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Dacia Case

In: Business and Management

Submitted By SB2600
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1. Why is the low cost market of strategic interest to the automotive industry?
Growth of the automotive industry in the developed world has started to decline or become steady, the car manufacturers are now shifting their focus on emerging markets for capturing new opportunities, i.e. low-cost cars, presenting substantial potential for growth
According to Roland Berger Strategy Consultants, by 2012 the global market for vehicles priced under
6,500 EUR is likely to reach 18 million cars, or a fifth of world auto sales. That's up from 12 million today.
Fresh demand is springing up not only in emerging markets such as China and India, but also in the richer western nations, where the cost of buying and running a car has significantly outstripped income growth As a result, many consumers are becoming more and more willing to compromise on comfort, basing car purchase decisions mainly on price instead.
In the emerging markets, the new middle class demands value for money automotives. Since they are willing to buy new cars a potential car seller has to meet price With the mid-range price segment shrinking, companies can only earn money on expensive premium offerings or in the low cost segment. At the same time, high fuel prices are driving down demand for large SUVs while boosting sales of small cars. Despite Western
Europe‘s prosperity, car prices have outgrown the wages. As a result, many consumers are becoming more and more willing to compromise on comfort, basing car purchase decisions mainly on price instead.
Renault's Dacia Logan was the first model to show Western Europeans that it really is possible for them to build cars at a profit in the low cost car segment.
Low-cost cars are the single most important trend in the automotive industry today
The low-cost car segment seems to be facing a bright future with steady growing sales volumes. But what is also of crucial importance is the potential to make money with these products. Low-cost cars can achieve satisfactory profit margins through an adjustment of the car’s value chain e.g. with regard to labor, capital, logistics, and distribution costs. According to estimates, profit margins of the Dacia Logan range between 3% and 6%. This matches well the average margins (before taxes) enjoyed by mass car manufacturers of approx. 3% to 4%.

2. What challenges did the Dacia Logan project face and what did Renault do to overcome them?
Although Dacia was an old and technically obsolete company, it was highly competitive in terms of labor and other associated costs. Since its acquisition, Dacia has undergone an enhancement program by upgrading its industrial infrastructure, suppliers’ network, employee care and an eye on safety hazards in the plant. Renault’s investments at Dacia amounted to 772 million EUR by the end of 2006.
While there exists also a clear risk in associating with a low-quality carmaker, which could degrade
Renault’s image, it was not the first time when a leading carmaker has taken such a step
The product, the process and the people have been very carefully prepared and the employees are now already taking on additional tasks such as assembly and partial manufacturing of a diesel engine as well as manufacturing of some chassis components. Renault’s Dacia plant is now Renault's second most productive plant globally.
Right from the start the goal was to meet the demands of customers for whom a car was a major purchase and whose chief criteria were the price, reliability and durability it was pivotal to have suppliers in close vicinity of the manufacturing site, located in Pitesti in Romania.
However, this was not an easy task, especially the relocate of crucial suppliers to Pitesti. When Renault took over Dacia, some of the suppliers were doubtful about the feasibility of Renault’s plans. Nonetheless, with its huge investments in Dacia Pitesti plant soon after acquisition, Renault was able to build reliance in Logan’s envisioned success and many suppliers were coaxed into that. Some of the key suppliers who moved to Romania in the initial phase were Continental, Valeo, and Johnson Control. To make the Pitesti project efficient; a core cross-functional team comprising of Renault’s senior experts with 15 to 25 years of experience in low-cost solutions and some key suppliers were co- located. This team was responsible for overseeing the whole project.
In order to meet these tough cost constraints changing the engineering mindset of the involved engineers was very important. To boost fresh thinking, project members were given substantial autonomy to pursue their tasks.
Making products smarter in terms of simplicity and robustness needed to become an equally acclaimed achievement within Renault as developing products packed with newest technological solutions.
Logan was primarily targeted for developing markets that added much more complexity to the given problem. It was not only about cutting the costs of the various critical parts of the car but to even customize them according to local market conditions. Another hurdle was to cut down the overheads by efficiently utilizing resources. In short, the goal of the team was to meet the demands of customers for whom the value of a car was a measure of functional utility, reliability and durability at a competitive price.

