Is the US ready for a true value brand? [w/ poll]

Dacia lineup

For a while us here at Left-lane.com have been in awe of the success of Dacia, the first true dedicated “value” brand (re)started by a major car manufacturer. Sure, Skoda was arguably the first attempt by a major manufacturer to buy a lowly brand and have it slot in at the bottom of its brand hierarchy, but it was never truly positioned as a “bargain” brand. Notwithstanding the Felicia, itself a re-skinned Favorit, all its models have been basically current VW models for some 20% less cash – that’s cheaper, but not really cheap. When Renault bought Dacia, on the other hand, it created a line-up of dedicated cars that were based on tried and tested platforms whose R&D costs have long been recovered, thus allowing the models to be sold at a very low price point. Add to that a simplified construction, long-travel suspension that was both sturdy and comfortable, minimal styling and a spartan interior and the first Dacia model, the Logan, was ready to do battle with both more expensive western, as well as long-obsolete homegrown models in the Eastern European markets. But what followed was a success story that exceeded all expectations Renault may have had for the brand – Dacia models became a mainstream hits in Western Europe as well, including in über-demanding markets such as Germany and England.

And it’s this success that got us thinking: would a brand like Dacia have any chance of success in the US market? While the US and European markets are similar in many ways, and the cars sold in both have gradually been getting more similar (think global Fords, Buick/Chevrolet, all premium brands), there is a niggling feeling that US customers have a different set of priorities when choosing their cars, ones that would make less fertile ground for a value brand like Dacia. Ultimately, Kriss and Bart had different feelings about whether the US is ready for a value brand:

Kriss: There are plenty of segments in which a “value” offering could succeed

Not every segment is ready for disruption by a value brand – customers buying large cars usually require some brand prestige, while premium markets are a different ballgame altogether. But there are still plenty of segments where a “basic” car could work: subcompact, compact, small minivan, compact SUV, small pick-up, or small cargo van. In Europe Dacia has offerings in most of these segments, and all its offerings are pretty successful: Logan and Sandero together rank 6th in the subcompact segment, Duster is 4th in the small crossover segment, while Dokker is 3rd in the passenger van segment. Only Lodgy has been unable to crack the top-10, and placed 12th in the midsized MPV segment in 2015. And the brand is not stopping there – it just launched the Duster Oroch small pick-up in South America, a car smaller than the typical US midsized pick-up like the Toyota Tacoma (you can read why I think such a car would do well in the US).

Bart: US customers have different preferences than Europeans

Sure, those cars succeeded in Europe, there’s no denying that, but US car buyers have different preferences European ones. For example, Americans spend much more time on highways than Europeans do, and that means they need plenty of power, stability afforded by a sophisticated suspension system and a low NVH levels, characteristics in which value brands have traditionally lagged. Americans also expect their cars to come with more creature comforts, such as air-conditioning, automatic gearbox or electrical controls in the interior, exactly the kind of things value brands save money on.

Kriss: Value-oriented cars already have had some success in the US

Nissan Versa

Despite those preferences, there are already cars on the US market that could qualify under the “value” banner, even if it may not be immediately obvious. One such car is the Nissan Versa sedan – a subcompact that for a while was the cheapest new car on the market, and majors on space rather than style or dynamics. In fact, its concept is very much like that of the Dacia Logan, all the way to the chassis being tuned explicitly for comfort. Another car is the Mitsubishi Mirage, a minicar that again majors on space and comfort over style or dynamics, and which assumed the “cheapest new car” mantle from the Versa sedan. Both cars have had some success in the marketplace: the Versa led the segment between 2009 and 2011, and has been hot on Kia Soul‘s soles ever since, while the Mirage has established itself quickly since introduction in 2013, and has been challenging its direct competitor Chevy Spark, as well as the style-conscious Fiat 500, for second spot in the segment (after the all-conquering Mini).

Looking further back, both Hyundai and Kia launched in the US as value brands and were so successful they’ve managed to move up to mainstream since, and are even moving into premium now, with the Genesis brand. In fact, to this date Hyundai still holds the first-year volume record for a new brand in the US, at over 168,000 sales of the Excel in 1986.

Bart: A value brand is tougher than a value model

yugo_gv2Sure, some brands already offer value models, but that’s a whole different ballgame than launching a budget brand. For example, the Nissan Versa benefits from the brand appeal of the Nissan brand as an established maker of reliable vehicles for the past few decades. Image may not top the priority list of every value buyer, but even subconsciously a Nissan (or Mitsubishi, Hyundai or any established brand for that matter) has more cachet than a value brand would have.  As long as Nissan also sells plenty of Muranos and GT-Rs, their brand image won’t suffer from one or two value models (they also continued to sell the previous-generation Rogue until the end of 2015 as a budget alternative to the new one). And I’m sure this is a great way to introduce first-time buyers or used car buyers into a brand, hopefully to keep them when their budgets grow.

