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Dongfeng Renault Bets on Chinese Consumers

by Li Hui and Neelima Mahajan

April 5, 2016

Jacques Daniel, CEO of Dongfeng Renault, on navigating a slower and more competitive Chinese market.

Jacques DANIEL - Renault

French carmaker Renault has finally begun production in China after selling imported cars here for more than a decade. In February 2014, Renault signed a 50-50 joint venture (JV) agreement with Dongfeng Motor Corporation. Dongfeng Renault Automotive Ltd recently began production of the Kadjar SUV (sport utility vehicle) at a newly built plant in Wuhan, Hubei. Speaking at the launch, Carlos Ghosn, chairman and CEO of the Renault Group, said that he hoped that going forward Dongfeng Renault could get 3% of the Chinese market.

Jacques Daniel, CEO of Dongfeng Renault, has his work cut out for him. Dongfeng Renault is beginning production in China at a time when the market is slowing down and rivals are already well-entrenched. In this interview Daniel, who has worked for Renault in several countries, including Colombia, the Netherlands, France and Romania, explains how the company is adjusting its strategy for a slowing Chinese market, marketing to the Chinese consumer and the opportunity in electric vehicles.

Excerpts:

You’ve worked in other countries as well. How different is the Chinese auto market compared to other markets?

To some extent there is a lot of difference, but in the end it is more or less the same. One of the major differences is that maybe one year ago was it was still the biggest market, it was also a very profitable market. Since the end of 2014 it has changed a lot and China is becoming just like the other markets: fierce competition and prices are going down. It has moved from a sellers’ market to a buyers’ market. Now the ball is in the hand of the buyers, and “Do I have enough cars to sell?” is a question that doesn’t exist anymore. There is much more capacity than customers to buy this capacity.

That’s a big shift for you as a multinational company—China was big and profitable and now it’s changing. How is that reflected in your strategy?

Like any company, we are supposed to be profitable at the end of the year, so when the price is going down, you have to make sure your costs are moving on the same trend. So we just put pressure on cost in order to ensure our competitiveness. We cannot change the market, so we have to adapt. We can also learn from competitors to see which strategies were successful, which were not, but because commercial pressure exists now, we have a much bigger focus on costs than before.

Who is your target customer in China and how are you positioning yourself in the market?

Somebody who can afford to buy a car, so not every Chinese person. Rather young, between 35-45, with the focus around 35 years old. A family with one kid who really [wouldn’t] like to get the same car as their parents. [People] trying to find their own way in this Chinese life, for which Renault represents a European way, which can be attractive.

What kind of marketing strategies do you adopt to target this group of customers?

We try to get in touch with them. You can go through TV—every channel claims to have an audience of one hundred million but it’s very expensive. And in the end, most people [watching] TV are maybe not buyers, so the ratio is not the best. So we can go through key opinion leaders. Everybody today says, “I’m innovating” in the car industry, but all the carmakers are telling the same story. In the case of Renault, we’ve got some things that are maybe a bit different from the others—a very long history. We are one of the oldest carmakers in the world. We went through all the crises, wars and so on and still [here] we are.

Second, we are very active in auto sport with a lot of titles. It means we have a lot of technology and we can demonstrate it through racing. We have a very rich art collection, that a company like Louis Vuitton would like to have, but it’s for a car business, so obviously very different from the others. By having [art] exhibitions we try to get in touch with customers who would never consider visiting a Renault dealership. Those people are really opinion leaders. We are already selling more than 10,000 units every year so we already have a group of happy customers and that’s what we can also claim—when you go to blogs or to internet sites you can see that Renault owners are rather happy with the relationship with the car and with their dealer. That is something I feel where we can take a bit of an advantage. We signed a contract with Wanda Plazas—they have a location in most of the cities and we have an exhibition of cars for maybe one week or 10 days in order to be closer to the public.

You are aiming to sell locally produced vehicles in 2016. You’re coming to that stage much later compared to companies like Volkswagen, GM or Toyota. Do you think there’s a lot for you to catch up with?

To some extent it’s really a handicap because we [will] not enjoy as much growth as [we would have] years ago when every year the market was moving plus 15 or 20%. The growth will continue for sure, but one digit growth, one digit on a market that is maybe 20 million cars, it’s something we can deal with. If I compare with what Nissan did 12 or 13 years ago, they were the latest Japanese car maker to enter China—everybody was [thinking they] came after Toyota, after Honda, and they are number one now. So there is no relationship [between] entering last and finishing [as] the first one. I am not aiming to be first. [I plan] to move from nothing to something; I don’t think it should be so complicated. We can learn from our competitors as they faced a lot of difficulties at the beginning within the JV—who’s doing what, what’s the best way to work with Chinese partners and we can probably avoid a lot of difficulties. So we are late, but we know most of the pitfalls.

