Renault Samsung: A French Recipe to Savor

How the European company heated up a struggling carmaker

Lim Sang Soo loves to boast about his taxi. He has driven more than 120,000 kilometers through Seoul's potholed streets in his blue and grey Renault Samsung SM5 without so much as a hiccup. And the car came with plenty of options: Instead of stripping out extras such as power windows and leather seats--as other Korean carmakers do for taxis--Renault Samsung piles the goodies in at no extra cost. "Many passengers ask taxi drivers' which car to buy, and I always tell them to buy an SM5," says Lim.

A lot of Koreans must be asking cabbies for recommendations. After just two years of operation, Renault Samsung Motors Co., the French auto maker's Korean subsidiary, is breaking even--two years ahead of target. In the fast-growing Korean market, the SM5 is vying with Hyundai Motor Co.'s Sonata as the best-selling midsize sedan. Sure, it has a reputation in the popular press for dull styling (the SM5, which starts at $10,000, is based on the five-year-old Nissan Maxima). But the company expects to sell some 116,000 cars this year--9.7% of all passenger cars sold in Korea. That should drive Renault Samsung's revenues to $1.25 billion, up 42% from last year. The success "beats all our expectations," says Yoon Jung Ho, a managing director at the company.

He's not alone in his surprise. The Korean conglomerate Samsung, better known for its mobile phones and computer chips, started selling cars at the worst possible time: in April, 1998, when the Asian financial crisis was sweeping through the region like a typhoon. After selling 44,000 cars in 1998, Samsung managed to move fewer than 7,000 the next year. The company's spanking new $3 billion factory in Busan--built in cooperation with Japan's Nissan Motor--looked like one of the worst investments in Samsung's history.

Enter Renault. In September, 2000, the French carmaker picked up 70% of the operation--with an annual capacity of 240,000 cars--for just $512 million, leaving Samsung holding $2.5 billion in debt from the project. As soon as new Chief Executive Jerome Stoll arrived from Paris to run the venture, he cracked down hard on costs, questioning everything from expensive tweaks in vehicle design to the cost of putting up an ad billboard. "We had to show how we would improve our bottom line for every move we made," says Ryu Jai Hyon, Renault Samsung's planning director. Stoll declined a request for an interview.

It's time for a second act. In September, Renault Samsung introduced a new model, a smaller sedan called the SM3. The car, starting at $7,500 and based on the same platform as the compact Nissan Bluebird Sylphy, is the first model developed since the French started calling the shots. So far, it has been a hit: Buyers have snapped up 3,000 SM3s in the three weeks since the car was launched, and there's now a backlog of 10,000 orders. "The success or failure of the SM3 will likely determine Renault Samsung's future," says Kim So Rim, head of research at the Korea Automobile Manufacturers Assn.

Marketing the SM3 may not be as easy as selling its big sister. For starters, Renault Samsung could offer the SM5 at a low price because it bought the factory on the cheap, after all of the design work on the car was already completed. The SM5 was virtually the only alternative to Hyundai in its class, whereas there's more competition for the SM3. And with General Motors Corp. taking over and reinvigorating rival Daewoo Motors, "the business environment will get tougher," says Goldman, Sachs & Co. auto analyst Young Chang.

Still, Renault has even bigger dreams. The French auto maker has earmarked $360 million over the next three years to help increase design and development capabilities at the Korean subsidiary. And Renault wants to ramp up production of the SM5, SM3, and at least one other new model to 240,000 in three years, and to 500,000 by 2010--when it plans to export half of its production. The Korean unit will concentrate on promoting Renault's brand in Asia, with its cars looking increasingly different from those of Nissan, its other affiliate in the region. The Korean operation "will be Renault's hub in Asia," Renault Chairman and CEO Louis Schweitzer said after a visit to the Busan plant in September. To be certain of success, all he has to do is export some Korean taxi drivers along with the cars.

By Moon Ihlwan in Seoul, with Chester Dawson in Tokyo

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