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Workers at Renault's Dacia Unit Begin Indefinite Strike
25 Mar 08
Renault is suffering the effect of wage inflation in Eastern Europe, as Dacia workers strike.
Global Insight Perspective | | Significance | Dacia workers at the company's main plant in Pitesti, Romania, have reportedly gone out on an "indefinite strike" as of Monday after negotiations over improved pay and conditions collapsed. | Implications | Renault's Romanian affiliate Dacia, is the key production centre for its budget Logan sedan 'world car', and it currently exports the model to around 20 different countries worldwide. Any significant disruption could have a marked negative effect on Renault's sales of the model. | Outlook | This strike could be an early sign that Renault and other carmakers looking to make Eastern Europe and the CIS into a low-cost production centre may not be entirely problem-free. Rising living standards may be helping to create significant new markets in these regions, but they are also leading spiralling wage inflation which could erode the Logan's impressive margins in the future. |
Renault's Main Logan Production Site Hit by Strike Workers at Renault's Romanian affiliate Dacia have gone out on what union leaders describe as an "indefinite strike" after negotiations with management over improved pay and conditions collapsed. The workers began their strike action on Monday (24 March) and, as yet, there is no indication of when they will resume production of the Logan low-cost sedan. Union leader Nicolae Pavelescu said: "The strike was started this morning and more than 80% of workers are taking part." The figure that Pavelescu quotes would translate to around 13,000 workers halting work, affecting production of the Logan and all its various derivatives, including the newly launched pick-up, van and MCV mini-MPV. According to a Thomson Financial report, the workers are demanding an average monthly salary increase of 550 lei (US$228), this compares to the average monthly gross salary at the plant of is 1,064 lei, as well as an increase to Christmas and Easter bonuses. In response to the demands from the company's workers, Dacia's management responded by stating that the demands in relations to bonus payments were unacceptable. The management have made a counter-offer of 144 lei in various bonuses, which would lead to a rise of 12% in the average gross salary and an 18% rise in the minimum salary. Workers are striking as a result of the huge salary inflation that has occurred in Romania in recent years, with average net wages increasing by 30.7y/y in January to 1,200 lei, and as a result of the profits generated by the Logan project and the Pitesti plant in recent years. However, Dacia official Liviu Ion said the profits of 302 million euro generated by the Pitesti plant between 2005 and 2007 had still not made up for the loss of 363 million euro that the unit incurred between 2000 and 2004,before the Logan came on stream. Dacia posted record sales in 2007, with a total of 230,000 vehicles sold in Romania and overseas, a 17.4% year-on-year (y/y) increase on the year before. Outlook and Implications The Dacia Logan programme has been a key part of Renault's internal internationalisation strategy. So far the model's phenomenal success has gone far to prove that "world car" designs aimed at multiple and seemingly disparate markets can work. The Logan's USP is that it is a competent, no-frills, soundly engineered C-segment passenger car that has been designed and developed to be built as cheaply as possible. This means that it is available under the price point of the cheapest B-segment models in most markets in which it is sold. Renault has abandoned a previous management decision to try and regain ground in the premium segments, in order to concentrate on providing affordable models in growth markets in Eastern Europe, Russia and the Commonwealth of Independent States (CIS). The Logan is integral to this strategy, as is the recent decision to purchase a 25% stake in Russian carmaker AvtoVAZ, with a view to eventually supplying platform and powertrain technology to reinvigorate Russia's biggest passenger car brand Lada. In overall terms it is an extremely sound strategy. Renault is being squeezed in its traditional Western European markets, along with other mid-market brands, by the ever increasing model portfolio of the volume premium carmakers such as BMW and Mercedes-Benz, while also experiencing intensifying competition from the increasing competence of the product offerings from brands that were previously considered as low-cost carmakers, such as Hyundai, Kia, GM Daewoo and Skoda. However, the strike at Pitesti could be the first signs of the plan's potential drawback. As the Eastern European and Russian markets develop and grow as the result of rising living standards, Renault and other carmakers operating in the region will have to cope with dramatic wage inflation, undermining the low labour cost rationale of investing in production capacity in these regions in the first place. According to Autocar magazine Renault CEO Carlos Ghosn recently said, "Don't think that low-cost cars are low profit. The margin on a Logan is 6%." This is around double the margin on a mainstream Renault product. However, this impressive margin is in danger of being eroded as a result of rising salary costs. The rise in average salary in Romania of 30% in the last year has been mirrored in other former Eastern Bloc countries and there is increasing competition in the region for skilled workers. The automotive industry in the Czech Republic in particular is suffering from a skilled labour shortage, which in itself is proving a potential obstacle to Skoda's continuing success (see Czech Republic: 30 November 2007: Skoda Seeks Workers in Vietnam Due to Domestic Labour Shortage). Renault and other carmakers must be wary about the effects of wage inflation in Eastern Europe, but at the same time they cannot afford to ignore the commercial realities of an increasingly liberalised global labour market.
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