To what extent will the cars be localized for Chinese consumers?

First, we are going [with] what we call localization in our industry, [which] means which part of the car will be produced in China. So it’s not just a factory to assemble components you buy abroad: 82, 87 and below 90% of the car will be made in China. That means we have control over what we want to do, what we want to change. We have had a very high level of localization since the beginning, and that’s something we have learned from our competitors: the best way to be competitive is to make sure that your costs are local so there is no currency effect. With more than 80% I cannot say I have no risk, but I have limited the risk.

Second, when we design the car we try to make it suitable to the Chinese tastes, so there are some small, [and] some bigger changes. The car is maybe a bit longer to provide a bit more space for the rear seats. Of course everything is going to be written in Chinese in the car. We have a very big open roof, which is not the case for our competitors and which is not the case for the Kadjar in Europe. Chinese customers want this spec[ification], so we decided to implement it.

How do you view the electric vehicle (EV) opportunity in China?

If there is one country for which EV cars make sense, it is probably China. The lifecycle of a car is nine years on average. You will see on the street cars which are maybe 14 years old; 14 years old for a car is probably not the best one in terms of emissions, so [there’s a] need [for] policies to really clean the street of old, contaminating cars, scrap them and help the customer replace them. This market is very promising in terms of EV.

There are still a few questions, first the car is much more expensive than what we call ICE cars—internal combustion engine. The normal car is much cheaper because the cost of the battery is extremely high, so it’s clear there is no business model which flies without any subsidies basically. Only freaks of new tech are ready to buy a car maybe twice the normal price just to say, ‘I’ve got an EV car’. Basically [if] you have to pay two times the price, you would probably consider having a normal car.

The second limitation is [that] it’s very easy to tank a car—you will find a station everywhere and in five minutes you will have the car ready for another 500 kilometers. With EV, it’s less obvious. Of course there is electricity everywhere but in the way that you can plug in your car [is] maybe not so easy. Second, with the time to load the car we’re not talking about a few minutes: depending on the quality of the infrastructure it may take up to one day or 10 hours. If I need to load my car, I cannot wait 10 hours. There is what we call a quick charge, which allows you to get your battery loaded at 80% in maybe less than one hour, but the real autonomy of the EV car is around 200 kilometers, probably less, and customers are afraid that it’s not enough.

The day we will have much more cars in the street it will, of course, push everybody to work on it—universities, to try to find a new battery, new tech; car makers to decide to have a full range of EV cars and not just one to say I’ve got one. It will take years to really see a change.

Are you also planning to get into that market?

Of course. We decided a few months ago to introduce our first EV car in China end of 2017. We need it because the Chinese regulations [mandate] that… if you want to send [traditional] cars you need at the same time to provide the market with a given number of EV cars.

How important will this car be to your portfolio?

At the beginning it’s not going to be the biggest part. First of all, we have no license today to produce these cars. So Dongfeng Renault has the license to produce small SUVs, medium SUVs and big SUVs and MPVs [multi-purpose vehicles]—no sedans, no EVs, so we need to request additional rights in order to produce these cars. We are in the process, but it’s clear that no car maker in China has a strategy [of] relying only on EV cars, and when you look at competitors, they are talking much more than they do because everybody’s afraid to be out of the game. So you see every week an announcement: ‘We are going to launch an EV.’ At the end when you look at the figures, just a few cars are sold.

In five years, where do you see Renault in China?

In five years I hope we are going to say we’ve been successful. It’s very easy to make a beautiful presentation with slides where you have graphs which show you’re rocketing. Real life is sometimes a bit different. The first part of the project is under very good control and execution. We entered China at the end of 2013, we signed our JV contract in December 2013, [and] during the last two years we have built an engine factory, assembly factory, we have localized one car, we are in the process of localizing a second one, we have built an engineering center, we have recruited and trained 2,000 people. We’re going to introduce our first car for sale in March. So far, so good. Now the biggest challenge is not to produce a car, it’s to sell the car. We have done a lot of things—is it enough? Probably not, because there is something we didn’t plan, or the change of the Chinese market was really very quick. Until last year, some of our competitors enjoyed a very favorable position to sell the car without a discount, but with a markup because there were many more people wanting to buy a car. [That] time is over. It’s like everywhere—you really have to fight to sell cars, and discounts are becoming more normal. We have a plan to make sure that we are competitive enough in order to make sure that we can be profitable.

(Watch the video below)

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