3. Was the Dacia Logan project a success? Please assess the impact of the
Dacia Logan in (a) emerging markets and (b) developed markets.
Until the end of 2008, over 1.2 million cars (counting Logan, Logan MCV, Logan Van, Logan
Pick-up and Sandero) have been sold worldwide (see Exhibit 6a). Logan’s success is based on a simple concept: deliver reasonable features at an affordable price.
Dacia Logan saw an unexpected growing demand from Western Europe as well. Anticipating
Logan’s potential in Western Europe, Renault decided to sell the Logan also in developed markets but with more features and options available, for example alloy wheels and metallic paint. - According to estimates, profit margins of the Dacia Logan range between 3% and 6%.
- Whether it is in Europe or any other part of the world, Logan is a clear blockbuster in the automobile world. By the end of 2007, Dacia was exporting Logan to 55 countries; 47 under the Dacia brand and eight under the Renault or Nissan brand. With new models of the Logan family, Renault is destined to maintain its leading position in the low-cost high-tech car market. Although Dacia has been much appreciated for its “low-cost, high-value” offering, many have underestimated its unprecedented importance for its strategic imperative in Renault group’s growth factor. Since its launch, Dacia has acted as a growth booster for the Renault group (see Exhibit 6b).

- Dacia Logan is truly the most successful car that has considerably revolutionized the world of high-tech, low-cost automobiles. Renault has been able to maintain its leadership in the low-cost car industry by far since the launch of Dacia Logan in 2004.
- Logan’s second expansion phase then takes 2 directions:
▪ Geographical expansion, with release in many countries, and local production
▪ Product range expansion, with the development of new variants based on the same platform
- Designed and developed for fast-growing markets, the Entry range has allowed Renault to significantly increase presence outside Europe and to penetrate new markets. At the end of 2007, 35% of Group sales were made outside Europe, up from 22.8% in 2004. In 2012 a new level was reached, with more than half of Renault sales made outside Europe. This is largely due to the Entry range. In 8 years, more than four million vehicles have been sold in 96 countries, including the priority Group markets of Russia, India and
- More than 2 million Dacia vehicles have been sold in Europe and in the Mediterranean basin since
2004. Development continues in 2012 with the broadening of the range with Lodgy, Dokker and Dokker
Van. The brand is now present in 36 countries in Europe, Turkey and the Maghreb region. At the beginning of 2013, Dacia will be launched in the United Kingdom and Ireland (with Duster and Sandero).

4. What are the future strategic challenges for Dacia?
Renault is designing the next generation of its Logan while bearing in mind especially about the Chinese carmakers, which are selling Logan rivals in emerging markets. Renault knows that eventually it is going to be forced to compete with other carmakers in some markets
Renault is also speeding up the creation of a stand-alone European distribution network for its Logan model line
Finally, Renault is making all the viable efforts to have its supplier base developed at the same pace as its long term plans. As a result, some of its key suppliers will expand their production to cater for the requirements of Dacia’s volume increase. The Chief Operating Officer at Dacia, Francois Fourmont stated that "Suppliers in Romania are going to open more than 20 plants". According to ACAROM, the
Romanian car manufacturers association, half of the factories will be new while the rest will be extensions of existing plants.
For Dacia, increasing product quality, improving technical performance and encouraging a high degree of innovation are all factors that can help boost sales by influencing consumers purchasing behavior.
Customers are currently largely attached to Dacia. This brand loyalty advantage added to those listed above, is placing the company products closer to the levels at which import automobiles brands are viewed on the Romanian car market (especially those of German origin). But for this goal to be achieved, a successful combination of marketing, financial, and production elements must be implemented. Dacia
Company proved that it is capable of surpassing great challenges and the current economic and financial conditions that impose more rational decisions from the customer’s part, could translate in a real opportunity for future expansion on global markets for Dacia’s products.

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