How Renault's Low-Cost Dacia has Become a 'Cash Cow'

Europeans think of Renault's Dacia lineup as cheap, entry-level models that compete with used cars for sales.

But Dacias are built and sold around the world, often badged as Renaults and sold for handsome prices – and profits.

For 2012, Renault expected that sales of its low-cost M0 platform would total 950,000 to 1 million units, up from 813,000 in 2011. Of those, nearly two-thirds will carry Renault badges, while the rest will sell as Dacias.

"Dacia is really a cash cow for the company," said Renault Chief Operating Officer Carlos Tavares in an interview with Automotive News Europe.

Fat margins

Renault does not report individual results for its brands, but Morgan Stanley estimates that Dacia has an operating margin of 9 percent, which is more common for premium automakers.

That's good news for Renault, whose global automotive unit in the first six months of 2012 reported an operating margin of only 0.4 percent.

"There seems to be a common misconception that average sales price for the Dacia business are extremely low, in the range of about 8,000 euros," said Laura Lembke, a financial analysts at Morgan Stanley in London. That is not the case. Dacia models branded as Renaults in international markets sold at least for 20 percent more than Dacia-brand models in Europe, Lembke said.

In Brazil, Renault sells the Duster small SUV for 21,000 to 27,000 euros, compared with a price range of 12,000 to 19,000 euros as a Dacia in Europe, Lembke estimates.

In Europe, Dacia upset the established order with no-frills models that significantly undercut the competition. For the first time, customers on tight budgets could buy new vehicles with three-year warranties at used-car prices.

When the first Logan sedan launched in 2004, Dacia was unknown outside Romania, its home. Now, annual sales in the European Union have grown to 250,000 units, according to the European industry association ACEA. Dacia has become a global brand, with sales in 36 markets.

Schweitzer's bet

Dacia is a bet that Renault placed 13 years ago, part of an ambitious expansion plan hatched by former CEO Louis Schweitzer.

In 1999, Schweitzer acquired Dacia, an obscure, nearly defunct Romanian company. The deal was overshadowed by Renault's alliance that same year with Nissan, which was nearly bankrupt at the time.

Schweitzer had a plan in mind. Under Renault, Dacia's first product was the Logan compact hatchback, which debuted in 2004.

The Logan was priced at 5,900 euros – higher than Schweitzer's 5,000 euro target, but still the cheapest modern car available in eastern Europe. Dacia subsequently introduced in western Europe a better-equipped Logan that started at 7,500 euros.

In a European market plagued by price wars, Dacia doesn't need big discounts. Tavares said that most Dacia customers don't even ask for a discount because they want to avoid the stress of bargaining.

The brand also has one of the lowest dealer margins in the region, approximately 5 percent of the retail price.

Dacia can do this because its dealers are not required to build their own stores. Instead, they share showrooms with existing Renault dealerships.

Global production

Renault has successfully transplanted its rock-bottom price strategy to emerging markets all over the world. Renault builds the M0-based vehicles in 11 assembly plants in eastern Europe, Russia, Africa, South America and India.

Dacia started sales in the UK and Ireland last year by exporting a right-hand-drive version of the Duster built in Chennai, India.

Despite its low price, the M0 architecture can be customized so that the cars it underpins will meet consumer tastes in different markets.

In India, for example, the Duster has a second climate control unit in the rear compartment, along with two reading lights.

"Being able to fine-tune the characteristics is an important part of the edge we have over our competitors," said Arnaud Deboeuf, chief of Renault's entry-level models.

Rivals say the Dacia business model works because its M0 platform uses old Renault technology that has been fully amortized. Morgan Stanley's Lembke agrees, adding that M0-based vehicles are built exclusively in countries with low labor costs.

"While a worker receives an hourly wage of 34 euros in France, 30 euros in Germany and 20 euros in Spain, it is only one-third of that in eastern Europe," Lembke notes.

And in Morocco, where Renault opened its new Tangiers assembly plant, workers earn less than 4 euros an hour.

More models

Eight years ago, Dacia started out with the Logan sedan. Two years later, the Logan-based MCV wagon joined the lineup. Then the brand added the Sandero subcompact, Duster small SUV, Lodgy compact minivan and Dokker, a car-derived van.

It took eight years to add those models. Phase II won't take as long.

At the Paris show last September, Dacia unveiled the second generation of the Logan, together with the new Sandero hatch and its highly successful Stepway variant.

The new models offer more style and more content for the same price.

In France, the redesigned Logan sedan retails for the same 7,700 euros as the previous model, while the Sandero is priced like its predecessor at 7,900 euros.

Moreover, the new models have optional equipment – such as multimedia systems and cruise control – that one might not expect in a budget car.

"We will remain true to Dacia's basic goal: a no-frills, practical car," Deboeuf said.

Given the uncertainties of Europe's market, Deboeuf says it's too early to offer a specific sales target for 2013. But he did say that Dacia will sell more vehicles this year – recession or no recession.

"So far, we have always sold more cars than the year before since the launch in 2004," Deboeuf said. "Why would that be different in 2013?"

Whether or not sales are strong this year, Dacia appears likely to strengthen its grip on the entry-level market. Rival global automakers have not mounted a vigorous challenge to Dacia in this segment yet. Tavares says he is not surprised. "We are 10 years ahead," he said. "For others it won't be easy to catch up."