The launch of the Renault Logan and the subsequent events is a happening which deserves recognition from strategists all around the world. The Logan was launched to appeal to the developing nations. Renault then launched a variation of the car for the Western European. This was immensely successful in both the regions and has been a key driver in the success of the company.
The Logan, a low cost car manufactured by the French auto giant Renault SA, was intended to be its ‘world car and was developed at the Romanian subsidiary, Dacia. Meant to be sold in the emerging markets of the world, it managed to achieve success even in developed nations like France, Spain & Germany. This lead Renault SA to introduce a Logan variant especially for these markets. We discuss the factors that made Renault to get into the low cost car segment. It also examines the approach of Renault to give to the developing world a car with a pre-designated sale price, various cost reduction methods.
It goes on to discuss the launch of the Logan in Western Europe where the company launched a variant based on the early success of the company.
We broadly look at the following issues while discussing the launch strategy:
To examine the strategic reasons behind a major auto company’s decision to manufacture a low cost car for developing markets.
To understand the reasons behind the success of the Logan, not only in developing nations but also in the developed nations’ markets.
To examine the strategy employed by the company while entering new markets
The Renault Corporation was founded in 1899 as Société Renault Frères by Louis Renault and his two brothers Marcel and Frerand in Boulogne. The founder was extremely fond of cars, the most important invention in the field of transportation in that century. He invented the first direct hold gearbox while he was working on a new design for his car. He succeeded to sell the gearbox to one of his father’s friends who was really impressed by the product. After patenting the product, he set up the company with his brothers and 2 friends. He was in charge of production and development and his brothers managed the administration stuff.
Renault factories started mass production in 1905 and started following Taylorisms, a method of Scientific Management to increase economic efficiency in labour intensive industries, in 1913. The first cars were bought only by the very rich people because of the price which was around ten years worth of a normal workers’ salary. The company thus promptly decided to diversify by getting into the production of taxis and trucks. At the same time, the brothers understood the importance of advertising and began to field Renault cars in automobile races.
The First World War presented a way for the company to become the first private manufacturer in France and it became well-known due to the participation in the war effort with production of various products ranging from munitions, military planes to tanks like the FT17.
After the war, the company diversified into the agricultural and industrial sectors. But the competition in the automobile sector became harder because of cheaper cars being available on the market.
At this time, Renault met some financial problems in a period that was hard for the social and economic environment in France. During the 1920’s, the company tried to overcome these difficulties. In 1920, the first Renault concessionaire appeared. A modernization process was launched in 1929 with the installation of the first assembly line in the Billancourt factory (in the West of Paris). Moreover, the demand for cars became very large especially for small automobiles designed for private individuals. Renault did limit its frontiers to the French market but enter foreign ones like the United Kingdom and its colonies. It was also a period which saw a lot of technical improvements in Renault cars.
During the Second World War and the German occupation of France, Renault produced trucks for the Germans but stopped the civil small automobiles because of the War. Louis Renault was arrested for collaboration at the end of the war and the provisional French government decided to nationalize the company in January 1945 which became the Régie Nationale des Usines Renault (the National State Control of Renault Factories).
With the reconstruction time after the world conflict, the company modernized its installations, built and bought new production sites. The French economy at the time was really prosperous and amongst the fastest growing at the time. Renault tried its hand at internationalization and succeeded to a degree but failed to enter the lucrative US market. Cars during this period really became indispensable for private use and thus big successes arrived with popular cars “for everybody”: the 4CV, and then the Dauphine, the Renault 4, the Renault 5, etc. The first premium model was born with the Renault 16 and other Renault sports cars continued to meet a lot of success in cars races in which Renault invested a lot of money.
The growth stage for the company went on until the beginning of the 1980’s. Many new models were launched and the premium products in particular- the Renault 25 and the Espace appeared and became big ticket selling items for the company. At the same time, the Renault brand grew strongly not in a small part due to the excellent performances in the Formula 1 world- the automobile racing championships.
Nevertheless, Renault encountered big losses in the 70’s and the economic crises during the 1970’s accentuated the problems. A drastic policy for reducing all the costs and refocusing on the core competencies was started and started paying dividends as seen in 1987 when Renault made profits again.
The 1990’s presented new opportunities for Renault. First, an alliance with Volvo was planned but it fell through. However, the real change came with the privatization of the company in the year 1996. 3 years later, in 1999, the company signed a merger deal with Japanese car maker Nissan a deal which through cross holding saw Renault getting 44.5% ownership of Nissan and Nissan getting 15% of Renault.
