Europe’s hard-pressed car makers are speeding ahead with low-cost cars. Ryanair’s low-cost flights and Inditex’s Zara fast fashion have shown how to appeal to budget-minded European consumers. But cheap cars may not be the answer to the European car industry’s problems.
The breakthrough was Renault’s Romanian-made Logan, a Spartan, four-door, mid-sized vehicle that sells in Europe for an average of €9,000 (Rs5.62 lakh). Regular new cars of similar size cost roughly double. When launched in 2004, the French car company targeted low-income markets in eastern Europe. Instead, analysts and Renault’s management were blindsided by strong demand from western Europe. Logan earns a 6% margin in Europe, well above Renault’s average 3.3% margins, and the French car maker aims to sell one million a year by 2010, up from 360,000 last year. Renault sold 2.5 million cars last year.
What is Renault’s trick with the Logan? The conventional car production model requires heavy capital investment which low labour costs can only partly offset. So, when developing the Logan, the French company threw out the received wisdom and relied on a combination of second-hand machinery and low Romanian wages. The result is that salaries are about a third of the Logan’s production cost, compared with about 10% for fancier models made in western Europe.
Renault further cut costs by offering no-frills models and discarding pricey ad campaigns. Customers discover the Logan through word of mouth or by visiting showrooms.
But Logan’s success remains fragile. Renault’s Romanian workers went on strike this week demanding wage hikes of up to 65%. Dacia, Renault’s Romanian manufacturer, is offering only 19%. Significantly higher wages threaten Renault’s budget car strategy. In addition, while Renault’s margins on Logan remain strong in western Europe, they are much tighter in other markets such as Brazil, India and Russia.
And stiff competition is emerging. Toyota, Volkswagen’s Skoda, and Fiat are working on budget cars. Low cost is also relative. The mid-sized Logan is much more expensive than the Tata Nano, billed as the cheapest car in the world at just Rs1 lakh and just this week, Renault has cut its Indian sales target. The French car maker now says it will develop its own ultra-cheap minicar. Logan’s success does not mean salvation for Europe’s struggling car makers.