Against the success of Hyundai-Kia weigh the failures of Yugo, DaewooDaihatsu or the homegrown Geo. It’s really not that simple to launch an entirely new brand into a mature market, or to re-launch a defunct brand as a value alternative. It takes huge investments in marketing, logistics and dealership infrastructure, which is much harder to recover with a low-cost business model than with a premium strategy. And even then, an established value brand like Suzuki eventually failed in the US when its sales collapsed.

Kriss: A value brand would have a certain left-field appeal in the 21st century

I see your point there, but Yugo, Daihatsu and Daewoo all happened a long time ago, and if there’s one good thing that came out of the recent recession, it is that it is not just acceptable to be frugal – in fact it is almost “cool”. This can be seen from success of brands such as Dollar General or Trader Joe’s (food), through Old Navy (clothing) or discount sites such as Living Social or Groupon. In such an environment, a value car brand could appeal not just to those who are truly budget-constrained when buying their car, but also to those who could spend more but choose not to, recognizing that their needs can be satisfied by a more “basic” type of a car.

Bart: Safety and environmental regulations are tougher in the US

Okay, good point. So let’s assume there is a market for a value brand in the US, then how much cheaper would its models need to be than the competition? If the difference is too small even the “cool factor” won’t work, and the US market price competition is so intense that I don’t think there is much room to undercut existing prices by thousands of dollars. Part of the reason is the investment required to make cars meet the stricter safety and environmental regulations in the US. The latter lead VW to develop emissions test-cheating software, because they couldn’t find another cost-effective way to meet the US emissions standards, which are stricter than those in Europe (for diesel cars, at least). Luxury brands like BMW and Mercedes-Benz were able to charge higher prices, which paid for their more expensive systems. Mahindra’s attempt at bringing an India-made diesel pick-up truck also failed in 2010, and one of the main reasons was presumably their inability to meet the US safety regulation (they actually never went as far as crash-testing the truck, even though they already had 350 dealers lined up to sell them).

And that’s the reason why Chinese brands like Brilliance and Landwind first tried to sell their budget cars in Europe instead of the US, and even then: when crash tests revealed underwhelming results for their models, they quickly retreated (Landwind later returned with a different model, but still hasn’t managed to sell more than a handful of cars).

So we can’t seem to agree on this subject. What do you think, dear readers?

Could a value brand like Dacia succeed in the US?

  • Unlikely, as US customers simply have different expectations of their cars (34%, 44 Votes)
  • Absolutely - the US market is ready for disruption by a value brand (22%, 29 Votes)
  • Maybe, it's really too hard to tell (18%, 24 Votes)
  • Absolutely not - the US market is completely different to the European one (15%, 19 Votes)
  • Yes, it could carve a decent slice of the market for itself (11%, 14 Votes)

Total Voters: 130

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About Krzysztof Wozniak

Kriss grew up in Poland reading German car magazines, before moving to England and graduating to the British magazines, which he still considers the best in the world and continues reading them after he'd moved to the US. In college he promised himself he's buy himself a used Porsche before he turned 30 (not to be accused of having a mid-life crisis), but instead family needs dictated a Subaru Outback. Still waiting for that perfect moment to buy a used 2008-ish Cayman...
You can find all his articles Here.

Comments

  1. Wasn’t Scion a “value/youth” brand attempt?

    • Bart Demandt says:

      Hi Stephen,

      indeed Scion was a youth brand, marketed to attract first-time buyers into Toyota showrooms, but it wasn’t necessarily a value brand in the spirit of Dacia. A true budget brand wouldn’t introduce a sports car like the FR-S, so we didn’t find it fit to be mentioned here.

  2. David walter-davies says:

    So interesting. In U.K. I bought a Skoda Fabia it was brilliant and good value.. They changed the model and it looked tall and thin so no way. The new model is relatively expensive so not worth it. I bought a Dacia.. Totally brilliant! Took a risk and came up trumps.. I’ll be back for another!

  3. Losange says:

    @David walter-davies…….Skoda was never supposed to be a budget brand, but in the long term a Volvo competitor.

    I think true value brands don’t have much space in the US to be profitable. The pricing of cars in the US is different in relation to European pricing. Take Toyota for example, in the States you can drive a Highlander for 30.000 dollars (= 26.600 euros). In most European countries you can’t even buy the smaller RAV4 for that amount. So in a way there are a lot of cars who already offer value for money in the US due to fair pricing.

