Global Economics

Renault Pins Its Hopes on New Models


The carmaker is hitting bumps, but analysts trust CEO Ghosn's assurance that profits will rebound with the Laguna and Twingo

Renault Chief Executive Carlos Ghosn is nearing the moment of truth in his two-year tenure at French automaker. As Renault's European sales continue to plummet—the result of aging models that Ghosn inherited from predecessor (and now Chairman) Louis Schweitzer—the spotlight is on two new cars developed under his leadership: the Laguna midsize sedan and the Twingo mini. Both are vital to reversing course at Renault.

Eagerly anticipating the long-awaited boost from fresh models, Renault gave the world an online glimpse of its sporty, third-generation Laguna sedan on June 4, several months before the car's scheduled September unveiling. And on June 15, Renault will launch an updated Twingo, its plucky city car that has inspired a raft of imitators. Just as important as the eye-catching French design of these vehicles will be their quality, reliability, and profitability. Ghosn has pledged to improve Renault's global competitiveness by providing quality and customer satisfaction comparable to that of Toyota (TM).

Relying on the Ghosn Touch

Declining sales have punctured Renault's profits for two years running, and the automaker's operating margin slumped to 2.6% last year, down from 3.2% in 2005 and 5.2% in 2004. First-quarter 2007 revenues were down 2.7%, to $13.8 billion, as vehicle sales in Europe declined 8.5%.

The bad news continued in May: Monthly new-car sales for Renault in France fell 9.6%, year-on-year, while those of rival PSA Peugeot Citroën rose 4.5%. At the same time, Ghosn's reputation at Nissan (NSANY), where he is also chief executive, has been dented by a profit decline in fiscal 2006-2007.

Investors will have to wait until yearend for the first clear signs of a sales and profit rebound at Renault. But analysts believe the rock-star auto CEO, famed for transforming a near-bankrupt Nissan into one of the industry's most profitable automakers (even with its recent profit setback), can deliver on his ambitious "Commitment 2009" plan to boost Renault's results. Ghosn told analysts on June 1 that the company is on track to produce an operating margin of 3.0%—reversing the two-year profit slide.

The First Half's "Trough"

Ghosn pledged in 2006 to catapult Renault's cars into the top ranks in quality and to increase vehicle sales by 800,000 over three years, to 3.3 million. But he could do little to stanch the sales decline over the past year as Renault suffered from a lack of fresh models and the pipeline ran dry (see BusinessWeek.com 2/9/07, "Ghosn's Renault: Bowed but Not Beaten").

"The first half of 2007 should be the trough," says Jochen Gehrke, analyst at Deutsche Bank (DB) in a recent report. "However, a strong product offensive should kick off in the fourth quarter." Ghosn plans to introduce 26 new models by 2009.

The low-cost Logan, which starts at $7,400 and is produced by Renault's Romanian unit, Dacia, is key to Ghosn's growth goals. The Logan sedan, together with several variants, should power sales growth of 17% in 2008, forecasts Deutsche Bank's Gehrke. A popular seven-seat minivan version of the Logan, which costs only €10,000 ($13,400), has a six-month waiting list and has helped spur a 51% rise in Dacia's sales this calendar year.

Small Cars, Big Markets

In early April, in partnership with Mahindra & Mahindra, Renault launched the no-frills Logan in India. By 2008, Renault hopes to sell 50,000 cars annually in India's booming market, with further gains coming on stream later. In a signal of the importance of the Logan to its global growth, Renault recently announced it will invest $664 million in a research center in Romania dedicated to future Logan models (see BusinessWeek.com 4/23/07, "The Race to Build Really Cheap Cars").

Raising Renault's reputation for quality and service is just as vital as production of a low-cost global car to a reversal of the French automaker's fortunes. Volume producers such as Renault, Peugeot, and Ford (F) have been squeezed in recent years, as premium automakers move into their turf with smaller, more affordable cars that carry big cachet, such as BMW's 1 Series compacts (which start at around $29,600). At the same time, Korean and Japanese players seek to outperform the Europeans on their home turf with quality cars at the lower end of the market.

To fend off the attack, Ghosn is implementing a cost-cutting program that will help Renault pack more car into the sticker price. The new Twingo, for example, is made in Slovenia and will cost less than €8,000 ($10,000), undercutting similar models by Fiat and Peugeot. The starting price also will be €860 ($1,153) less than the previous Twingo.

Ghosn also plans to develop more expensive models—including crossovers and SUVs—in a bid to double sales of cars priced above €27,000, or $36,300. For instance, the new Laguna, which goes head-to-head with popular premium cars such as BMW's 5 Series or the Audi A6, starts around €22,000 ($29,570) but could quickly rise higher with options.

Renault touts the Laguna's dynamic styling and improved handling, and emphasizes the car's "driving pleasure"—clearly implying buyers should compare the car with BMW, which has long used the phrase "the ultimate driving machine" to express its brand image. A teaser campaign for the Laguna will reveal information about its development in the coming weeks, prior to its official unveiling at the Frankfurt Auto show in September. The Laguna goes on sale in October.

Edmondson is a senior correspondent in BusinessWeek's Frankfurt bureau.

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