In a move toward becoming a major car producer in Eastern Europe, Renault in 2004 purchased the Romanian firm Dacia for €200 million to build Logans in Romania. The pact calls for Renault to start producing as many as 100,000 Logans a year, primarily for sale in Romania, at an old Dacia factory located some 120 km northwest of Bucharest in the Arges.

The Logan is a modern, robust entry-level vehicle aimed at emerging markets and priced very moderately at Romanian leu (RON) 15,000. The company had already invested nearly that much in Hungary for an engine plant and small-scale assembly operation from which Dacia would source its engines at the equivalent of €1,250 (but actually denominated in forint, which is pegged to the euro). Since 2007, when the RON stood at RON 3. 50 = €1, inflation in Romania has run at an annual rate of 9 percent (against 1. 5 percent in the euro-zone) while the leu

(RON) has steadily depreciated at an annual rate of 5 percent against the euro.

a. Assess Renault-Dacia’s operating/economic exposure to inflation/devaluation.

The exchange rate stood at RON 4. 45 = €1 on January 1, 2012. Until Romania joined the European Union in 2007, Dacia as the national state-owned automobile manufacturer enjoyed a quasi-monopolistic hold on its domestic protected market.

b. With Romania’s tentative plan to join the euro-zone by 2017, it was announced that the RON might be pegged to the euro at a new rate of RON 5. 00 = €1 as of January 1, 2012. Would this new exchange rate arrangement benefit or penalize Renault-Dacia?

c. As a general manager of Renault-Dacia, you are preparing for a summit meeting with the governor of Romania’s central bank and the minister of finance.

How would you make the case against this new currency plan?

d. Transylvania Cars Ltd is the newly appointed distributor in Romania of South Korean Hyundai automobiles, which are to be imported from Turkey, where subcompact models are assembled. How should your diagnosis in part a of Renault-Dacia’s economic exposure be revised?