Renault builds low-cost sedan for the masses one euro at a time

Publish date: 06-03-2007
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BUCHAREST: At Renault, 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. An additional €2 to €3 was trimmed by using identical side mirrors rather than the asymmetric pair found on most new cars. The final price tag: €4,790, or $6,270, before sales tax.

"We would fight for even one euro," said Luc-Alexandre Ménard, 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?'"

Carlos Ghosn, chief executive of Renault, said last month that the next generation of Logans would be even less expensive. They will have to be. Toyota Motor, General Motors, Volkswagen and Hyundai Motor are all planning economy models to compete for new car buyers among the emerging middle classes in developing countries from Russia to Brazil.

"Renault has the first-mover advantage," said Simon Davis, who manages assets 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 a month, compared with €2,000 in France. Renault agreed last month to raise Romanian salaries by about 19 percent.

Since Renault started selling the car in 2004, surging demand and orders for options like power rear windows have pushed the average after-tax retail price to €7,500 in Romania. Logan prices start at €7,600 in France.

By comparison, the two-door Volkswagen Fox, which is 16 inches, or 40 centimeters, shorter than the Logan, starts at €8,990 in France. The VW Golf, about the same size as the Logan, starts at €15,440.

Renault aims to sell one million Logans a year by 2010, up from 247,514 last year. On Saturday, it started taking orders in Iran, where the car would be marketed as the Tondar-90, Farsi for "thunder." The Logan is already one of the most popular cars 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 last month. "People know it is a basic car with all the functionality you care about at a very low price."

Ghosn needs success with the Logan to counter a slump in sales and earnings. Worldwide, Renault sales fell 4 percent to 2.43 million vehicles last year. Operating profit at Renault plummeted to €1.02 billion last year, or 2.6 percent of sales, from a 2004 peak of €2.12 billion, or 5.2 percent. Ghosn defines a healthy carmaker as one with a profit margin of at least 6 percent, his target for 2009 — and for the Logan line.

The global car industry is preparing for millions of new customers in developing markets as people move out of poverty.

Carmakers will sell 12 million more vehicles a year by 2014. About three- fourths of those will be sold in markets outside the United States, Japan and Western Europe, said Calum MacRae, the European leader for PricewaterhouseCoopers Automotive Institute in Norwich, England.

In India, one in 126 people owns a car. In China, one in 143, and in Brazil, one in 10, according to the Italian automobile industry association's 2006 yearbook. That compares with one in two in the United States and Western Europe.

Paul Craus, a Romanian police sergeant, is an example of the target customer. Though he aspired to own a Mercedes when growing up in Bucharest, he opted for a Logan with plastic door paneling and manual steering when he replaced his 1982 Dacia. Craus said he has not had to take it in for repairs in the two years he has owned it. The Logan is sold under the Dacia name in Romania and in Western Europe.

"It's not the car I've always dreamed of, but it's the right car for my pocketbook," he said. "It isn't the fastest car in the world, since I got the one with the smaller engine, but it always works."

Other carmakers are now racing to catch up with Renault.

Toyota had to rethink how it uses materials and develops new cars to be able to make a low-cost vehicle profitably. It has not decided where it will produce the budget car or how it will be priced, a spokeswoman, Shiori Hashimoto said.

Garel Rhys, professor of automotive economics at Cardiff Business School in Wales, said that in the new generation of entry-level cars, cutting costs is more about shaving cents off the price of each part than building a large number of cars.

"Taking cost out that way is often more effective than economies of scale," said Rhys, who estimates that going from two million to three million cars produced over the life of a model reduces costs by about 5 percent. "Doing it Renault's way can cut that by 10 percent to 15 percent."

Ménard, Renault's senior vice president for Eastern Europe and the Mediterranean, said 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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