Romania’s Dacia changes gear

By bne IntelliNews November 10, 2015

Clare Nuttall in Bucharest -

Automaker Dacia has been highly successful in exporting to markets across Europe and the Mediterranean area since its takeover by Renault in 1999, but the small domestic market and rising labour costs is forcing the company to reconsider its strategy in Romania.

Construction of the Dacia factory at Mioveni near the industrial town of Pitesti, 120km from Bucharest, started in 1966, and its first model, the Dacia 1100, rolled off the assembly line two years later. Named after the ancient territory of Dacia, which covered much of present-day Romania, the brand is an iconic one within the country, and Dacia accounts for the lion’s share of domestic production.

France’s Renault acquired a 51% stake in the company when it was privatised in July 1999, five years after losing out to Volkswagen in the race to acquire fellow east European carmaker Skoda of the Czech Republic. Renault has since raised its stake to hold 99.43% of Dacia's equity, while investing over €2.2bn. Today, it is Romania’s largest company by turnover, and produced its five millionth car in May 2014.

Through its acquisition of Dacia, Renault gained a base in Southeast Europe, and access to a workforce that is cheaper than in either Western Europe or other Emerging European countries such as Poland and Slovakia, even after Romania’s entry to the EU. Labour costs are, however, steadily creeping up towards the EU average, forcing Dacia’s management to look at ways to ensure the company remains competitive.

“Labour and other costs are increasing, which means we have to look for higher value-added activities whether it’s in manufacturing, engineering or the offshore activities we have for Samsung and Nissan,” Dacia Renault Romania’s director general, Nicolas Maure, told the Foreign Investors Summit in Bucharest on October 27. “The only way to compensate for this is to invest into added value and keep flexibility.”

Hi-tech response

Dacia’s response to rising labour costs has been to invest into high-tech production in Romania. At present, its car assembly plant and mechanical and chassis plant at Mioveni are “not highly automated”, according to Maure, but this is about to change. “We want to introduce leading-edge technologies in both product and process,” he told the conference.

Back in 2006, the company made a significant investment in its engineering centre in Bucharest. This was followed four years later by an advanced testing facility, which is the largest Renault testing facility outside of France. The facility has state-of-the-art engine stimulation test benches working not only for Dacia, but for Renault, Samsung and Nissan, following the 1999 strategic agreement between Renault and the Japanese carmaker, Maure said in an interview with bne IntelliNews on the sidelines of the conference. Meanwhile, the company’s stamping dye plant works in line with Nissan processes, at the same level those in Japan today.

“This is a major change in the processes we have. We will continue to develop our engineering activities under Renault in Romania, as well as to move into new high-tech domains,” Maure explained. This will entail other changes such as recruiting more engineers and other highly qualified staff.

“We will not increase production capacity for the foreseeable future, but we will continue to invest in the line-up, adding more automation to maintain the competitiveness of our plants,” he told bne IntelliNews.

The vehicle plant, which has a capacity of 350,000 vehicles a year, is mainly export oriented; 93% of its output was sent abroad in 2013. The most popular model is the Duster, which currently accounts for over 50% of total daily output.

Mark Fulthorpe, director of automotive at IHS Global Insight, describes Dacia as the standout success in Southeast Europe, helped by its focus on exports of low-cost models. Within the region, “in terms of vehicle manufacturing, the big story is Romania”, Fulthorpe said in an interview with bne IntelliNews earlier this year. The Dacia plant “stands apart from others in the region and clearly has the broadest strategic implications.”

Data from the Romanian Automotive Manufacturers and Importers Association (APIA) shows vehicle production was up 18.4% year on year (y/y) in September. In the first nine months of the year, Romanian automakers produced just under 300,000 vehicles (up 3.8% y/y), of which almost 260,000 were produced by Dacia. This follows a hike in Dacia’s sales in 2014 to reach a total of 511,465 units, up 19% y/y. Just under 30,000 of these were sold within Romania, the company said. At the same time, APIA reported an increasing trend in car imports, of which the majority were used cars.

The rise in production at Dacia was mainly driven by external demand. September data from the European Automobile Manufacturers’ Association (ACEA) shows that demand for new passenger cars increased for the 25th consecutive month, which ACEA said was driven by ongoing scrappage schemes and by the economic recovery in Southern Europe. All Europe’s ‘big five’ markets saw a strong increase in registrations during September, with a 22.5% y/y increase reported in Spain. Overall, new car registrations in the EU passed the 10mn mark in the first nine months of 2015.

Closer to home

However, the extremely small local market is seen as a missed opportunity for Dacia and Romania’s other major automaker, Ford Craiova. Total EU registrations in January-September included 56,839 new cars registered in Romania. This is equivalent to just one new car per 378 people, compared with a new car bought by approximately one in 34 people in Germany or one in 149 in Poland.

Most of Romania’s fleet is old, and the majority of purchases are of old cars, with imports of used cars outweighing purchases of new cars by around three to one. “It is a very great weakness in Romania not to have a domestic market for new vehicles,” Maure said. “The market for new vehicles dropped from 350,000 new cars in 2008 to a bit less than 100,000 last year. It is not a very robust situation when we have two big plants working 90% for export, so it is crucial that we find ways to restart the domestic market for vehicles.”

A government effort to stimulate the market, the First Car programme, was less successful than hoped for. “Unfortunately the programme was modified quite a lot and is not effective today. We must discuss with the government ways to stimulate the credit side,” said Maure.

Constantin Stroe, president of ACAROM, the Association of Automotive Manufacturers of Romania, described the programme as “stillborn”, adding that: “It is totally absurd that two high-end brands sell only 6% of their production in Romania.”

Maure believes that doubling the size of the domestic market by 2020 is a “minimum objective”, but this will depend on several factors including continued economic growth, tighter controls – both fiscal and in terms of technical inspections – over used car imports, and a revival in crediting for car purchases. “We need to find ways to encourage fleet customers and especially individuals to start taking credits to buy cars again,” said Maure. “Since the 2008 crisis, the vast majority of potential buyers of vehicles in this country have been very reluctant to take out a new loan on top of their existing debts. Interest rates are low, but people do not go to the banks any more.”

He noted that with Romania’s GDP growing at 3.5% to 4.0% a year, well above the EU average, this should encourage new purchases by both fleet and private customers. APIA figures already show an upturn in vehicle purchases by companies in September. However, credit growth has stalled since the crisis despite the faster economic growth, and as a result many people are still buying cheaper used cars, to which there is no immediate change in sight.

The situation elsewhere in Southeast Europe is even less promising, since virtually all sales are of used cars, meaning that Dacia will have to continue looking to Western European and Mediterranean buyers until the Romanian market makes a full recovery.

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