Please prepare the case “Renault’s Logan Car: Managing Customs Duties for a Global Product” to be discussed in the next class. The case report is due at the beginning of the next class. Please keep separate copies for purpose of participating in class discussion. Study Questions: (1) What are the complexities involved in factoring out the effect of customs and duties in designing the supply network of Logan (i. e. , where to build the CKD parts and CBU, and what markets to serve from what sites)? 2) In general, what are the quantifiable and non-quantifiable factors that one should consider in designing a supply network? (3) For Logan, what new opportunities were created by Romania entering the European Union in 2007? (4) One of the benefits of Renault’s alliance with Nissan was supposedly the potential of Renault using more of Nissan’s parts in their products. What are the factors that you would consider in determining whether a Nissan part should be designed into the Logan? (5) The emergence of the South African market offers an opportunity for Renault to build CBUs in South Africa.
Based on the data from the case, as well as your best assumptions, compare the alternatives for sourcing CKDs and building CBUs to serve the South African market. What are the pros and cons of building CBUs of Logans in South Africa? There would be a lot of factors that are to be considered while designing a supply network. We can broadly classify then into quantifiable and non-quantifiable factors. Non-quantifiable factors: a. The Free Trade Agreements (FTA’s) existing between nations would be an uncertain factor and certainly an unquantifiable one.
An FTA between nations is considered for regular changes and is looked at with utmost importance from both sides as to not affect the trade imbalances. A supply chain built around an existing FTA would have to face the wrath of it being cancelled, in the form of taxes, import and export sanctions, etc. b. The probability of success of a new model of a car or of an existing model in a new market is another non-quantifiable factor. This is a factor that cannot be measured until the product (car) is launched and unexpected success might add pressure on the existing supply chains for huge supplies.
Similarly a huge supply chain network built in anticipation of the success of the product might be a burden if there does not exist enough demand. c. Political unrest between nations always adds to the pressure of trade. This would be a major factor especially when we build a supply chain that is well woven between two nations with a bit of a political unrest. d. Countries and Unions- A country joining a union, say like the European Union, would allow for a major overhaul of the existing tariffs and custom duties between the existing nations of the union and the newly joined country.
We can never be sure of this scenario as this involves a lot of negotiations and agreement to applicable laws, but this does have a major impact on the costs and tariffs. The positives would be decrease in tax rates and import/export duties while the negatives would be increased competition. e. Unexpected variations in the demand for a particular model should be countered to build an efficient supply network. Demand forecast would be a powerful tool that can be applied in such a scenario but cannot be quantified accurately. Quantifiable factors: a.
Economic growth of countries is a factor that can be measured and one that has impact on a vast range of parameters, especially on consumption patterns of the population. b. Export and import duty rates and tariffs have a major impact on the cost of the final product, which in turn affects the affordability and popularity of the car. The cost would be a major factor especially when entering new or emerging markets. c. Exchange Rate is one of the factors that determines the favorable condition especially for bilateral trade and can actually have a major impact on the profit margins. d.
Traditionally strong and weak markets: Automobile manufacturers would always consider their traditionally strong markets and their core strengths before entering a new market and start selling their vehicles in the markets. e. Transportation/Shipping costs: Transportation or shipping costs would be a major concern for trade when there does not exist a supporting supply network or existing partnerships with local suppliers. f. Achieving a balance between importing parts (CKD’s) versus percentage of local parts used to get duty exemptions based on local parts used or country of origin criteria would be a tricky factor to be considered. . Inflation trends would be worth keeping an eye upon. Though uncontrollable by the company, keeping a close view on the inflation would help structure the future and long term plans. Note: This is under the assumption that there are no major swings in the inflation/deflation rates of a country. h. Lead time, would be a major factor if the demand rises to new heights and the production levels are not catching up as per the increase in demand. i. Quality and Durability are always a wanted factor in any market. But, their degree of importance may vary depending upon the customer nature of different markets.
Customers from separate markets might have total varying need like some might prefer high durability while some might just prefer comfort and would not even bother about the durability. New opportunities created by Romania entering E. U: On January 1, 2007, Romania would enter the European Union, and thus become able to import parts from several countries using the free trade agreements available as a member of the E. U. Thereafter Romanian vehicles would be considered as European vehicles and could claim a zero percent duty rate on vehicles imported into Mexico.
Also there would be a major advantage regarding the duty rates for mechanical parts supplied from Brazil, which were subject to an MFN duty rate of 30% prior to 2007. Another outcome of Romania entering European Union would be that Romanian parts would be counted as local contents in the E. U countries. So a Logan being assembled in Morocco (using parts imported from Romania) would now qualify for a zero percent duty rate on the import of CBUs into E. U, under the rules of origin country. This would be a straightaway reduction to zero percent duty rates from the prior 10% duty rate.
Romania was supplying its domestic market and Eastern European markets with CBUs, and also sending CKD parts to Russia, Morocco, Colombia, Iran, India, Brazil, and South Africa. But, as the demand for Logan unexpectedly began to take off in Europe, Renault will have to consider alternative ways to serve the Western European production requirements for CBUs. This factor is not majorly affected by Romania entering the E. U but Romania would be more attractive to cater to European markets after entering the E. U especially because of the zero percent duty rates applicable. Factors to be considered in using Nissan parts: . Whether the design of a Nissan part into Logan would require a major overhaul/reconstruction of the already established Logan assembly or production lines. Renault would have to weigh the options of cost cutting versus new investments needed if the assembly line would have to be modified. b. The affects on the overall performance of the vehicles especially as Logan is targeting at customers with atypical needs such as long running times (5-6 years, or even up to 8 years). Also the road conditions are harsh and the cars wear out three times much faster than in normal European conditions.
Under such conditions we have to look at whether Nissan parts are manufactured for such needs. c. Achieving the right balance with respect to costs and the criteria to qualify under the country of origin rule. Nissan parts might have an advantage in some criteria but we will also have to consider using local parts in the CBU, so that the vehicle built can claim duty exemptions or tariff reduction based on the local parts used in the CBU. d. The production sites of Nissan must be logically integrated into the supply chain being built or planned.
If Nissan has a mother plant which is located quite away from the supply network then the overall transportation and shipping costs of the individual CKDs might be a factor worth looking at. e. Quality and variety of the parts that Nissan produces. Nissan primarily serves parts for SUVs (Sport Utility Vehicles) but the market strategy of Renault is to target at families and taxi service providing companies. These types of cars might have a different type of requirement when it comes to specification of the vehicle parts. So we have to consider whether the Nissan parts currently being produced can be integrated into the Renault car models.
