VW, Nissan, Others Look to Tap Growing Demand for Budget Cars

Following the lead of Renault's Dacia brand, more and more carmakers will begin offering low-cost models within the next five years, IHS Automotive analyst Christoph Stuermer said. "If they want to survive, they will have to," he said.

Stuermer expects the world auto market to grow by 3.4 million cars between 2012 and 2015. "Most of that growth can be tapped with affordable types of vehicles aimed at new buyers," he said. "Now that VW is entering, I think everybody's going to ratchet up their efforts."

Volkswagen is planning a low-cost car brand for emerging markets priced about 5,000 euros, Ulrich Hackenberg, VW-brand product development boss, told a German magazine Auto Motor und Sport earlier this year. "There is a market segment between 5,000 and 7,000 euros, which is a real challenge," he said.

The trick is finding the right amount of content to take out of the car to make it affordable. "Here you really have to closely look at what can be done away with, but those cars would not be sold under the name Volkswagen, more as their own brand," he said.

Volkswagen has not yet made an official decision on whether to build such a car. In a separate interview, Hackenberg said that a budget brand would not be introduced before 2016. It would initially be launched in emerging markets, although European sales have not been ruled out.

Analyst Stuermer said that developing affordable new cars for high-growth markets poses a significant challenge to companies such as VW, General Motors and Ford.

"They would normally fire with their full engineering power to develop the smartest product," he said. He added that selling a car for less than 8,000 euros means that companies must innovate on the business side and put as little new technology into the vehicles as possible. When Automobilwoche, a sister publication of Automotive News Europe, recently ran an online survey asking if VW should offer low-cost models in western Europe as well as in emerging markets, more than 60 percent of respondents said yes.

IHS' Stuermer, however, cautioned that such a move could have wide-ranging implications for the used-car market. "Only when their cars have good demand in the secondary market can they offer competitive leasing and financing rates, because their cars have good residual value," he explained. "So trying to cap off the secondary market is an extremely risky business."

Datsun learns from Dacia

Renault's alliance partner, Nissan, hopes to attract first-time buyers with its new lineup of Datsuns, which will be launched in 2014 in Russia, India, and Indonesia. Vincent Cobee, who heads the Datsun global business unit, told Automotive News Europe that the company is tailoring the completely new vehicles to each of these markets, based on the differing needs people in these countries have. He added that Datsun has worked closely with Dacia to develop best practices for the new iteration of the Nissan marque, which was established in 1932 before being phased out in 1981.

Peugeot's and Citroen's new entry-level models for fast-growing markets were unveiled at the Paris auto show last September. With more room for passengers and a bigger trunk, the Citroen C-Elysee and the Peugeot 301 have been designed to appeal to families in Mediterranean countries, China and Russia.

With the success of its Dacia brand, Renault has proved that low-cost cars can be profitable. Renault Chief Operating Officer Carlos Tavares calls Dacia a "cash cow" for the company, with an operating margin above 6 percent. Arnaud Deboeuf, director of Renault's entry-range program, expects to sell 950,000 to 1 million cars based on the company's low-cost MO platform this year, up from 813,000 in 2011. Renault is also looking to expand production of its low-cost models, which include the Logan sedan, Sandero hatchback and Duster compact SUV, in new locations. Said Deboeuf: "We feel that our experience in this field gives us a competitive edge."