EMERGING MARKETS ANALYSIS: Logan’s success shows way for the ‘emerging markets car’

By Mark Bursa | 27 October 2006

Developing a car for emerging markets has become something of a quest within the car industry. Fiat nearly cracked the puzzle with the Palio; Renault might just have done the trick with the Logan. And now everyone else seems to be on the trail, writes Mark Bursa.

Such cars - modern yet affordable in low-income regions - are essential tools for growing the car industry. Without them, the streets of the world's emerging markets are populated by obsolete western designs still in local production, or imported used cars from more affluent markets that have been dumped there.

These cars are old and dirty - and with environmental pressure to clean up the planet becoming one of the key issues of the 21st Century, car makers have it in their power to replace these vehicles with modern cars that may be built to a price, but that meet current emissions standards.

Look around the world, and old designs are still very much in evidence. In many cases, factories set up in the 1960s or 70s are still making the car they were set up to build.  Russia is still dominated by AvtoVAZ and its 40-year-old Zhiguli, a car that has been made at Togliatti since it opened. The same applies to India's market dominator, Maruti, where the early-'80s Maruti 800 is still is a mainstay of its range, as it has been since production began in 1982.

In Mexico, production of the original VW Beetle may have stopped a few years ago, but Nissan still makes the Tsuru, a budget-priced version of a 1980s Sentra. One of Brazil's top sellers is still the Fiat Uno, another car that has been in production since Job 1 at the local factory back in 1976.

All these models share the same basic economic model - the production line is bought and paid for; the R&D costs of the models were amortised long ago. They're made in simple plants with low-cost labour and using local suppliers, to tolerances that would not be acceptable in the developed world. They're easy to maintain and spares are readily available. In a nutshell, they're cheap. And mostly rather nasty.

The trick is to replace them with something that's equally cheap - but cheap and cheerful instead of cheap and nasty. Cheerful in that it's safe and clean. But that's fiendishly difficult to achieve.

Fiat's Project 178 of 1996 was the first concerted attempt to create such a car. Fiat has substantial interests in a number of emerging markets, principally Latin America and Central Europe, but also in North Africa, South Africa, Turkey and India. Project 178 spawned a number of vehicles off a new platform - Palio hatch, Siena sedan, Palio Weekend wagon and Strada pick-up. And Fiat talked the project up, predicting sales globally of close to a million units a year.

In reality, it hasn't come close. So far about 3.5m units have been built - including more than 2m in Brazil. But over the 10-year lifespan of the project, that's only 350,000 a year. Part of the problem was a failure to set up a meaningful alliance in China - Fiat has a low-key operation with Nanjing Automobile, established in 1999, and only sells about 30,000 cars a year there.

But more importantly, the Project 178 cars weren't cheap enough to take over from the entry-level clunkers they were intended to replace. In Brazil, the Uno Mille soldiers on as Fiat's cheapest model, with Palio positioned as something of an upmarket alternative.

Brazil is an oddity among emerging markets too in that its consumers like hatchbacks. In most emerging markets, the traditional booted sedan is the carriage of choice, largely because small cars tend to carry more people on an average journey than in the west, so a separate, larger luggage compartment is preferable.

The sedan version of the Palio, the Siena, is too large to be an entry model in Central Europe or India, and in these markets it is sold as a mid-range model. In India, as in Brazil, the Uno props up the range. Fiat seems to accept this - its Siena/Palio replacement, codenamed D200, is due to be unveiled next month. And it'll be larger than the Siena, closer in size to a Toyota Corolla, according to reports.

Renault has come much closer to the "holy grail" with the Logan. Like Fiat, Renault has a reasonably large emerging markets footprint, which became much more appealing once it had acquired its former Communist-era partner, Romania's Dacia, which had survived the post-Ceausescu turmoil by cranking out ancient Renault 12s in a crumbling plant.

Logan was created along a brief to build a car that would sell for less than EUR5,000. It involved raiding the parts bin - mainly Clio, though the suspension is from the Modus - and producing a simple four-door sedan to be built in Romania and other emerging markets.

