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Sights Set On India

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The Indian auto market is booming, and global auto makers are in a hurry to bite a share of the pie. French auto maker the $56-billion Renault, however, is treading cautiously. Having burnt its fingers in failed partnerships in the past, the company is not exactly setting a scorching pace. It plans to sell 100,000 vehicles by 2014. That's a mere 2.5 per cent of the Indian auto market, which is expected to be 4 million by then. Is Renault setting its sights too low?

"Renault is going to make a living out of India," says Marc Nassif, managing director of Renault India. On the cards are five new vehicles. The executive sedan Fluence has already hit the market, Koleos, an executive sports utility vehicle (SUV), will be introduced by end-2011. The third offering is a hatchback based on the ‘V' platform that Renault shares with Nissan. Then there is the compact SUV Duster, a small hatchback in the B-segment. And the fifth, a ‘surprise' vehicle is also in the works. "We will cover 60 per cent of the market with these products," says Len Curran, vice-president of marketing and sales of Renault India.

As evident, Renault is taking the top-down approach to the Indian market rather than the bottom-up route adopted for small cars. The Volkswagen group followed a similar strategy by first introducing Skoda followed by the Jetta and the Passat before launching Indian made brands such as the Polo hatchback and the Vento sedan. Similarly, Renault's Fluence and the Koleos will build the brand name before the hatchback drives into the market.

But Renault's target segments are not the biggest volume generators. The executive sedan market, where the Fluence will compete with the likes of Skoda's Laura, Toyota's Corolla Altis and General Motor's (GM's) Cruze is only 31,000 units.

Similarly, the market for the Koleos — an executive SUV — is just 60,000 units and is dominated by Toyota and GM. The Toyota Fortuner rules the segment (it sold 26,875 cars in 2010-11). Renault's third offering, a Romanian SUV called Duster, priced under Rs 10 lakh, will compete with its former partner Mahindra & Mahindra (M&M) that leads the segment with 170,000 units of Bolero and Scorpio. Again, the SUV segment sells only 220,000 units per year. Hence, Renault's first three offerings will cater to a market not bigger than 260,000 units a year. That is, until the small car / hatchback, where the volumes are expected, is launched.

"The hatchback segment grew by 30 per cent last year and we'll see similar growth in coming years," says Kapil Arora, head (automotive practice), Ernst & Young. About 1.4 million hatchbacks were sold in 2010-11, and 232,979 cars were sold in the first two months of 2011-12 (April and May).

How quickly Renault can ramp up to 100,000 units will depend not on the smaller categories it is targeting, but on when Renault introduces the hatchback. The segment is dominated by Maruti Suzuki, Hyundai and Tata Motors that collectively sell 1.2 million units, constituting 87 per cent of the market.

Renault is unlikely to record such large volumes initially. Its competition is going to be GM (with 4.72 per cent market share), Ford (4.32 per cent) and Toyota (3.70 per cent) in 2.2 million passenger cars and SUVs segment. Renault plans to bring to the Indian market what is called the V platform, on which it will build a hatchback for the masses. The new car is likely to be completely localised. But to really create a dent in the hatchback market, Renault will need a portfolio of products. The market is so competitive that one small car will not be enough to fight the entrenched players such as Maruti (seven small cars with 20 variants), Hyundai (three cars and nine variants), Tata Motors (two cars and six variants) and even GM (three cars with nine variants).

The other aspect Renault needs to fix to pull in the volumes is a fast dealer ramp-up. Even smaller players such as GM, Ford and Toyota started with a few dealers. Now they are all ramping up. By end-2011, GM is planning to have 250 dealers, while Ford and Toyota will have 200 and 150, respectively. Renault is planning to ramp up dealers from 15 to 100 by 2012. "They will have a problem in executing the target of 100 dealerships in 16 months. (If) each dealer takes two months to set up shop, Renault should have its dealers identified and ready with the concept by the middle of 2012. It is a hard task as finding location is not easy," says Hormazd Sorabjee, editor, Autocar India.

Among Renault's rivals in India, the Ford Figo sold 78,116 units last year, while GM's Beat and Spark together sold 72,000 units. Toyota's Liva received 1,000 bookings within two days of the launch. Toyota, which can produce only 150,000 units of all its brands, has decided to sell only 30,000 Livas a year. At least, on capacity, it's ‘Advantage Renault'. The Renault-Nissan Alliance's (RNA) Chennai plant can produce 200,000 vehicles a year, which can be ramped up to 400,000 units with additional capex.

Troubled Past
Renault is cautious due to a series of failed partnerships in the past. The Bajaj-Renault deal to make an ultra low-cost car got into trouble after the Bajaj family said it wanted to make its own low-cost car and use Renault's help only in marketing it, if at all. The original plan was that Renault will bring in the technology and Bajaj the platform, and both would jointly sell the car. However, this alliance was short-lived.

Renault's partnership with M&M had issues right from the beginning in 2007. Renault did not like the positioning that M&M gave Logan, which it felt did not communicate the car's value proposition of reliability and quality. M&M, on the other hand, did not like the design and blamed poor sales on it. The $169-million joint venture came to an end in 2010, with M&M buying out Renault's 49 per cent share.

It was after the M&M partnership ended that Renault decided to go solo in 2010. Since then Carlos Ghosn, the supreme boss of the Renault-Nissan Alliance globally, has mandated Renault to make India the profit centre for the company this decade. India has been placed ahead of Russia, Brazil and China to contribute to the mother company's revenues in France.

The India Game
"Renault and Nissan are betting on India because it is one of the fastest-growing automotive markets in the world," says Ammar Master,  senior market analyst at JD Power Asia. There is a huge potential for growth in India, which can also serve as a global production base for export models, especially small cars. India's relatively cheaper labour costs and value engineering capability are also advantageous for global automakers. "We don't think Renault will focus on exports; its main objective will be to establish itself in the domestic market," says Master.

However, Renault's partner Nissan has low expectations from India and is concentrating on exports. Nissan sold 12,302 units in India last year, while it exported 55,321 cars. In the first two months of this financial year, Nissan has already exported 13,368 units and sold 2,795 units in the domestic market. Nissan also plans to launch the compact sedan Sunny; it is expected to be exported to right-hand drive markets in South Asia and Africa.

Nissan has moved the production of Micra from the UK to India and will export the model to Europe, the Middle East and Africa. JD Power expects Micra exports to be about 90,000 in 2011, and about 115,000 units through 2017. It also projects Nissan's sales to touch 60,000 units by 2017, with the addition of three more models to its kitty.

Renault, on the other hand, is focused on the Indian market. With Fluence, Renault does not want to repeat the design issues that it had with Logan. Renault's technical centre in Mumbai has worked on the power train and the simulation of the product's validation process to make it a sedan that can be successful on Indian roads. The car, however, is manufactured at Renault's plant in Turkey and comes to India as a CKD (completely knocked down) kit.

Selling 100,000 cars may not appear to be a huge task, but Renault has many more plans for India. Last year, it exported 35 million Euros worth of parts globally and it plans to increase this number over two years to reach 150 million Euros. It has over 40 dedicated suppliers for the exports of spare parts, while the RNA has over 120 suppliers for domestic supplies.

In a booming market, Renault may not have set its sights too high, but it is ensuring it creates a strong foundation in the country, at least.


(This story was published in Businessworld Issue Dated 08-08-2011)