Renault bets big on Indian market

Nearly five decades ago, Renault had signed an agreement with Mahindra & Mahindra to bring a car to India that would cost Rs 7,000. The plan never took off thanks largely to prevailing policies of the Indian government at that time. Since then, Renault just did not seem interested in India. Its French counterpart, Peugeot was more aggressive and was among the earlier entrants to set up operations here once the economy opened up in the early 1990s. It was also the first to leave less than four years later and contributed precious little to the image of French automakers.

In 1994, Renault and M&M carried out clinics for the R17 and R19 but neither was found suitable because of the high price tag. The Indian company had meanwhile tied up with Ford in a new joint venture while Renault just did not seem to have the right product for India. It was content to enter into a supply arrangement with M&M for the Scorpio’s petrol engine. However, all that changed with the Logan which seemed the best bet for emerging markets like India. In some ways, it has been a homecoming of sorts for Renault. The Rs 7,000 car of 1956 remained a pipedream but the Logan is reality and will hit the roads here by the first half of 2007.

It is possibly for the first time globally that Renault has settled for a minority stake in an automobile joint venture overseas. Both partners have reiterated that the alliance will confine itself to the production of the Logan which will see 50,000 cars produced at M&M’s Nashik plant in a project that involves an investment of Rs 700 crore. So, is this all Renault would look for in India? The company has drawn up an aggressive three-year plan worldwide which will see 26 products and variants being produced. It will also look at enhancing its revenue from outside Europe (which is presently around the 27 percent mark) closer to 40 percent. Emerging markets like India will be among the biggest growth drivers and it is only natural to offer a product like the Logan.

Renault, as is well known, has a crossholding equity arrangement with Nissan where it holds 44 percent and the latter has taken up 15 percent in return. In India, Nissan recently announced its intention to join hands with Suzuki and produce cars for the export market.

This will involve setting up a new facility which is tipped to be in Gujarat. The two companies will also produce cars at Maruti’s new plant in Manesar and it is likely that a part of the output will be earmarked for the domestic market. Renault’s interest in this venture could involve supply of parts to this alliance through Renault Nissan Purchasing Organization (RNPO), which was set up for the purpose of common sourcing of components. A critical part here could involve supply of diesel engines to Nissan for its cars that will be made in India. This will obviously mean good business to local vendors as volumes are guaranteed to be large in the long-term.

##### LEVERAGING IN INDIA

The overall objective would naturally be to optimise sourcing opportunities for the Logan and Nissan-Suzuki projects which is not going to be an easy task but crucial nevertheless. The diesel engine for the Logan in India will come from Spain and it will be interesting to see if it will eventually be manufactured here. Renault’s expertise in this area coupled with the projected levels of dieselisation in India could see some keen developments here.

The company has floated a 100 percent arm, Renault India, though it is still not entirely clear what the role of this entity will be. At one level, it seems quite logical to presume that the parent will look to producing the Logan in the joint venture with M&M and save up a superior lineup of products for Renault India that is part of the image building exercise. However, this seems unlikely for now. The Logan is an extremely important product from the French carmaker’s point of view and it is irrelevant that it has 49 percent in Mahindra Renault.

The success of the car is extremely important to both M&M and Renault and could pave the way for bigger things in the future like derivatives from the same platform. Numbers, in that case, may go beyond the only lakh unit mark. Of course, this will also depend on the rapport between the partners and the comfort level they have with each other. Renault India will try and build up a sourcing base here in the form of tapping expertise from vendors, engineers and other specialised services. For instance, fabrics for the Logan’s upholstery could be supplied from here to other parts of the world where the car is produced. India is still the best bet for low costs and high quality, something that Renault would be aware of and, therefore, keen to capitalise on.

This competence could be used both for the company and its affiliates like Nissan which chose to team up with Suzuki in India largely because of the cost advantage. Renault’s own partner, M&M, has identified the engineering and component business as one of its important revenue streams (Ashok Leyland and Eicher are other examples). Similarly, Renault India will also look at a similar business model to optimise costs and help its parent in the entire process.

All this is only natural in the context of high labour costs that are hitting companies in Europe and North America. Peugeot recently announced that it was slashing 10,000 jobs in Europe. GM and Ford are bogged down with similar issues in the US. As Renault looks at an aggressive product plan in the next three years, one of its biggest priorities will be to outsource expertise that is affordable. India may not be able to match China when it comes to costs but is certainly one up when it comes to quality and reliability. This is precisely what Renault will look at even while putting the Logan plan in place.

##### ON SCHEDULE

On this subject, representatives of both companies had met Indian journalists in Paris. Pawan Goenka, president of M&M’s automotive had said, “The project is going extremely well and everything is on schedule. This includes the date of making the first vehicle, date of launch and cost of the project. We do hope the customer likes what he sees.”

He also drove home the point that the relationship between the two partners has been cordial despite the doomsday prophets who had warned at the time of forming the joint venture that the French were difficult to work with. “We have had our arguments but these have added value to the joint venture. Both partners respect each other and have contributed to the alliance. What we are learning is tremendous inputs on manufacturing processes, quality, dealing with suppliers and so on,” he said.

Patrick Pelata, executive vice-president (products) of Renault said that the company was committed to the Logan project in India. The advantages here included a knowledgeable partner as well as a spacious and affordable car. “India has a specific place in the Renault gameplan. Sales outside Europe accounts for 27 percent and the goal is to move this to 37 percent. India is a key part of this plan and it is a market that is growing quickly. The Logan is the perfect car for the country and Renault would not have entered it without a partner like M&M,” he reiterated.

According to Pelata, investments for the project have been lower than what was expected. “This reflects efficiency of the relationship with M&M and the country as a whole. This also augurs well for Renault in India. “We have been impressed with the quality levels of vendors and the localisation level is slightly higher than what was initially projected (it is closer to 58 percent). We are pushing the central purchasing team in Renault to buy more from India,” he said.

Rajesh Jejurikar, managing director of Mahindra Renault, said trial production for the Logan had started with 20 bodies and four vehicles had already been produced. The process of supplier assessment had kicked off in right earnest. "We are also working on upgrading vendors as a joint initiative between M&M and Mahindra Renault teams with support from Renault. The objective is to elevate suppliers involved in the Scorpio and Logan and get maximum synergies across the products,” he said.

According to Jejurikar, the joint venture was aimed at reducing investments across the board and the business model was to use the assets of both partners. Nashik, therefore, became a sub-contracting location for Logan. As is well known, it will be sold alongside the Scorpio. The body shop and assembly lines are already in place and the car is now ready for homologation. The biggest challenge, of course, is to keep costs in check so that the car is assured of a competitive price tag. Even as localisation levels are up to nearly 60 percent, it is doubtless a difficult task to ensure high quality levels. This is because not all vendors meet world quality levels and would, therefore, require greater handholding.

Quite unlike Peugeot which panicked and left, Renault is clearly in India for the long haul. The Logan will be its primary growth driver on the product front while it will looking at sourcing components from India for its global needs to make the most of what a low-cost base can offer. As the economy grows, Renault could consider appropriate products that fit in with market requirements except that this is not likely to happen till well after 2010.