Global Insight Perspective | |
Significance | Renault and Nissan have signed a MoU with the state government of the Tamil Nadu province which will mark the first stages of over US$1 billion worth of investment by the automakers in the region. |
Implications | The announcement of investment underlines the great value that the pair now hold in the region alongside Nissan's light commercial vehicle (LCV) joint venture with Ashok Leyland and a potential ultra-low cost vehicle that is currently been studied for its viability with possible partner Bajaj Auto. |
Outlook | Renault and Nissan will have to make further investments in the country beyond those to be spent on its manufacturing and technical projects in order to gain the maximum dividends from the market. Even then, it is unlikely that established competitors will lie down when faced with the possibility of a decline in market share. |
On Friday (22 February), French automaker Renault and its Alliance partner Nissan signed a memorandum of understanding (MoU) with the state government of Tamil Nadu confirming that it will spend over US$1 billion on a new manufacturing project in the region. The agreement, inked by Patrick Pélata, Executive Vice President, Product, Plan and Programs for Renault, and Carlos Tavares, Executive Vice President, Corporate and Product Planning for Nissan, will see a minimum of 45 billion rupees (US$1.13 million) in the construction of a production plant that will be built on a 670-acre greenfield site in Oragadam, near Chennai. It will have the capacity to build 400,000 units per annum (upa) within seven years of the MoU being signed, with initial production beginning in 2010. As well as vehicle production, a powertrain assembly line will be installed that will be shared between the automakers, and which Pélata told Reuters should give an around 80% localisation rate for components, adding that he would not "be satisfied until we reach 90%."
According to a Renault press release, a wide range of vehicles will be produced for both domestic sale and export, with Nissan's range primarily for the latter. Colin Dodge, senior vice president for general overseas market operations added to Reuters that Nissan had four vehicles in the pipeline for the facility including an A-segment model it is developing.
Renault, Bajaj May Sign JV Agreement in 2008—CEO
In a separate statement, Renault's chief executive officer Carlos Ghosn has said that a deal between the French automaker and Indian motorcycle-maker Bajaj Auto to develop and build a new ultra low-cost model could take place some time "within this year." He made the statement to reporters in Seoul (South Korea), adding that all sides were pushing forward with plans despite a MoU having not yet been signed. Ghosn also said there was not much time for the deal to come to fruition as he aimed to have it on the market by early 2011 at the latest. Pélata confirmed that a dealcould be signed "within the next two months."
Outlook and Implications
The deal signed here confirms the single-minded importance of India to Renault and Nissan. Initially, the project was to include Indian partner Mahindra & Mahindra (M&M) which was also supposed to utilise the plant for its own ends. However, the Indian automaker announced in mid-January that it would be pulling out to concentrate on its own 320,000 upa facility that will be completed by 2010 as well as another JV with Navistar to build trucks. Despite this, Renault and Nissan have maintained plans in this direction, and have in fact upped the ante by increasing the investment from an originally stated 40 billion rupees.
The decision to make the investment comes in addition to the firm's other undertakings in India. Amongst these is Renault's continued involvement with Mahindra & Mahindra (M&M) building its Logan low-cost sedan at a plant in Nashik, where it has shared a 3.5 billion rupee investment with the Indian automaker. It is believed that an additional vehicle will be added to the line-up built at this plant also on the Logan platform, and it is likely to be a multi-purpose vehicle (MPV) if past reports are to be believed. On top of this is Nissan's light commercial vehicle (LCV) JV deal signed with Indian truck-maker Ashok Leyland. The US$500 million contract between the two comprises three main areas—vehicle manufacturing, powertrain assembly and technical developments—with the former anticipated to have an output of 100,000 upa by 2010. Interesting, however, is Alliance partner Renault's reluctance to become involved in the LCV sector in India which it deems too fraught with economic difficulties to be profitable.
The biggest of these, even possibly beyond the manufacturing agreement signed last week, is the still-unapproved plan to develop and build an ultra-low-cost car in India with Bajaj Auto. The viability study for this project is still taking place but it is likely that the goal price will be very close to that of the Tata Nano, which will get a minimum two-year head start on sales. The still continuing study has led to conflicting reports as to what the main goals of this project will be, with Renault said to be aiming for the lowest cost possible, while Bajaj believes that fuel economy will ultimately lure customers to buy its products. Either way, the introduction of such a vehicle would underline Renault's superiority in the development of low-cost vehicles, and could well see it mount an invasion of emerging markets with this vehicle in a similar way to the Logan, although it is likely to be far more selective due to the expected small size.
Although the companies have made and will continue to make significant investments in the country, additional spending will be need to take place in order to reap the potential dividends of the Indian market. Much of this will need to be in the pair's sales infrastructure, particularly on the Nissan side, as it at present only sells two vehicles in the country, the Teana sedan and the X-Trail sports-utility vehicle (SUV), but has ambitions to expand this to eight by 2012, including the four that will be built at Oragadam. Plans are afoot to expand the current distribution network from five to 55, including 25 in the north of the country, but Renault is likely to need a greater number as much more of its production is expected to remain in the country. On top of this, despite vehicle sales growth in India expected to continue over the coming years, it is not a foregone conclusion that Renault or Nissan's expansion here will follow suit. More established players like Maruti Suzuki, Tata and Hyundai will continue to take every available step to expand their market share even in the face of heavy investment.