Case Solution Renault’s Logan Car: Managing Customs and Duties for a Global Production: Amanda Silverman, Prof. Hau Lee (Case: GS-62 Date: 04/29/08) Stanford Graduate School of Business) Topics: International Value Chain, Foreign Trade Related Risks & Trade Barriers Internationalised Value Chain of Renault Logan Pitesti ROMANIA €489 Million Investment in Production site for Renault Logan CKD Parts CKD-parts Decree 166: 0% duty rate for ~90% of parts Moscow, Russia investment of €230 for assembly plant Duty Free
CBUs 0% duty rate resulting from free trade agreements By 2006 20,000 Logans exported Ukraine (free trade agreement) Export Morocco 54% stake in Assembly Plant SOMACA: €30 million invested, CAPACITY: 30, 000 Logan per year Tunisia, Jordan, Egypt (Maghreb and Algeria) (free trade agreement) Colombia, Envidago assembly plant investment €23mil: Capacity 15,000 by 2010 Export of cars to Venezuela Ecuador (free trade agreement) CKD Parts Duty Free Export Assembly Plants in Brazil, India, Iran Mechanical parts 0% duty rate instead of 30%: Romania = EUmember
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Romania now EU Member CBUs 0% duty rate resulting from free trade agreements Brazil: Assembly plant: Mechanical parts CBUs 0% duty (higher than expected demand form EU countries) EU Countries, + Croatia & Turkey The “Custom Consulting Group” is responsible for planning various aspect of the company’s global infrastructure especially logistic and administration required to satisfy customs regulations in the entire supply chain. Moreover they were also responsible for understanding the global customs environment.
Inbound and outbound logistics operations and procurement were organized to add value at each step. The home base in Romania produced cars for EU countries, however the automobiles built in a given country could be produced with a range of local content also. A Logan could be exported as a “CBU (completely built-up) vehicle where the importing country received a ready for sale car for the local market. Logistic then is required to transport the vehicle form production site to its market of sale. This allowed the assembly to be centralized in Romania.
However this method was not always an advantage for some target markets such as India where duties could be up to 100% of sale price. In order to save cost another option could be used. CKDs (completely knocked down units) could be shipped to another country for final assembly. Hence, 1 Renault seeks to order CKD-parts from various suppliers, acquire them at a competitive price and in enhanced quality; therefore CKDs were not only ordered form the mother site in Romania but also from local plants.
Domestic vendors or other regional sites were also taken into consideration. Sourcing parts from the mother site in Romania could come with a 0% duty however outbound logistics could eat into theses saving. Purchasing parts from local suppliers than using CKD parts would also depends on the competiveness of the supplier in each country. A volume increase correlated to the increases in competiveness of local suppliers. Cost reduction in operations came about due to Renault’s usage of segments of the B-platform, which was also used for the Nissan Micra and Renault Modus.
Depending on the end market, Renault would use either its own name or the brand name Dacia. Foreign Trade Related Risks Inflation and foreign exchange related risks are very dominating risk factors which are closely watched and analysed. Here the inflation rate of the local currency and also the exchange rates are taken into consideration before deciding whether or not to invest or source pars form a country. A duty drawback provides refund on customs duties, taxes, or other fees that had been collected at importation.
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Payment risks could occur if such regulations are misinterpreted resulting in the company losing out on drawbacks. Trade policies in a particular country could also endanger the company’s chance to obtain drawback in the future. Such policy changes might force policy changes might force them to move their operations to countries with improved economic incentives. Unexpected hike in demand from Western Europe saw Renault seeking alternative means to supply its subsidiaries in Russia, Morocco, Colombia, Iran, India Brazil and South Africa with CKD parts.
Investment in the assembly plant in Morocco might be reduced due to a change of duty rate to 0% on CBUs. Knowing that Toyota considers South Africa a strategic centre for export to “Maghreb”, Renault must weigh its options of doing the same, which could seem them been confronted with a substitution for their product. Trade barriers and Renault’s Configuration Customs duties for exported goods Each country has its own procedures in custom policy, which varies in complexity (decided by implementing of Trade Beam (trade compliance system)).
It was cost prohibitive for Renault to export Logan as CBUs because duties on vehicles imported as CBUs were too high (from 35% to 100% in India for example) a decision was made to export vehicles as CKDs (completely knocked down units).
Local content regulations for subsidiaries and affiliates: TRIMS agreement – restricts import of goods for domestic companies, preference to domestic goods, the amount of imported goods should be equal to exported. After accession Romania to EU, the duty rates on the import were reduced, as far as 0% with some countries. 2
