Renault’s No-Frills Brand Braces for Costly Exhaust Rules
Renault’s No-Frills Brand Braces for Costly Exhaust Rules
(Bloomberg) -- Close to 10,000 people gathered near a Cistercian abbey north of Paris in June, not for a religious festival, but to celebrate a Romanian automaker named Dacia.
Eric Lanneau, a 57-year-old former plumber, attended the Renault SA brand’s annual picnic, which featured a performance by French pop star Jenifer. He bought a Dacia Duster in May, won over by the compact SUV’s design and affordability. “I had been a Ford customer for almost 30 years,” said Lanneau, who lives in a suburb of Paris.
Dacia has built a devoted following for its often spartan, low-cost vehicles, making it one of the French manufacturer’s fastest-growing consumer brands. Yet the unit, which prides itself on its penny-pinching ethos, could now become a drag on Renault as it faces the costly hurdle of meeting the European Union’s toughening pollution standards.
Dacia’s 2018 lineup had more ground to make up before meeting the EU’s 2021 emissions targets than other brands, according to Evercore ISI estimates. Overhauling its models to meet the rules “could disproportionately hurt profitability,” even as Renault as a whole is better positioned than some rivals to meet the regulations, Philippe Houchois, an analyst at Jefferies in London, wrote in a note.
The new standards are among myriad challenges facing Renault, which is struggling to sustain its troubled alliance with Nissan Motor Co. while also grappling with a slump in European auto demand. Renault cut its forecast for 2019 revenue last month. The stock has declined by almost a third in the past year.
Starting in 2020, auto fleets will need to comply with new limits on carbon dioxide emissions, or face penalties. In one scenario laid out by Jefferies that assumes a continuing slowdown in auto sales, fines at Renault due to partial non-compliance could amount to 450 million euros ($504 million) -- or 17% of next year’s estimated profit.
The penalties will be based on emissions for all the cars made by the manufacturer. On average, thanks to cleaner technologies, Renault brand cars emit less carbon dioxide than Dacias.
Dacia may introduce a hybrid SUV as a step toward lowering its average emissions, people familiar with the matter said. Olivier Murguet, head of sales at Renault, said “it’s hard to imagine that Dacia would remain on the sidelines of the movement” to electrify cars.
Owned by Renault since 1999, Dacia has been a bright spot for the French automaker. Its cheapest model, which lacks electric windows or a stereo and comes in just two colors, starts at about 8,000 euros in Western Europe, less than the baseline offerings from rivals Fiat Chrysler Automobiles NV and Peugeot-maker PSA Group SA.
Lanneau paid about 20,000 euros for a fully-loaded “prestige” version of the Duster, which starts at about 12,000 euros.
The French company doesn’t disclose profitability by brand or model, but some analysts estimate the Duster generates an operating margin of more than 10% -- beating the usually more lucrative premium carmakers like Daimler AG’s Mercedes-Benz and BMW AG. Dacia sales climbed 7% last year, while Renault-branded cars slid 5%.
Carlos Tavares, the current CEO of PSA and the former No. 2 at Renault, once called the Romanian carmaker a “cash cow.”
Founded in 1966 in the then-communist country, Dacia has a manufacturing base in Romania and North Africa. Its sales account for almost a fifth of Renault’s total.
“Dacia proved that you can make money while being frugal,” said Jean-Louis Sempe, an analyst at Invest Securities SA in Paris. “The low-cost business model requires very specific skills.”
Still, costly investments in hybrid or electric technologies to improve Dacia’s emission performance could hurt its profit margins. Arndt Ellinghorst, an analyst at Evercore ISI in London, reckons complying with emission targets for the next two years will cost Dacia some 671 million euros, or 1,269 euros per unit, with little leeway to pass those costs on to its price-conscious customers.
A spokeswoman for Renault declined to comment on the impact of future regulation.
Renault already offers electric vehicles, including its Zoe, starting at around 23,000 euros, and is planning to begin selling a hybrid version of its cheaper Renault Clio in 2020 -- a possible litmus test for an electrified Dacia.
To contact the reporter on this story: Ania Nussbaum in Paris at anussbaum5@bloomberg.net
To contact the editors responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net, Frank Connelly
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