Tuesday, September 29, 2009

Logan’s run: success of Dacia has attracted Ford to invest in the country

By Thomas Escritt
Published: September 28 2009
The Financial Times

In the run-up to Christmas, the production lines at Dacia’s car factory in Pitesti were shut down for periods totalling a month, as demand collapsed in Romania and abroad.In 1999, when France’s Renault bought Dacia, the then-ailing state car company, the outlook looked bleak for Romania’s manufacturing sector, which had not attracted western investment on the scale of nearby countries such as Hungary or the Czech Republic.

Starting from the premise that there was a need for a car tailored for developing countries that was easily user-serviceable and had raised suspension needed for dealing with rough roads, Renault set about manufacturing the Logan, a car that would sell for as little as €5,000.The Renault subsidiary saved the Romanian auto industry and was producing 1,340 vehicles a day at its peak last year; but when the downturn came, and domestic demand fell 60 per cent year on year in the final quarter, production was suspended for weeks on end to adjust stock levels to the grimmer circumstances.

Salvation came in the form of west European car scrapping schemes. When the German government introduced a €2,500 rebate to bolster flagging car demand during the downturn, its aim was to support the German car industry. But Dacia proved an unexpected beneficiary when consumers realised the rebate could spare them as much as half the price of a new Logan. Export demand soared and, after spending much of the winter at home on 80 per cent pay, the company’s workers are now back in the factory, which is once again running at full capacity.

Whereas before, Dacia was producing the Logan primarily for the domestic market, it can now be seen driving on the streets of western Europe.“Some 85 per cent of our production is for export now,” says Francois Foumont, the company’s general manager. Germany accounted for 40,000 sales in the first six months of this year, France for 25,000, while only 23,000 were bought in Romania. Last year, Dacia had revenues of €2.8bn, accounting for some 2 per cent of the country’s gross domestic product.

Over the past two years, Romania has come a long way in catching up on the investment it lost to richer central European neighbours in the 1990s. In September, another milestone was passed with the arrival of Ford, the US carmaker, which bought a state-owned plant in the southern city of Craiova, where it plans to manufacture a new Transit van and, eventually, a new budget car, details of which are still under wraps.

Romania’s emergence as a manufacturing centre, however, has not been without problems. The western city of Cluj was confident of being chosen as the site for a new Daimler plant last year – before being pipped at the post by Hungary. In the end, analysts reckoned the neighbouring country’s better-developed motorway network made the difference.The core western European markets are still as much as 20 hours away from Romania by road. And this shortage of infrastructure is the biggest complaint of the two car manufacturers.

“It’s a problem wherever we go,” concedes Nadia Crisan, of Ford in Romania. “[But] in Romania, roads are the number one priority at this point.”But Dacia’s and Ford’s wishlist – which includes new roads linking Craiova, Pitesti and the capital, as well as improved rail links and upgrades to the port of Constanta – may take a while to be fulfilled.With an eight-year boom behind it, the country still has only two motorways and little progress has been made on the Transylvania Highway, which would bring Bucharest to within eight hours of Vienna, after five years of construction.

At a time of recession and IMF-imposed cuts, little progress is expected in the next few years.But if an underdeveloped infrastructure remains a deterrent to some investors, the two existing foreign investors remain confident enough to invest further. Dacia plans to launch a four-wheel-drive version of its Logan in 2010, and is investing €160m in a new research and development site in Romania that will allow it to move its vehicle testing from France to Romania, and Mr Foumont remains optimistic about the sector’s future.”Ford’s arrival proves what Dacia has being showing: that Romania is a real industrial country.”Together, he hopes, the two manufacturers will be able to press for improvements to the country’s infrastructure.

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