp., General Motors Corp., Volkswagen AG and Hyundai Motor Corp. are all planning economy models to compete for new car buyers among the emerging middle classes in developing countries from Russia to China and Brazil.
“Renault has the first mover advantage,” says Simon Davis, who helps manage $192 billion (Rs8,540 crore) at Putnam Investments in London, including Renault and Toyota shares. “We will be looking around 2010 to see what other new models of cheap cars they can come out with. Toyota will certainly come out with a credible competitor.”
Renault, based in the Paris suburb of Boulogne-Billancourt, will display its new Logan models, including a station wagon and utility van, this week at the Geneva International Motor Show, where rivals may give updates on their budget-car projects.
With the Logan, Renault set out to design an inexpensive car that would stand out from existing entry-level vehicles in reliability and spaciousness. It started building the car at the Dacia plant it bought in Romania, where its workers earn around 350 euros a month, compared with 2,000 euros in France. Renault agreed last month to raise Romanian salaries by about 19%.
Since Renault started selling the car in 2004, surging demand and orders for options such as power rear windows have pushed the average after-tax retail price to 7,500 euros in Romania. Logan prices start at 7,600 euros in France.
By comparison, the two-door Volkswagen Fox, which is 16 inches shorter than the Logan, starts at 8,990 euros in France. The VW Golf, about the same size as the Logan, starts at 15,440 euros.
Renault aims to sell 1 million Logans a year by 2010, up from 247,514 last year. On 3 March, it started taking orders in Iran, where the car will be marketed as the Tondar-90, Farsi for thunder. The Logan is already the second-most popular car in Russia, where consumers bought a record $32 billion of new vehicles last year.
“The Logan’s success is that people understand what it is,” Ghosn said. “People know it is a basic car with all the functionality you care about at a very low price.”
The global car industry is bracing for millions of new customers as people in developing markets move out of poverty and look to buy their first car, replace decades-old models or upgrade from vehicles with engines that are one liter or less. That will create a surge in demand for inexpensive cars similar to that of the US and Europe in the middle of the 20th century.
In India, only one in 126 people owns a car. China’s figure is one in 143 and Brazil’s is one in 10, according to the Italian automobile industry association’s 2006 yearbook.
Toyota, which may surpass GM as the world’s biggest automaker this year, had to rethink how it uses materials and develops new cars to be able to make a cheap vehicle profitably. It hasn’t decided where it will produce the low-cost car or how it will be priced, spokeswoman Shiori Hashimoto says.
Seoul-based Hyundai Motor, South Korea’s largest automaker, in December said it would develop cheaper vehicles to sell in Southeast Asia and South America.
“People’s cars were all around in the 1950s,” says Thierry Morin, CEO of Valeo SA, Europe’s third-biggest car-parts maker, which supplies gear for the Logan, including the air conditioning, starter and radiator. “My first car was a 1952 Renault 4CV. That was a true, cheap people’s car.”
Even in Western Europe, the Logan is winning lower-income buyers as an alternative to a used car. Logan sales jumped 40% to 28,620 cars last year in the region. For now, neither GM nor Renault, which doesn’t sell cars in the US, plan to sell such models in North America.
In the new generation of people’s cars, cutting costs is more about shaving cents off the price of each part than building a large number of cars, says Garel Rhys, professor of automotive economics at Cardiff Business School in Wales.
“Taking cost out that way is often more effective than economies of scale,” says Rhys, who estimates that going from 2 million to 3 million cars produced over the life of a model reduces costs by about 5%. “Doing it Renault’s way can cut that by 10% to 15%.”
Menard, Renault’s senior vice president for eastern Europe and the Mediterranean, says it would sometimes take hours of discussion to decide whether to add or subtract one euro in the cost of producing the Logan.
“It’s not easy to get this, it’s really not easy,” he says. “And now we have this know-how.”
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First Published: Mon, Mar 05 2007. 03 44 PM IST
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