Formula 1 during the period saw Renault become title challengers through Fernando Alonso. This again contributed to the brand equity for Renault. The Innovations and went on with models like the Megane and the Laguna which contributed the maximum to the sales of Renault during this time.
In the 2000’s, the Renault-Nissan alliance has become stronger and the companies have found synergies which can only help in the alliance. The group internationalization is a big objective now and this can be seen the buyouts of Samsung Motors and Dacia. They brought over 99% of the Romanian company and this subsidiary of Renault was the one that actually brought the Logan to the market.
Renault’s necessity to capture the emerging markets stems from the fact that markets in the developed nations are not growing fast enough to cater to the growth requirement of an international car company.
For this very reason, the global strategy of Renault was renewed, and it was decided that the optimal one would be to strengthen their position in their natural market, meaning the European one and to enter new market with a high potential of development, meaning emerging markets.
In the year 2004, Renault-Nissan was the fourth largest manufacturer in the car industry. The objective defined in the new strategy formulated in 2004 was to become the third largest company by 2010 and to achieve an increase of 30% on the number of car sold (meaning an increase of 900 000 cars). This objective meant to sell 6.5 millions of cars in 2010 instead of 5.6 in 2004, hence capture 10% of the global market.
The purpose of this plan was to take Renault into the car industry’s global group. They also wanted to restore the operating margin which has been deteriorating since early 2005.
An international strategy needed a global vision of the market, hence defining what was common to consumers all over the world. This was Renault’s strategic context that led to the launching of the Logan.
Developing a car for developing markets has become a quest within the automobile in recent years. It all began with Fiat nearly doing it with the Palio;
Launching a car in this segment- modern yet affordable- in lower-income regions is an essential tool available in the hands of automotive companies for expanding the car industry on the whole. In the absence of these models, the streets of the emerging markets are full of obsolete western designs which are still in local production, or used imported cars from developed markets that have been dumped there.
The dumped cars are old and invariably never adhere to environmental standards, thus making the low-cost modern cars an even better value proposition for not only environment lovers but also for people who are sensitized to the issue. These cars match up to all the environment standards set around the world thus appealing to the people living in the developing or emerging nations.
Old designs can still be seen in many countries and the factories setup over 30 years back are still making the car they were initially setup to build, albeit with some minor adjustments. An example of this is the Maruti 800 in India which has been in production from 1982. Another example of the same is the 40 year-old car, the Zhiguli, a car by Russian giant AvtoVAZ.
The examples given above are not really about car makers from developed nations dumping old generation products in emerging markets. This can be seen from the example of the Nissan which still makes the Tsuru, a budget-priced version of the 1980s Sentra, in Mexico. Another of Brazil’s top sellers, the Fiat Uno, has also been in production since at the local factory back in 1976.
All these models share the same basic economic model – the production line is bought and paid for; the R&D costs of the models were amortised long ago. They’re made in simple plants with low-cost labour and using local suppliers, to tolerances that would not be acceptable in the developed world. They’re easy to maintain and spares are readily available. In a nutshell, they’re cheap. And mostly rather nasty.
The trick is to replace them with something that’s equally cheap – but cheap and cheerful instead of cheap and nasty. Cheerful in that it’s safe and clean. But that’s fiendishly difficult to achieve.
Fiat’s Project 178 of 1996 was the first concerted attempt to create such a car. Fiat has substantial interests in a number of emerging markets, principally Latin America and Central Europe, but also in North Africa, South Africa, Turkey and India. Project 178 spawned a number of vehicles off a new platform – Palio hatch, Siena sedan, Palio Weekend wagon and Strada pick-up. And Fiat talked the project up, predicting sales globally of close to a million units a year.
In reality, it hasn’t come close. So far about 3.5m units have been built – including more than 2m in Brazil. But over the 10-year lifespan of the project, that’s only 350,000 a year. Part of the problem was a failure to set up a meaningful alliance in China – Fiat has a low-key operation with Nanjing Automobile, established in 1999, and only sells about 30,000 cars a year there.
But more importantly, the Project 178 cars weren’t cheap enough to take over from the entry-level clunkers they were intended to replace. In Brazil, the Uno Mille soldiers on as Fiat’s cheapest model, with Palio positioned as something of an upmarket alternative.
Brazil is an oddity among emerging markets too in that its consumers like hatchbacks. In most emerging markets, the traditional booted sedan is the carriage of choice, largely because small cars tend to carry more people on an average journey than in the west, so a separate, larger luggage compartment is preferable.
