Thursday, December 2, 2010

Romania: Driving ambition

Oxford Business Group

The Romanian carmaker Automobile Dacia, a subsidiary of France’s Renault, is looking to build on its success in the low-cost, emerging-markets car segment with an ambitious play for Western European customers seeking a more cost-efficient option.

In October, the international press reported that Renault was looking to boost Dacia’s annual European sales by almost 50% in the next four years. The increase, from 350,000 to 550,000, would form part of Renault’s plans to sell more than 1m low-cost models worldwide by 2015. Company officials told London’s Financial Times that the firm plans to boost Dacia’s sales by adding a “light commercial vehicle and a family car” to its five-model range, as well as entering new markets such as the UK, where it will launch in 2012.

This strategy would reinforce Dacia’s ongoing process of geographical expansion and diversification. It would also likely prove a welcome fillip to Romania’s wider automotive industry, particularly component suppliers.

Dacia is one of Romania’s industrial success stories. Renault bought the firm in 1999 after a partnership that had lasted since Dacia’s formation in 1966. Within a short period of time, the somewhat ailing communist-era company – which was suffering from lagging technology and a weak brand outside its home market – had been turned around. While other Eastern European automakers such as the formerly Yugoslav, now Serbian Zastava and the Czech Tatra stagnated, downsized or went out of business, Dacia has adopted an aggressive but simple regeneration and expansion strategy. The firm has offered robust and modern but no-frills vehicles – good quality but pared-down units with few non-essential extras – and targeted emerging markets.

The solid vehicles were specifically designed to withstand the tough road and climatic conditions of the countries in which they were sold in Eastern Europe, and then the Middle East, North Africa and Latin America. The 2004 launch of the Logan saloon was a landmark moment. The car now sells in dozens of countries worldwide, and is sometimes badged as a Renault rather than a Dacia in South America.

Dacia’s success in emerging markets has led to it being manufactured in Morocco, South Africa, Brazil, Iran and Russia, as well as at its home plant in Mioveni, near Pitesti, southern Romania.

The Mioveni factory now produces around 1350 units per day, 85% of which are for export, and in October it produced its one millionth Logan. The impact on the domestic automotive sector has been significant, with the demand for components leading to a cluster of suppliers springing up in and around Pitesti. Dacia plants may now be found on three continents, but much of the value comes back to Romania, as many of the units made abroad are assembled from complete knocked-down kits delivered from Mioveni.

Having established Dacia as a growing force in emerging markets, Renault has now turned towards Central and Western Europe, marketing Dacias as economical, good-value vehicles in countries in which consumers have felt the squeeze of recession and subsequent austerity measures. Renault officials compare Dacia to Ikea, the Swedish home furnishings brand that offers simple, well-designed products and has proved a huge success among Europe’s middle classes.

So far, Dacia’s European strategy has proved a success, with the marque’s sales in Europe up 11% in the first three quarters of the year while the market as a whole contracted by 4%. Even Renault has been taken by surprise, and a six-month waiting list has built up. Though one should cite the caveat that Dacia started from a relatively low base, other affordable brands including South Korea’s Kia and Hyundai have also significantly outperformed the market, suggesting that the Romanian carmaker has seized the initiative at the right time.

In March, Dacia launched its first sports utility vehicle (SUV), the Duster, priced at €12,000, low for such cars, and is also contemplating manufacturing a commercial vehicle. These developments indicate Renault’s ambition for the brand, willing to push it into new segments while retaining its core strengths. In 2012, Dacia is due to launch on the high-value but highly competitive UK market, a new challenge that contains both potential pitfalls and great opportunities.

Expansion abroad is proving particularly important for Dacia at a time when the Romanian automotive market continues to suffer as economic recovery is . Car sales (measured by new registrations) fell 27% in the first ten months of this year, to 70,629, according to official figures. Dacia took a market share of more than a third, with more than 23,000 units sold, and outperformed the market as a whole, but still saw sales fall 24% on the same period of 2009. Purchases are now picking up again as growth returns, but domestic demand remains rather sluggish and it could be some time before the market bounces back.

The success of Dacia may have encouraged Ford to purchase a controlling stake of Automobile Craiova, an ailing Romanian carmaker, in 2008. The Craiova plant south west of Bucharest produced its first units, the Ford Transit Connect small commercial vehicle, in 2009, and is expected to commence manufacture of the B-Max small passenger car next year. Ford has pledged €675m in investment in Craiova, and is due to take on another 3500 staff from early 2011.

The Romanian government has expressed hopes that the factory will ramp up to its output of 250,000 units in the medium term, and Ford expects to export 80% of these cars. While there has been some delay in expanding production at Craiova, the success of Dacia has both highlighted Romania’s strengths as an auto manufacturing centre, and further enhanced them by stimulating the growth of a high-quality component industry and the supply chains on which the sector thrives.

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