Renault's Race to Replace the Rickshaw
Renault-Nissan Chief Executive Carlos Ghosn touched down in India twice on Oct. 29, making pit stops in his frenetic bid to grab a piece of the emerging global market for ultra-cheap cars. After inking a joint venture for low-cost vans and trucks in Chennai with Ashok Leyland (ASOK), he flew to Pune in his corporate jet to kick the tires at the factory of Bajaj Auto (BJAT), India's No. 2 motorcycle maker and a potential partner in Ghosn's quest to engineer a $3,000 car by 2010. A project could be announced within months.
Ghosn needs to quicken the pace. In the race to develop the world's cheapest car for emerging markets, he's about to be lapped. India's Tata Motors (TAMO) aims to launch its long-awaited $2,500 car in 2008. Tata Chairman Ratan Tata vowed in 2003 to build a people's car for India costing 100,000 rupees ($2,500)—a project once greeted with widespread skepticism. Now, as he prepares to unveil the audacious experiment at the New Delhi Auto Expo, Western auto chiefs including Ghosn are starting to sweat. "The challenge is to build a low-cost car that makes money," says Ghosn.
At the Tokyo Motor Show in late October (BusinessWeek, 10/26/07), Ghosn predicted Renault-Nissan (RENA) could have a $3,000 car on the market by 2010, though he has yet to clinch a joint venture for the project in India. "We know Tata is announcing this car in the Indian market in 2008. And if Tata can do it, we can do it," Ghosn said in Tokyo.
Producing A Partner
The Renault CEO is keen to nab an Indian partner to do "frugal engineering" on a $3,000 car, since Indian engineers are more able to break with Western automotive traditions and think outside the box, he says. Western experts agree that engineers will have to entirely "rethink" how a car is designed in order to bring development costs down radically.
"Low-price vehicles are not vehicles of inferior quality equipped with the most basic components," says Wolf-Henning Scheider, president of the gasoline systems division at German auto supplier Robert Bosch. "They are inexpensive technical solutions produced using state-of-the-art components."
During his visit to the Bajaj motorcycle plant in Pune, Ghosn and two top Renault-Nissan executives spent an hour in discussion with Managing Director Rajiv Bajaj, toured the plant, and spoke to workers about the opportunity Ghosn envisioned for a joint venture. He also took a ride in a Bajaj three-wheel rickshaw—the popular, inexpensive vehicle that a $3,000 car would compete with.
Before departing, Ghosn told Bajaj—a mechanical engineer who received a master's degree in manufacturing systems engineering from the University of Warwick in Britain—that he was impressed with the clean, well laid out factory, the network of suppliers nearby, disciplined work practices, and the clear evidence of Japanese Kaizen quality practices.
If Ghosn shakes hands on a deal with Bajaj, the Indian vehicle maker would take the lead in developing the $3,000 car, while having Renault-Nissan's vast engineering expertise at its disposal. "Cost is the main challenge, and we have to make it robust," Ghosn says.
Bajaj doesn't make cars yet, but it's no bit player either. In its 2007 fiscal year, revenues jumped 24%, to $2.54 billion, and net profit rose 10%, to $315 million. It's also riding the wave of surging transportation growth. The company produced 2.3 million motorcycles in fiscal 2007, up 24%. It's also interested in developing a low-cost light truck to compete with Tata.
Most likely, Bajaj would get a helping hand from leading global suppliers eager to solve the riddle of halving the price of the cheapest car on the market today. Bosch (BCSHF), for instance, is already developing alternators, brakes, and gasoline and diesel engines for Tata's $2,500 car. From the time Tata asked Bosch to make a bid, it took the German company's engineers only four months to come up with innovative cut-rate prototypes that clinched a contract. By 2010, Bosch forecasts its sales in low-priced vehicle components of all kinds will hit $1.4 billion, or roughly 30% of the global market.
German auto supplier Continental (CONG) is also investing heavily in components for low-cost cars that will be safe and reliable. "Competitive prices [for parts] must in no way compromise safety or long-term quality," says Karl-Thomas Neumann, chairman of the board of directors of Continental Automotive Systems.
A Modern Twist
Ghosn must cut a deal by January's New Delhi Auto Expo or sit on the sidelines as Tata basks in the limelight. And there's yet another risk: If Tata's $2,500 car is a credible vehicle, it will trump Renault's no-frills Romanian-built Logan.
The French automaker pioneered a modern twist on the low-cost car in 2004 with the bulky Logan, which was designed for first-time car buyers in emerging markets as a reliable, easy-to-fix, five-seater sedan with maximum space for a rock-bottom price—starting at €6,000 ($7,500) in Eastern Europe and €7,500 ($10,000) in Western Europe. As sales soared, the homely Logan sent shockwaves through the auto industry and triggered competing low-cost car projects at Toyota (TM), General Motors (GM), Fiat (FIA.MI), Volkswagen (VOWG), and VW's Skoda unit.
But the Logan qualifies as a medium-priced car in India, where cheap hatchbacks—including one built by Tata—start at $5,000 and dominate the market. With a $2,500 car, Ratan Tata is betting he can forge an entirely new market segment, targeting the 60 million Indians who now ride a scooter or a motorcycle and can't afford a $5,000 car. Tata Motor also aims to export the ultra-cheap car to Africa, the Middle East, and Latin America—and already has a joint distribution agreement with Fiat in Latin America.
As Tata and Ghosn plumb the lower end of the market in India, it's increasingly clear that low-cost cars are set to transform the global auto industry. Emerging countries are booming, while the huge U.S. and European markets stagnate. And in India, cheap wheels are all the rage. Western automakers that don't have low-cost models in the pipeline for millions of aspiring car buyers in Asia, South America, and Africa could see their fortunes wane in the 21st century. "If we are not present in this sector, we risk losing some of the knowhow to compete," says Ghosn.
Bosch, the world's largest auto supplier, predicts that sales of cars priced at less than $7,000 will hit 10 million units annually by 2010, or 13% of the global auto market. That constitutes an average annual growth rate of 5%—double the pace of the industry as a whole. Already, Ratan Tata says he expects to sell 2 million of his low-cost cars, mainly in India, by 2010, while Ghosn has vowed to sell 1 million Logans worldwide by the same date. Renault is fast cloning its simple Logan factory concept around the world and creating sister models to the Logan sedan on the same platform, such as a pickup and minivan. Worldwide Logan sales may top 400,000 this year.
But India is the pivotal market. Its annual auto sales are expected to nearly double over the next five years, to 2.3 million cars in 2012, surpassing China as the fastest growing auto market, according to market forecaster J.D. Power & Associates, which, like BusinessWeek, is a unit of The McGraw-Hill Companies (MHP).
Ghosn is pressing ahead on several fronts in India at the same time. Renault-Nissan already has teamed up with truck maker Mahindra & Mahindra (MAHM) in a joint venture that will produce some 400,000 cars a year starting in 2009. The Renault-Nissan alliance is also setting up a technology and business services center in Chennai, which will open in 2008. And in addition to the Renault Logan, alliance partner Nissan now plans to build a $7,000 car itself in India. Ghosn says a future $3,000 model might be exported to Western markets for $5,000. He's already got a running start, but needs to go even faster to stay in the cheap car race.