The sedan version of the Palio, the Siena, is too large to be an entry model in Central Europe or India, and in these markets it is sold as a mid-range model. In India, as in Brazil, the Uno props up the range. Fiat seems to accept this – its Siena/Palio replacement, codenamed D200, is due to be unveiled next month. And it’ll be larger than the Siena, closer in size to a Toyota Corolla, according to reports.
Renault has come much closer to the “holy grail” with the Logan. Like Fiat, Renault has a reasonably large emerging markets footprint, which became much more appealing once it had acquired its former Communist-era partner, Romania’s Dacia, which had survived the post-Ceausescu turmoil by cranking out ancient Renault 12s in a crumbling plant.
Logan was created along a brief to build a car that would sell for less than EUR5,000. It involved raiding the parts bin – mainly Clio, though the suspension is from the Modus – and producing a simple four-door sedan to be built in Romania and other emerging markets.
While the EUR5,000 target turned out to be theoretically possible, such a vehicle has never existed as the specification would have been too basic even for Romanian tastes. Logan prices start around EUR7,000, and the project has undoubtedly been a success, with more than 250,000 sold in the first 18 months of production.
As well as Romania, Logan is also manufactured in Russia, where 25,000 vehicles were produced from April 2005 to May 2006, as well as Morocco and Colombia. Production will soon start at a major plant in Iran, where 250,000 units a year are targeted, followed by India – in partnership with Mahindra & Mahindra – and Brazil in 2007. A wagon version was premiered at the Paris Show in September, and panel van and pick-up derivatives will also be built.
Logan has outperformed Palio because it’s a bit smaller, a bit cheaper and the production is better spread. There are potentially genuine economies of scale thanks to annual volumes at full production of around 800,000 units a year. It would be an even greater success if Renault could get it into China – but talks about building it in partnership with Dongfeng-Nissan stalled last year and have remained unresolved.
The initial idea of the Logan came from the former CEO Louis Schwetzer, who imagined, during a trip to Moscow in 1997, an economic saloon car (Berline) for the Russian market.
The Logan was one car from car manufacturers which was not a sub product of a car already in existence in the developing world. Thus the car could be designed from scratch and thus could add to its probability of success in these markets. This gave developers more flexibility right from the design phase to the actual manufacturing phase. This flexibility and ability to create the product just for the emerging nations gave Renault a big competitive advantage over competitors. They could thus follow a low cost strategy right from the very start.
There are two parts in Renault’s low cost strategy to ensure that the product launch is successful; firstly it lays emphasis on a specific organizational and production strategy to match the low prices thus incorporating extreme efficiency in the organization and secondly on achieving the right product positioning which is supposed to fulfil consumers’ needs in both developed as well as emerging countries.
To answer the needs of a mass market, the price of the car needs to be such that the car is accessible to everyone. The production costs will then have to be lower than for a normal car under the criterion set by Renault. But at no stage should our product not fulfil the consumers’ expectations, in particular concerning the safety of the car. Certain factors in cars are hygiene factors and they are a necessity no matter what the cost. This also has to be taken into account while making the final decision.
As the Logan was not a product derived from some other product, the whole production process was to be adapted to the main idea underlying the concept of the car; it had to be extremely lean and efficient. We had to control the costs and thus make production less expensive and yet meet high level of expectations regarding the reliability, strength and performance of the product.
Reducing the costs was a strategic phase of the project, and with this low cost approach, Renault could put on the market a car that was sold with a sub 5000 Euro price tag in emerging countries.
The company also standardized its processes in all the plants across the world in order to ensure lowest possible costs. The company has taken the best practices from various companies around the world. They have incorporated concepts like Six Sigma, Total Quality Management, Just in Time, etc based on the success at other firms around the world. The company is known for its logistics and follows the following principles for the same. This has been especially in practice ever since the launch of the Logan as the volumes for the company have really picked up as a result.
15,000 trucks and 26 trains are used to ship parts and cars are transported daily in around 400 wagons, 10 ships and 1,200 trucks. The transport budget totals around € 470 million for supply and another € 725 million for vehicle distribution.
Logistics at Renault is divided into 7 main families covering all logistics activity, from design to project to series life apart from spare parts and accessories. They include
Production Supply and Management
Logistics
Quality Shipment and Transport
Industrial Planning and Programming
Supply Chain Architecture
Physical Flow Engineering
Process Engineering
Renault could apply a low cost model for the production of a new car, as it had all the core competencies for it.
