French car maker Renault SA is betting big on India. Its low-cost sedan Logan is fast turning into a popular fleet car, even as it has won a quality award from JD Power and Associates, the benchmark in the auto industry. Renault is also exploring the option of a low-cost car with India’s No. 2 bike maker Bajaj Auto Ltd. However, a year into selling its cars here, the Indian economy is starting to cool and lower vehicle sales have caused the company to revise its original sales target for the country. In an interview with Mint, Renault India Pvt. Ltd managing director Sylvain Bilaine talks of the firm’s plans in India and how the slowdown is affecting them. Edited excerpts:
Renault has now been in India for a year through the Logan sedan and your partnership with Mahindra and Mahindra Ltd. What’s your assessment of the Indian auto industry over the next 18-24 months?
With the economy slowing down, I am worried that we are not going to see the kind of growth that we have witnessed. We’re probably not going to get 9% growth (in the economy). The manufacturing industry’s growth is at 5% and, so, the auto industry will grow at maybe 5-7%. Nothing like double-digit growth as we have seen before.
Bilaine says the auto industry will grow at 5-7%(Picture by: Abhijit Bhatlekar / Mint )
Has this slowdown caused a revision in your original production plans and sales target?
We’ve not grown as fast as we expected. It’s a new brand, it’s a new car, it’s a new network. Therefore, the planning phase is the most difficult. One thing obviously is that we put investment in the plant, which is the maximum of what we had hoped in our business plan—that is to make 50,000 cars a year in Nashik. This is the capacity and, of course, it’s for the Logan, but we can produce any car. That’s the upper limit. Now, the ramp up naturally depends on your network, sales force, word of mouth and brand image...we have a customer base that’s improving as we’ve sold around 23,000 cars so far.
Now, we are making the budget and are working on different scenarios. We are working both on pink (optimistic) and more black (pessimistic) scenarios in case the economy would really plummet.
So, you are preparing yourself for the slowdown. Has your sales outlook been revised downwards?
Yes, obviously. We are seeing ramp up (sales growth) which has been slower than originally planned.
Your original sales target has come down?
Yes. It is in line with the economic slowdown of the segment where we operate. So, we operate in the mid-size entry segment, which is not doing as well as we had originally planned (this segment has grown 11.85% in April-February 2008 from a year ago).
Can you give us more clarity on your joint venture with Mahindra?
First, it is a 49:51 joint venture (Mahindra Renault Pvt. Ltd) in favour of Mahindra. We had agreed from Day One, which was March 2005 when we announced the joint venture, that Mahindra will run the company having a managing director, a chief financing officer and the head of sales and marketing. Renault will provide the technology, bring the car, licence the car to the company, bring some technical assistance so that we could build a plant at worldwide quality standards and have a car at worldwide standards. We would bring also our purchasing skills so that we would build an excellent supply base, not only in terms of costing but also pricing. So, the first two years of that story have been almost perfect. We launched the car before schedule. We spent less money as an investment (the project cost of this venture is pegged at around Rs700 crore). We have the local content that we have planned which is at 50% already. And, the final outcome in terms of quality out of the plant is as per standards. Mahindra brought the network, their marketing skills and their manufacturing skills.
We have structured the financing in the joint venture. So, the JV will receive equity from both the partners. We’ve done our own leverage in terms of how much money we should borrow from the banks in India. I’m not going to share these details with you. And once we’ve done that, Mahindra Renault will invest (this money). So, they have invested in vendor tooling for suppliers, in manufacturing facilities inside the plant and in advertising, dealer network, etc. The joint venture contracts manufacturing to the Nashik plant of Mahindra.
What is the benefit for Mahindra out of this, how do they earn money?
First of all, they own 51% and, so, they will get 51% of the end result of this (profits). On top of that, they have two contracts. One is for manufacturing, out of which they will ma-ke some profits. The other is the distribution contract (wh-ere they also make money). They also get the technology transfer and the knowledge they have learned from us.
You’ve seen the Bajaj Auto’s small car, called Lite, at the Auto Expo. What is your impression of the car?
Don’t forget that this car is a result of what Bajaj had in mind before they met us. So, they had in mind that they would make a small four-wheeler, and would look like what they showed. Now, in styling, it’s a nice show car. In terms of packaging, you don’t see much because it was in a box. We don’t even know where the engine is. You see the end result, and it’s not that far off from the Tata Nano, which is a real product. This means that Bajaj’s original idea was not that far from Tata’s original idea. Of course, it means that probably there are not too many solutions to achieve a product at a very decent price at Rs1 lakh for Tata and being able to carry four adults in a safe mode from place A to B. If Tata was right, then they were right from Day One.
Can you give us an update on your feasibility study with Bajaj on the $3,000 car?
We’ll see a few results in the coming months. We think we are on track on the costing, which is the most difficult. Now, our engineers are working with what our product planners had summarized. It’s (taking) a bit longer than we anticipated. Now, they are working on at what cost I can deliver to the customer, what investment I need to make for development, what investment I need to make for the plant, how many products I will deliver, and what is the global economy. So, that’s what the feasibility study is about.
What do you think is Bajaj’s strength for this project? Do you think engine development is one of these strengths?
Yes, they have done some work on the engine. Yes, we would probably leverage this. We’ll see because specific powertrains (engines and transmissions) are still under discussions. Bajaj’s strength is to be able to manufacture a product in a plant like Chakan, making about a million units with 800 workers with full quality, full implementation of home grown technology not only from the product but also from the process point of view, and to make that in a very excellent way.
Beyond the Logan, what can we expect from Renault in India?
We will work on all the product plans, obviously, to make 200,000 capacity (Renault’s planned capacity in the plant in Chennai). Therefore, we are now working on which customers we want to address in different segments. We have a bit more capacity left at the Nashik plant, so we will also work on the plan to make other derivatives of the Logan.
The Logan is more for emerging markets. Does this mean that Renault will be bringing more upmarket products?
Let me explain. We have three brands (globally). We have the Renault brand which is of western European standards. This means these cars are capable of German expressways, travelling at around 200km per hour. We have a full line-up there. Then, we have the Renault Samsung brand (Renault Samsung Motors), which is Korean. We have products (here) that are luxury products made for Asia. We have cars like the SM7 which is like the (Toyota) Camry in India. Korean drivers, and most Asian drivers, do not drive very fast. Their dream is to be comfortable in a very luxury car. We have a full line-up of these products. And we have the third line-up which is the Logan line-up. This line-up is for emerging markets. In this line-up, we have the sedan, which is the Logan, a hatchback called Sandero at less than 4m length, a pickup called Logan pickup and seven-seater station wagon called Logan MCV and a panel van. We have more coming, which we have not yet disclosed.
So, you think Renault Samsung has potential in India?
We think that the products that are made by Renault Samsung in Korea have a potential for India… Now, in India, we have to be careful about the number of brands that we have. We have a partnership with Mahindra.
Does this mean that in the future, new Renault products have to be badged as Mahindra Renault?
Hopefully, yes. We clearly stated that it’s not because we did not succeed in one project in Chennai, but we plan to brand our products with Mahindra and we plan to distribute our products with Mahindra. We plan to badge our products Mahindra Renault. We plan to use the distribution network that we’ve built with them.