SUV Market Irresistibly Hot For Renault

BMI View : Renault and Dongfeng have entered into a US$1.3bn JV to produce SUVs as part of Renault's strategy to sell locally produced cars in the Chinese auto market by 2016, which validates BMI's view of European automakers needing to diversify away from their weak regional market. While Renault will face challenges in making its brand stand out among established competitors, the strong growth potential of the SUV segment will provide support to the firm's strategy.

French carmaker Renault and Chinese automaker Dongfeng Motor have recently entered into an agreement for a CNY7.8bn (US$1.3bn) production joint venture (JV) to make cars and engines for both firms. The pair will also work with Renault's global alliance partner, Nissan Motor, to gain synergies in costs and technology. This development is part of Renault's plans to sell locally manufactured vehicles in the Chinese auto market by 2016.

Renault Seeks To Diversify Out Of Europe

BMI View : Renault and Dongfeng have entered into a US$1.3bn JV to produce SUVs as part of Renault's strategy to sell locally produced cars in the Chinese auto market by 2016, which validates BMI's view of European automakers needing to diversify away from their weak regional market. While Renault will face challenges in making its brand stand out among established competitors, the strong growth potential of the SUV segment will provide support to the firm's strategy.

French carmaker Renault and Chinese automaker Dongfeng Motor have recently entered into an agreement for a CNY7.8bn (US$1.3bn) production joint venture (JV) to make cars and engines for both firms. The pair will also work with Renault's global alliance partner, Nissan Motor, to gain synergies in costs and technology. This development is part of Renault's plans to sell locally manufactured vehicles in the Chinese auto market by 2016.

Renault Seeks To Diversify Out Of Europe

BMI has long maintained that European mass market auto companies will need to re-orientate their business models to shift their focus away from the weak regional market towards higher-growth markets elsewhere. Indeed, half of Renault's global sales still come from Europe and it is keen to diversify out of the region.

However, Renault's entry will not be without any challenges. French carmakers hold just 3% of the Chinese passenger car market share. The market is dominated by Volkswagen and General Motors. Even Japanese automakers, which have seen their market share slide over the past year due to the eruption of the Sino-Japanese dispute in 2012, enjoy a larger market share. Renault will face the daunting task of increasing consumer awareness of its brand, which still remains obscure compared to the other more well-known brands in the market. This is perhaps the reason why Dongfeng's President Xu Ping said that Nissan's experience ranging from dealerships, marketing to technology will be harnessed.

Red-Hot SUV Market Will Help

At present, the JV only has the license to produce sports utility vehicles (SUVs), but Renault eventually aims to manufacture other types of passenger cars as well. We remain bullish on the SUV market and expect it to continue outperforming the broader auto market in 2014. Additionally, we see this segment enjoying strong growth over our 2014-2017 forecast period as it will benefit from first-time car buyers as well as repeat customers looking to upgrade their set of wheels.

While the utility vehicle segment will undoubtedly face strong competition in the coming years as new entrants seek to ride on its growth ( see 'Booming UV Market Favourable To Localised Jeep', December 4), and incumbents roll out new models to defend their market share, the strong growth potential of the segment, in our opinion, will be a tailwind for Renault in its quest to increase its domestic sales.

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Sector: Autos
Geography: China
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