Ghosn Bets Big on Low-Cost Strategy
African Plant Underscores Race to Head Off Chinese, Indian Car Makers
TANGIERS, Morocco -- The plan by French automotive group Renault SA and Japanese partner Nissan Motor Co. NSANY -0.75% to build a joint assembly plant in this North African port city highlights the accelerating race among global car makers to redefine the meaning of "low cost" for the auto industry, not just for emerging markets but for the developed world as well.
With the sort of flourish that has become his trademark, Renault-Nissan Chief Executive Carlos Ghosn flew to Tangiers Saturday, where, in a carpeted tent overlooking the Mediterranean Sea, he signed the draft agreement with Morocco Prime Minister Driss Jetto for the future Tangiers plant. If Renault-Nissan and the Moroccan government can agree on certain key details, the two companies will invest as much as €1 billion ($1.36 billion) to erect one of the largest auto-production facilities on the African continent, designed to feed low-cost cars and trucks to showrooms in Europe, Asia and North America.

The plant's initial capacity of 200,000 vehicles per year will increase gradually to 400,000 a year, including variants of Renault's low-cost Logan car line and a new range of $10,000 trucks under development at Nissan, the companies said. The plant is slated to open during the second half of 2010.

Mr. Ghosn said moving into the no-frills segment represents a tough challenge. He set a high standard for success, saying he expects the Logan program could achieve a 6% operating-profit margin in 2009. "It is easy to make a cheap vehicle," Mr. Ghosn said. "To make a cheap vehicle that is robust and reliable and to turn a profit, that's the future of the auto industry."

Mr. Ghosn, like his major rivals in the global mass-market car business, is moving in the face of a fast-rising competitive threat to his companies' core, high-volume car franchises.

Mimicking the way Japan and South Korea built up strong auto industries by focusing initially on low-cost products, India and China have started to export low-cost cars, taking advantage of a combination of relatively inexpensive home-market labor and technology imported from Western partners and suppliers.

While many Indian and Chinese vehicles don't meet Western safety and pollution standards, they represent an immediate challenge to efforts by established car makers to win new customers in emerging markets of Africa, Eastern Europe and Asia. U.S., European and Japanese car makers also fear that if they abandon the low-cost segment to India and China, those countries will rapidly improve the quality of their products and start to attack mature markets.

In several cases, that assault will get a boost from established players. Renault is in talks with Bajaj Auto Ltd., the Indian maker of motorbikes and three-wheelers, to develop a $3,000 car. Mr. Ghosn said Renault needs to look into the possibility of making ever cheaper models because its existing low-cost car (the Logan), which was introduced in India this year with a price tag of about $7,500, is more suited for middle-class purses.

Earlier this year, Chrysler LLC and China's Chery Automobile Co. struck a deal under which Chery will assemble a series of small, inexpensive cars for export to Western Europe and the U.S. under the Dodge brand. The deal is intended to help Chrysler roll out new models quickly, inexpensively and with less capital investment than would be required in the U.S.

Other big auto makers are pushing their own low-cost strategies. General Motors Corp.GM -5.87% recently announced a $500 million investment in its operations in Brazil and Argentina aimed at producing a new line of low-cost vehicles. GM also is aggressively shifting engineering to new centers in India, Korea, Brazil and China, and is nurturing its ties to ultra-low-cost Chinese mini-car maker SAIC GM Wuling Automobile Co., which sells cars that start at prices below $4,000.
Toyota Motor Corp. TM -0.75% , which is on track to surpass GM as the world's largest auto maker, is also working on efforts to develop lower-cost cars for the so-called BRIC markets -- Brazil, Russia, India and China.
Renault made its first inroad into the low-cost market in September 2004, when it launched the Logan, a no-frills five-seat car made at its Dacia affiliate in Romania.

"At the time, we weren't too sure of what we would do with this car," said Dacia Chairman Luc-Alexandre Ménard who also is responsible for East European and North African markets at Renault and was present at the Tangiers signing ceremony. "It was meant to be a one-off, a Trojan horse to penetrate new markets in developing countries."

But he said the car's quality -- he recalls how Mr. Ghosn once pushed a Logan to its limits on Romanian roads ahead of the September 2004 launch, with no damages -- as well as its marketing success, convinced Renault directors to turn Logan into a low-cost platform for a wide range of no-frills vehicles.

"Logan is to the auto industry what easyJet is to the airline industry," Mr. Ménard said, referring to the British no-frills airline. "We rewrote the manufacturing codes."

Mr. Ménard said the secret of low-cost manufacturing lies in details. To cut costs, Logan designers opted for identical mirrors on the right and left side of the car and an almost flat windshield. When it first looked into the possibility of building a low-cost plant in Tangiers -- just three months ago -- Renault asked Moroccan authorities if it could blast a few hills near the massive container port that was inaugurated earlier this year.

Morocco refused, but offered to give Renault a large parcel of land, 23 kilometers away from the coast, and committed to build a rail track to connect the future auto plant to the port. "The parcel is great but we still need to agree on a fee for the right to use the rail track before we can sign the final deal," Mr. Ménard said. "If you get something like this wrong, the entire project can get derailed."

The Logan is now produced in seven countries, including Colombia and Russia, and soon will be available in five versions, including a hatchback and pickup truck.

Depending on how quickly Renault's partner in Iran increases Logan production in the Islamic republic, Mr. Ménard said Logan sales will reach between 350,000 and 400,000 this year.

Nissan, meanwhile, has been aggressively exploring low-cost production options, in an effort to boost sagging profit margins. In May, Japan's No. 3 car maker by sales reported its first full-year drop in net profit in seven years, a setback for Mr. Ghosn who led Nissan's resurgence from near bankruptcy in 1999.

Mr. Ghosn's strategy at Nissan relied heavily on large, expensive vehicles aimed at the U.S. market. But Nissan suffered as U.S. consumers began opting for smaller, fuel-efficient vehicles, as gasoline prices rose over the past two years.

Now, Mr. Ghosn and Nissan executives are focusing on smaller vehicles designed for emerging markets. In July, Nissan announced it would begin construction on a $200 million car plant in St. Petersburg, Russia, scheduled to begin assembly of the Teana sedan and the X-Trail crossover for the fast-growing Russian market in 2009.

Last month, the company signed a pact to form three joint ventures to make and distribute light commercial vehicles in India with Ashok Lelyand Ltd., a Chennai-based maker of commercial vehicles and buses. The joint venture is expected produce 100,000 units by 2010.

The Morocco plant will further extend the Renault-Nissan alliance, which both firms have been taking advantage of, to keep costs down. The car makers share a factory in Curitiba, Brazil, that makes small trucks, cars and power trains. This summer, Nissan put its own regalia on the Logan and sold it in Mexico as the low-cost Nissan Aprio.

Particularly as they bring low-cost vehicles to their mature markets, global car makers could face a marketing challenge, attempting to sell low-cost vehicles and their existing lineup of pricier models under the same brand.

So far, sales of low-cost Logan-based cars represent a relatively small share of Renault's sales in Western Europe. This year, the French company expects to sell about 30,000 Logans in France, 20,000 in Germany and 600 in one of Europe's most elitist car market: Switzerland.

Another complication for Western car makers is managing potential opposition from their home-market workers and their unions. Mr. Ghosn addressed that issue Saturday, saying that shedding Renault's historical production base in Western Europe would make no business sense. "Closing a plant in Western Europe would be too expensive," he said.

—Amy Chozick in Tokyo and Stephen Power in Frankfurt contributed to this article.