  4. Krzysztof Wozniak says:

    @Losange – you make a very good point about the US seemingly offering “fairer” pricing, though I wonder whether cars being seemingly more expensive in Europe than in the US is not misleading. From a business perspective, the European market is at least as competitive as the US one (in terms of number of firms, as well as models competing), so it’s counterintuitive that prices would be that much higher there. Instead, it could be due to non-car costs (dealer network, car delivery) or even local taxes/tarrifs? Honestly, I’m just speculating, but I find it hard to believe that carmakers would earn much, MUCH higher profits per car in Europe than in the US. But, you may be right…

    • Bart Demandt says:

      I think the European car market is just as competitive as the US, if not more. There’s a lot of overcapacity, which has brought down prices and cut into the profits of auto makers. Almost no brand has been making money in Europe between 2009 and 2014 while they’ve enjoyed fattening profits from their North American operations, which is one of the reasons why the Chrysler takeover has saved Fiat.
      Besides that, the US is a more homogeneous market than Europe. That’s why for example Subaru is much more focused on the US market than on Europe: setting aside differences in brand perception, it’s much easier and cost efficient to reach economies of scale in a single market than in 27 separate countries, each with its own local differences in regulations and taxation, but also marketing (because of language and a single importer/distributor instead of one for each country).
      As Losange said, American car buyers do tend to get much more car for their money, but mostly for their domestic cars (not necessarily domestic brands, but the models specifically developed for and produced in North America). A Mercedes-Benz C-Class has almost the same (pre-tax) price in the US as in Germany, accounting for equipment etc. I think this is also because US consumers are less demanding in terms of refinement and fuel economy. When Volkswagen sold the European Jetta and Passat in the US, they were considered too expensive for their segments, and that was even with – for European standards – old-fashioned 2,5 liter 5-cylinder engines instead of modern, downsized 4-cylinder turbocharged engines which are more expensive to develop and build. Then a few years ago they switched to locally produced models with a less sophisticated suspension and a more basic interior, and they could lower their prices to fall more in line with the competition.
      These days, even Chinese consumers are more demanding than those in the US, as Lincoln has only recently struck success in China because they changed strategy from trying to sell US-content cars there to cars tailored to the specific needs of the Chinese consumer (higher quality leather, softer dashboard materials etc.): http://www.autonews.com/article/20160307/OEM03/303079972/how-lincoln-fine-tunes-its-vehicles-to-satisfy-chinese-consumers

  5. Losange says:

    Hi Krzysztof,

    Well I didn’t state carmakers earn more money per car in Europe. What I strongly believe is that American customers get ‘more car’ for one dollar than Europeans get for one euro. Value for money is a widespread phenomenon in the US. Mainstream brands like Ford, Toyota and Chevrolet already focus on value for money with their range of cars so a true value brand would be competing with these brands which is a tough road to enter the market.

    Dacia is successful in Europe, partly because there are no true competitors around to make life difficult. Lada? Nope. Skoda? VWs with a different logo. Hyundai and Kia also lifted themselves towards the level of mainstream brands. I’m still surprised Dacia hasn’t introduced value models with higher margins like a large sedan/stationwagon (D/E-segment) between 20.000-25.000 euros. Should be an instant hit, because Europeans easily pay this amount for B-segment crossovers or C-segment cars.

    • Bart Demandt says:

      Hi Losange,

      I’m sure such a Dacia would be successful in Europe, but one of the reasons the brand gets its low prices from its scale thanks to its models being sold in such a widespread area (Russia, Middle East, North Africa, South America and Europe), but such a car would only really be popular in Europe, which would give it too little volume to make it profitable at Dacia’s price point. That’s why they’ve given priority to the Oroch pick-up truck: not relevant for Europe, but with huge market potential in South America (and perhaps North Africa).

  6. M. Hoffmann says:

    Hi guys,

    I think you also have to see the labour costs in “really available” low-cost-countries to produce in on both sides of the Atlantic.
    In the Americas, there is Mexico as a meanwhile “huge” car producing nation directly next to the states. Every car maker can go there without any “poliical instability doubts” or already produces there, With labour costs meanwhile lower than in China an ideal place to round up each model list with affordable entry models for every car maker.

    Dacia’s success in Europe with “shockingly affordable” cars started driven by the low labour costs in Romania before Romania joined the EU, but these costs quickly have more than doubled in the last decade. ( from “mexican-like” 1.9 Euros p.h.in 2004 to 4.6 in 2014 in the overall economy acc. to my data, plant workers surely above that – which is now obviously much higher than in Mexico ).

