Global Insight Perspective | |
Significance | After investing US$2502 million to launch assembly of the Renault Logan in Russia in 2005, the French carmaker is set to inject another US$150 million to boost capacity for the Logan sedan and start production of a new version by mid-2009. |
Implications | The capacity increase announced in Russia is not only a response to the impressive success of the Logan in the country and a plan to tap directly into what is expected to be a very buoyant market over the next three to five years especially for foreign brands, but also a reflection of the Logan's growing success globally as new production sites are coming online and new model variants introduced. |
Outlook | As part of Renault's medium-term development plan, the Logan family will include six model variants, one of which could be a SUV. Should Renault decide to make an SUV variant of the Logan, Russia would be the ideal location to organise assembly of such a model and a collaboration with AvtoVAZ in this respect could be highly beneficial. |
A possible partnership with AvtoVAZ may take time to form and remains in a hypothetical state but Renault is nonetheless taking clear steps to boost its presence in Russia. As new car sales rose at a stellar rate in 2006, the growth potential of the Russian new car market can no longer be ignored by international carmakers. In the case of Renault, the company wants to capitalise on the sudden success of the Logan and use the AvtoFramos facility in Moscow to orchestrate the model's next evolution phase.
Renault has signed a memorandum of understanding (MoU) with the government of city of Moscow regarding the expansion of the AvtoFramos production plant in Russia. Under the agreement, the French carmaker will invest US$150 million to double production capacity to 160,000 units per annum (upa) by mid-2009, and the city of Moscow will contribute the necessary land and premises to expand the AvtoFramos plant. Previous reports announced that the Moscow city government had bought part of the remaining Moskvich premises for this purpose. The city of Moscow owns a 5.9% stake in the AvtoFramos joint venture (JV) and Renault controls the rest. The extra capacity will be used from mid-2009 to boost assembly of the Logan sedan and start production of a new variant of the budget car.
With this new investment, Renault aims to further increase production capacity in Russia as plans have already been laid out to bring AvtoFramos' annual output from the current 60,000 upa to 80,000 units by mid-2007. Most of the investment will be used to refurbish part of the Moskvich facility and set up new facilities as well as increase local sourcing from 50% to 60%. The Logan is produced on a completely knocked-down (CKD) basis, with body parts and engines originating from Romania.
Outlook and Implications
With 72,484 units sold in Russia in 2006, Renault captured a 7.7% share of total foreign brand sales, and is currently the sixth best-selling foreign carmaker. In 2006, the first full year of production for the Logan, Renault sold 49,323 units of the model which became the second-best-selling foreign model in Russia being the Ford Focus. To support the Logan's success, Renault has developed a distribution network that includes 71 dealerships and a total of 91 points of sale in 55 cities. This network covers practically all Russian cities with a population of more than 300,000. With the Logan being assembled in Russia, Renault has been able to position its model in the largest market segment and compete directly with traditional Russian models.
The capacity increase announced in Russia is not only a response to the impressive success of the Logan in the country and a plan to tap directly into what is expected to be a very buoyant market over the next three to five years, especially for foreign brands, but also a reflection of the Logan's growing success globally as new production sites are coming online and the model receives its first variant in the form of the Logan MCV, a station wagon derivative produced in Romania since the end of 2006. A little more than two years after the official launch of the Logan, the budget car is now an integral part of Renault's growth ambitions. The vehicle is meeting with insatiable success worldwide (247,514 units units sold globally in 2006) and its commercialisation has been widened to selected Western European markets. Competition is organising to take a slice of this new market and Renault is eager to remain ahead by increasing capacity in the key production sites of Romania, India and now Russia, while widening its Logan production network globally (Brazil, Argentina, Iran, Pakistan) and augmenting the number of product variants to eventually include six models.
In addition to the sedan and station wagon versions, the Logan is set to receive a light commercial vehicle (LCV) derivative in 2007 and future evolution will include a pick-up and a hatchback while a sports-utility vehicle (SUV) or a multi-purpose vehicle (MPV) are also widely expected. Assembly of the station wagon and LCV variants will be organised in Romania where Renault is currently working on expanding total capacity of the Pitesti plant to 350,000 upa and boost production of CKD for other assembly plants worldwide. Should Renault decide to make a SUV variant of the Logan, Russia would be the ideal location to organise assembly of such a model and a collaboration with AvtoVAZ in this respect could be highly beneficial. Not only because Russia has a large SUV market, which is set to grow further but also because AvtoVAZ's ability to develop a low-cost, long lasting SUV, with real off-road capabilities (in the form of the Lada Niva) that can be exported worldwide is still unrivalled, even by Asian brands. However, AvtoVAZ's future development plans are still obscure and the carmaker already collaborates on the assembly of an SUV with General Motors (GM).