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Renault’s growing share of emerging markets shows that low-end cars still need solid brands

Ein 'Clio' Kompaqktwagen des franzoesischen Herstellers Renault spiegelt sich im Rueckspiegel eines Autos am Mittwoch, 14. September 2005, auf der 61. Internationalen Automobil Ausstellung IAA in Frankfurt. Mehr als 1.000 Aussteller aus 44 Laendern zeigen auf der IAA vom 15. bis 25. September ihre neuesten Modelle und Entwicklungen. (AP Photo/Thomas Kienzle) --- A 'Clio' compacr car by French automaker Renault is reflected in the mirror of another car at the 61st International Auto Show IAA in Frankfurt, Germany, Wednesday, Sept. 14, 2005. More than 1,000 exhibitors from 44 countries will present their latest models and developments at the IAA from Sept. 15. to 25, 2005.
AP Photo/Thomas Kienzle
Objects in mirror may appear bigger than they are.
By Gwynn Guilford
ArgentinaPublished Last updated This article is more than 2 years old.

Because of Europe—where sales fell 18%—Renault’s profits dropped 15%. However, a bigger-than-expected uptick in operational cash flow drove the French carmaker’s shares higher today, up 5.5%.

Its saving graces were its 43.4% stake in Nissan and emerging-market demand for Renault’s line of cheap cars, including the Clio and the Dacia. The company can boast some major toeholds in emerging markets. It currently claims 30% of the Russian market. Meanwhile, five out of the top 10 cars sold in Mexico are Nissan makes, giving it a one-quarter share of the market there. And while France is still its biggest market, at 22%, Brazil, Russia and Argentina, respectively, rank second, third and fifth, said CEO Carlos Ghosn on the earnings call.

There are also the pastures kept freshly watered with loose money. In the US and Japan, total Renault sales were up 12.5% and 27%. In Japan, of course, the Nissan brand contributed heavily, though record sales of mini-vehicles there helped as well.

What does it say about the global economy that makers of fancy wheels like BMW, Volkswagen and, to a lesser extent, Daimler all performed solidly last year, but manufacturers of low-end cars almost uniformly tanked overall?

For one thing, it signals that the “emerging markets save the day” line isn’t as obvious as it might seem. It’s apparently much harder to establish a brand reputation for cheap cars than it is luxury brands in emerging market. That’s not entirely surprising. For newly moneyed consumers, cars symbolize status. That makes brand reputation all the more important. Western companies trying to win customers on the price tag, meanwhile, end up competing with local carmakers putting out affordable vehicle lines (and with much cheaper labor, their business model generally has different economics than, say, Opel, Renault or Peugeot). That doesn’t mean creating a strong brand isn’t possible, particularly when targeting middle-class consumers. Nissan’s success in Mexico should attest to that.

Renault’s plan to boost production in Russia, Brazil and other up-and-coming markets will strengthen its brand reputation and keep labor and transport costs down—which could help keep its cash position healthy.

Like its competitors, Renault will continue to struggle this year with the European focus of both its operations and its sales. Layoffs might be unpopular in France—particularly with the French government which owns a sizable chunk of Renault—but its robust balance sheet should be helped by the 8,200 job cuts the company is pushing through. And on the demand side, its rival Peugeot said earlier this week that it expects European demand for cars to slump 3-5%. That means Renault’s going to need to step up its emerging-market long game.

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