He used the method design to cost for the Logan, already used with the Twingo in 1992. With this method all the processes are defined regarding the feasibility of a technique and the savings it would lead to.
It is a centralized method, one manager was appointed to check all the process, instead of having each business unit participating to the project. This manager had a broad decision power, and it saved time and resources.
The material was chosen as per the availability of the material all over the world, as the productions sites were supposed to cater to the nearest possible consumers markets. The contractors were also chosen depending on the location of the production site.
The number of components was reduced from 4000 on an average for a car to about 1400 for the Logan. Another important cost reduction was the reduction of the promotional budget (mainly in developed countries). 150 Euros is spent for one Logan, whereas the average cost of promotion is 400 Euros for one car.
All these competencies are not easily imitable by Renault’s competitors.
Traditionally, consumers’ need for a car were analyse as opposite between developed and emerging countries.
For the emerging markets, the development of a middle class is the appearance of a new market for the car industry as more and more people can afford one. Until the Logan, the consumers from this new middle class could only afford a second hand car. With the Logan, Renault is offering a new car at the same price than a second hand one, with the possibility to personalize your car with a broad choice of options. The second advantage of the Logan is the guarantee of safety as it is constructed by a well-known car constructor. Another argument for the emerging markets is the fact that it is a foreign brand. Indeed, for emerging markets consumers, it can be better for your social status to have a foreign brand car.
In developing countries, the launching of the Logan was a success even if it was not meant to be launched at first in developing countries.
For example in Germany, the consumers were attracted to the idea of having a popular car. In those markets, the price argument was extremely important but all the attraction of the Logan came from the fact that it could be personalized has any other car. With the Logan, Renault was able to sell a low cost car to consumers by make them forget it was a low cost car.
Even if the price is the common factor in both markets, the motivations surrounding the price are different. The possibility to buy a new car is mainly linked to the social status for emerging countries’ consumers whereas what attracts developed countries’ consumers is the rationality of buying a safe new car at a low cost.
The originality of Renault’s positioning is to have made one product and to adapt the marketing strategy to the specificity of each market.
The price is the first difference between markets. A Logan is sold in France 1500 Euros more than in Romania. This difference can be explained on a strategic point of view; because Renault didn’t want that the Logan became the only car sold in France by Renault. If the price had been too low, the Logan would have competed with others Renault’s products. (In French it is called the cannibalism effect… not sure if the translation exists; it is a concept in marketing)
Apart from that specificity of the French market, the price is changing depending on the countries mainly because it is possible for a client to invest in options and then pay more.
Owing to its marketing strategy adapted to each local market, Renault intends to satisfy a maximum of different expectations and obtain an optimisation of its sales.
The low cost positioning of the Logan is original because it links a low price product to a diverse offer in order to meet different consumers’ expectations.
In that context, an offer adapted to the revenue of the emergent’s countries consumers was suppose to be Renault’s way to enter those markets with high growth potential.
The specificities of emerging countries’ car market are that it is today underdeveloped, meaning that its potential growth is very high.
The importance of having a product adapted to these markets for Renault was also the only way to be able to compete with the future competition coming from India and China.
The first production centre for the Logan was based in Romania. The car was initially sold in 16 countries Romania, Croatia, Slovakia, Hungary, Czech Rep, Serbia, Montenegro, Macedonia, Turkey, Syria, Lebanon, Baltes countries, Moldavia, Poland).
Launched the 9th of June 2005 in France, it was also sold in Germany and Spain.
The decision to launch the Logan in Western Europe was a forced decision as a parallel market appeared. It was the only way for Renault to avoid competition with its others cars in Western Europe.
Renault originally did not have plans to launch Logan in Western Europe. However, the company started importing a more expensive version of the car in 2006 which was priced at € 7000. The car was a success in Western Europe contrary to the beliefs of the company. This showed the predilection of the buyers for a low cost no frills car. The car is sold under the name of Dacia Logan in the western European region. The car manufactured mainly for the developing nations in Eastern Europe was not intended to be launched in the developed markets of Western Europe. Dacia was assigned the task of developing a car which is low cost and suits the need of developing market and the success in Western Europe did come as a surprise for Renault.
By 2007, over 15% of the total sales of Logan was coming from France and Germany. For people in Western Europe the looks are not that good. The Logan MCV shares the same dowdy lines as its siblings. You also don’t get many features. To keep costs down, Dacia minimized the frill factor to such a low that they were almost non-existent. Nevertheless, the Logan MCV handled city streets with ease. The steering is direct. The suspension is firm but still comfortable. To deal with the often-unpaved roads of its target markets, the Logan’s suspension is slightly higher than other comparably sized vehicles.