    Therefore Renault already had to look for other oppurtunities and found them in Morocco,
    With special treaties between Morocco and the EU it was possible to build a plant in Tanger which can export duty-free to the EU. I guess that it also was helpful for establishing this joint venture with the moroccon royalty, that Ghosn as a “franco-brazilian libanese” also speaks the arabic language.
    Not only Dokker&Lodgy are produced there on the one line , the other production line produces Sanderos at full 3-shift steam, with production figures higher than Logans & Sanderos combined in Pitesti, Romania.
    Only the EU-Duster – which more attracts a bit more solvent buyers, which already bought new cars of other brands before – is now “exclusively” from the romanian assembly lines, the main focus of production in Pitesti shifts more and more to sophisticated production of turbo-petrol-engines, ( partially automatic ) gearboxes etc.

    Renault as long-term market leader in North Africa and already with ( not EU-duty privileged ) production sites there ( Somoca, Oran in Algeria ) had no big problem with that ( Renault Group market share 2015 in Morocco > 38% ) .

    I guess other car makers just see too much “stability risks” in investing billions in an arab country, so Dacia/Renault can be quite sure, that they have quite exclusively such advantages on the entry-level market for a longer period ( the biggest part of new Dacia car buyers in the EU are consumers with thinner wallets, who formerly could only afford a used car ).

    Other manufacturers only “dare” to choose Turkey as production country ( but also higher labour costs as Mexico ). Besides again Renault ( mainly diesel engines also for export , cars more for the meanwhile real big domestic market – Turkey ranks #4 on the 2015 Renault Group selling list behind France, Brazil and Germany ) for my knowledge only Toyota and Hyundai produce passenger cars there, Ford for my knowledge only produces light trucks there.

    As Bart pointed out, Renault/Dacia has another adavantage which is not very applicable for a similar strategy including the US market: The Dacia models are designed more or less as world cars. Once developed with one cost block for the whole world, they build production lines everywhere on the planet, marketing and selling them under the primary brand Renault in less standard-demanding emerging markets and as Dacia “secondary brand” in more demanding markets. More Dusters, Sanderos and Logans are sold worldwide with a Renault-Badge than with a Dacia-Badge.This results besides the lower development cost per car also in further scaling cost reduction effects.

    Accordingly the new newest Renault Atlas, Renault wordwide car sales in 2015 were 1,822,965, Dacia 511,510. If you put all “designed ( also ) as Dacia”-model sales from the Renault-column to the Dacia column, you end up with only 1,259,999 “pure” Renaults versa 1,074,876 “Dacia/Renaults”. I think this figure brings out quite drastically, how extremely important this strategy for Renault already is.

    Other car makers tend more to ship production infrastructure of outdated models to “secondary market” production sites to continue to produce and sell them there when introducing a successor in “primary markets”. This “old behaviour” is per se not suitable for establishing a budget brand in the primary market.

    So the situation for car makers in Europe is much more complicated when they aim to compete with their entry level cars with a “strategic” budget brand. Renault just hit the sweet spot by overtaking Dacia at a favourable time and consequently used the advantage to establish it as a european-wide budget brand. But they have hard work to stay there and keep prices low at reasonable margins.

    Latestt example: For my knowledge the new Euro 6 16V “H4M” base petrol engine for Duster, Lodgy and Dokker is “naked”-produced at very, very low aluminium- , energy- and labour costs at AvtoVaz Togliatti in Russia – also part of the Renault-Nissan universe – shipped over to Turkey, there married with there-produced gearboxes ( perhaps, I’m not sure ) and other stuff and then shipped over with a powertrain-codenumber, that marks them as “produced in Bursa, Turkey” to the assembly lines in Pitesti and Tanger. This allowed Dacia to keep entry prices for the models at the same level as with the quite simple outdated iron-cast 8V- and 16V Renault-engines used until Euro 5, which were produced in Romania and Spain ( which obviously were not upgradable to the Euro 6 – emission standards )

    Btw. This “H4M” (Renault-Code) is just the same engine as the mexican-build Nissan HR16DE 2nd gen you find in the Versa in the US, all alu, VVT on both camshafts, 8 point injection ( dual injector )…

    • @M. Hoffman – this is some fascinating insight, thanks for sharing! I am really curious how you know so much about this 🙂

      I especially like the points you make about Dacia taking advantage of super-low production facilities outside of the EU, but which still have favorable duty-free status with the EU. To the best of my knowledge there are no such opportunities for the US, though Mexico is a large country and while manufacturing in the north is no longer super-cheap, the south may still hold more opportunities for car manufacturers.

      Also, it is fascinating to see, how you point out, that Renault-badged models originally developed as Dacias sell even more than Dacia models themselves.

Let me know what you think of this article. Thanks!

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