While the EUR5,000 target turned out to be theoretically possible, such a vehicle has never existed as the specification would have been too basic even for Romanian tastes. Logan prices start around EUR7,000, and the project has undoubtedly been a success, with more than 250,000 sold in the first 18 months of production.

As well as Romania, Logan is also manufactured in Russia, where 25,000 vehicles were produced from April 2005 to May 2006, as well as Morocco and Colombia. Production will soon start at a major plant in Iran, where 250,000 units a year are targeted, followed by India - in partnership with Mahindra & Mahindra - and Brazil in 2007. A wagon version was premiered at the Paris Show in September, and panel van and pick-up derivatives will also be built.

Logan has outperformed Palio because it's a bit smaller, a bit cheaper and the production is better spread. There are potentially genuine economies of scale thanks to annual volumes at full production of around 800,000 units a year. It would be an even greater success if Renault could get it into China - but talks about building it in partnership with Dongfeng-Nissan stalled last year and have remained unresolved.

Now the success of Logan has triggered other leading automakers into setting up similar projects. Toyota and Nissan in particular have revealed plans to make an emerging markets car. Toyota plans to launch its version in India from around 2010, priced at around US$7,000, about US$900 cheaper than today's lowest-priced Toyota, the Aygo.

Note that this is conceptually different from Aygo; while Aygo is built in the Czech Republic, it's not really an emerging markets car; rather it's a European city car produced in a low-cost country. Most Aygos are sold in Western Europe. The same applies to other small cars made in central Europe - Fiat's Panda and planned new 500, for example, are chic city cars for the sophisticated west, not Logan-style family sedans for emerging markets.

After India, the new Toyota will be launched in Central and South America as well as central and eastern Europe, and Toyota's small-car subsidiary Daihatsu will help develop the car in Japan. This makes sense - Daihatsu is an under-used resource within Toyota, but it is very successful in the few emerging markets where it is present - particularly Malaysia, where Daihatsu vehicles are built and sold by Perodua.

Nissan has announced plans to develop an emerging market vehicle, to be produced at a rate of around 600,000 units a year from 2009. This will be a smaller car than the Logan, with a 1-litre engine. Nissan is eyeing production options in Brazil, Russia, India and China - South Africa and Mexico are also possible. And it could use Suzuki to help develop the car, as Suzuki is no longer joined at the hip to GM, and Nissan already sources some Japan-market vehicles from it.

Other manufacturers could argue that they produce "emerging markets cars" without the need for separate projects like Palio or Logan. Toyota could argue successfully that Corolla has done this job for years. General Motors acquired the know-how to make cheap, modern cars through Daewoo, for example. The Matiz and Aveo models in particular fit the bill - while both having considerable appeal in developed markets too. GM's strategy is to evolve Chevrolet as a "world brand", making no real distinction between emerging markets and those in the developed world.

Volkswagen, on the other hand, seems at a loss as to how to make a cheap "world car" of any sort. The nearest it has is the Brazil-developed Fox hatchback, though this has no sedan version, limiting its appeal.

Ford also struggles here. It has adapted the Fiesta into a decent sedan called Ikon, sold in India and Mexico, but compared to Logan this is an unambitious programme. Ford has even given up development of a replacement for the European Ka entry model, piggybacking Ka's replacement off Fiat's 500, which will be built in Poland.

So developing merging markets cars is a case of those who can - Renault, Fiat, Toyota, GM - and those who can't - VW, Ford. And there are some that don't see the need: PSA happily hands down its old technology in China and Iran, and gets away with it - though it failed in India in the 1990s for the same reason, when buyers rejected the old 309.

So while it may be possible to service the emerging markets without specific models, car makers would be foolish to reject the concept. Renault's Logan proves its value - those 800,000 sales are incremental for the company. And there are a lot of fast-rising car companies in China that could claim these market sectors as their own as well - companies that have the inherent low cost base, and the ability to make the sort of cars that would fit the bill.

Mark Bursa