Like many European cars, the Logan comes with small and efficient engine options. Despite the small engine the car performed well under traffic. The major reason for the success should be attributed to the price. Compared to the others cars in the segment the price that Logan was charging were unbelievably cheap. Others cars in the segment were priced at around € 13000.
The appetite for low cost cars in Western Europe is a tantalizing development and it could serve as a major point to sell more cars in the markets which are believed by most to be saturated. The low cost cars have a potential to be bought by families who want more than one car. This could also fulfill the requirement of students and the working class early into their career. The scope is wide and prospects wider.
Renault launched its low cost car Logan in India in April, 2007. The car had been hugely successful worldwide. The low cost car was conceived primarily for developing markets, but due to its huge success in Eastern Europe, Renault chose to launch it in Western Europe as well, where it turned out to be successful.
Renault entered India via a joint venture with Indian automaker Mahindra & Mahindra, which provide market insights and distribution reach, while the engines were to be sourced from France. During the launch, the company had projected sales of 30,000 units a year, or 2500 units per month. The actual sales in October 2009 were around 500 cars per month.
The joint venture was supposed to deliver synergy and allow Renault the platform to grow its brand in India. Each partner was expected to deliver a resource which the JV could exploit. While Mahindra provided marketing and distribution, Renault brought to the table technology. However, the JV failed to deliver for the following reasons:
The price point for Logan was a major problem. The petrol range starts at Rs 4.43 lakh going up to Rs 5.32 lakh and the diesel variant is priced at Rs 6.68 lakh. The competitors of Logan in the low cost segment, like Maruti Swift Dzire and Tata Indigo CS, had much more aggressive price tags, and cars like like Ford Ikon and Hyundai Accent that were available in a price bracket close to the Renault model put pressure on demand for Logan.
The reason for Logan having to price higher than its other low cost competitors was the fact that 50% of Logan’s parts and the engine itself were sourced from France, which is higher than any other manufacturer. As a result costs went up
The issue here that prevented synergy was the lack of trust between Renault and Mahindra. Renault refused to part with its technology in an attempt to retain power in the JV and it to keep open its option of having an independent future in India.
Another problem that the JV faced was the rising Euro. Due to the fluctuations in currencies, the costs of the company kept going up, and it could not move to a more aggressive price point.
Moreover, being just over 4 meters long, Logan was in an excise bracket higher than other low cost cars. To top it all, Renault felt that the current volumes were not large enough to justify localized supply. This showed lack of commitment towards the JV.
After the JV with M&M, Renault initiated talks with Bajaj for its small car and also started contacting other auto manufacturers. This strategy of having multiple partners in the same category, especially when these partners maybe competitors, is not a smart one. Due to this apparent lack of commitment from Renault, the Logan was relegated to the backstage in Mahindra outlets with no dealer push coming forth for the car. The company M&M and its dealers preferred to push the Scorpio more, for obvious reasons. Therefore, the Logan entered the market with limited dealer push in spite of having one of the strongest distribution networks in India.
There was very little by way of branding done for the Logan. After the initial launch campaign, there was precious little brand building. The JV tried to drive growth by discount ads, provided primarily by local dealers. As a result Logan never became a strong brand in India. This lack of customer pull, coupled with the lack of retailer push mentioned above ensured that the brand Logan never really took off in India. Moreover, news about the rocky relationship between the partners kept consumers away from the car due to uncertainty about service in the future.
We can derive many lessons from the unexpected failure of the Logan in the Indian market. It teaches us how to derive value from a resource like a JV.
Both partners must be committed to the joint venture for it to succeed. Renault was in talks with other manufacturers, as a result Mahindra did not take the JV seriously. This led to low retailer push, bad press and low investment in marketing activities. In its attempt to grow too quickly Renault actually jeopardized its existing brand.
The partners have to share a degree of trust. The JV sourced about 50% of the parts and the engine from France. This would not have been the case if Renault could have trusted M&M with its technology. Even though that would have given greater power to M&M, it would have ensured a successful take-off for the Logan. Renault could have built its power in the JV by gradually developing its own distribution network over a period of a few years. However, in its rush to grow quickly it jeopardized a very good product.
Renault could also have signaled its commitment and trust by building manufacturing facilities in India, but refrained from doing so.
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