Monday, December 8, 2008

Cheap, reliable, popular: A lesson for Detroit

ERIC REGULY
www.theglobeandmail.com

ROME -- As unlikely as it sounds, the Big Three Detroit auto makers might look to Romania for inspiration on how to reinvent themselves.

Romania is a struggling Eastern European country that gets little attention in the rest of Europe, or anywhere else. The country's industrial base is in rough shape, though slowly improving as it creeps into the European Union fold. But it has one industry that stands out as an international success story - car making.

Romania's Automobile Dacia is one of the few high-growth car businesses in the otherwise ailing global auto industry. The brand's French owner, Renault, couldn't be happier. The Dacia is a genuine low-cost car that rolls out of the factory near Bucharest with a fat profit margin.

The machine sells well throughout Europe, and elsewhere, because it is not a jalopy pieced together with 40-year-old parts from Warsaw Pact trucks. The Dacia's engineering and drivability, if not visual appeal, come close to the standards of the latest Renault cars.

The lesson: You don't necessarily need dazzling technology to make a buck in a competitive market (though it certainly can help, as Toyota learned with the hybrid Prius). You do need an inexpensive, safe, reliable car that can appeal to the masses.

Any automobile research firm can tell you that the car makers, after swamping the planet with leather-clad land yachts stuffed with more gadgetry than a Pentagon missile-launch site, will soon find their greatest growth potential in the cheapie end of the market.

Even Toyota, with its so-called EFC (Entry Family Car), is getting into the game. So is Italy's Fiat.

In Rome, where I live, the Dacia is becoming popular, a remarkable achievement in a city obsessed with sleek cars, like Alfa Romeos, apparently designed as fashion accessories. Dacia offers three lumpy models here - a small hatchback called the Sandero, a bigger sedan called the Logan and a wagon version of the Logan, which is the best seller of the trio. The Logan wagon starts at €9,100 (just under $15,000) and tops out at about €13,800. For that you get a big, roomy car with as many as seven seats, decent fuel and safety ratings and good handling. The motoring press thinks the Logan is one of the best buys on the market.

Renault took a gamble when it paid the Romanian government $50-million (U.S.) for a controlling stake in Dacia in 1999. At the time the company, which had made its first car, a pug-nosed brute called the Dacia 1100, in 1967, was in miserable shape. Nonetheless the French company decided to make Dacia its automobile centre for Central and Eastern Europe.

The goal was to produce a decent car at very low cost. The Dacia factory was filled with refurbished equipment from Renault's French factories. The new Logan model would be based on existing Renault and Nissan platforms. The car would be simple - it would have 50-per-cent fewer parts than the most expensive Renaults - and go light on electronics. It would be available in several versions, including a van and a pickup. Inexpensive, though well-trained, Romanian workers would put the cars together.

It all worked. The Logan came out in 2004 and its success has surprised everyone, including Renault. The Economist magazine recently reported that the Logan is produced at less than half the cost of the typical European compact car, according to a 2005 Deutsche Bank research report.

Two years ago, 164,000 Dacias were sold. Last year the number was 230,000, accounting for 9 per cent of the Renault group's total sales. Renault boss Carlos Ghosn said he wants to take Dacia output in Romania to 400,000 next year (even though production was stopped for two weeks starting Nov. 4, because of the credit crisis). To reach that level, Renault has invested almost €500-million in factory expansions and upgrades.

The Logan, meanwhile, has become a global car. It is assembled in seven other countries, including Iran and Brazil. Inspired in part by the success of the Logan, other companies, Fiat among them, are planning similar strategies. "I want to become a serious player in low-cost cars," Fiat CEO Sergio Marchionne told Automotive News Europe last month.

The cheap car market is the place to go. Auto research firm R.L. Polk said sales of cars with price tags of less than $14,000 (U.S.) will increase by 70 per cent over the next nine years, far outpacing the growth of other types of vehicles.

General Motors, Ford and Chrysler are not in the cheapie car business. They make huge SUVs and pickup trucks that never see farms. In an effort to squeeze the American taxpayer for tens of billions of dollars, they are now promising to build fleets of small, fuel-efficient cars with the latest technology, like lithium-ion batteries. Their CEOs might consider it beneath them to beg for money to build simple, down-market cars. But Renault's experience with Dacia says that very strategy can be a winner.

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