BCG - The Boston Consulting Group

BRIC Auto Markets Offer 'Exceptional' Growth Opportunity and Largely Untapped Strategic Potential, Says New Study by The Boston Consulting Group

China Will Remain the Largest of the Four BRIC Auto Markets, Expanding its Share of Total BRIC Sales from 53 Percent in 2008 to 61 Percent in 2014

BEIJING, March 26, 2010—For at least the next decade, the future of the automotive industry lies in the BRIC countries. Together, Brazil, Russia, India, and China will account for 30 percent of world auto sales in 2014—while also offering significant opportunities for cost-effective R&D, sourcing, and manufacturing, says a new report released today by The Boston Consulting Group (BCG).

Yet, although virtually all multinational automotive OEMs and tier one suppliers have set up operations in the BRIC countries, they are not fully capturing those markets' strategic potential because the operations are not deeply localized, says BCG.

Because the individual BRIC countries differ dramatically in market development and local capabilities, as well as in consumer preferences, companies must devise country-specific approaches to localization, as well as strategies that span all four countries, BCG contends.

"Auto companies cannot succeed in these markets by offering one-size-fits-all BRIC products, processes, or approaches," said Nikolaus S. Lang, a Munich-based partner and lead author of the report. "To realize the full value of localization, the key is knowing which functions are best suited to which BRIC countries."

The report analyzes the challenges and opportunities associated with localizing R&D, sourcing, manufacturing, and sales in each of the four countries. The findings are based on the firm's experience and more than 250 interviews conducted with senior executives at the leading auto OEMs and suppliers that are active in those countries.

Exceptional Growth Opportunities Through 2014

While the economic crisis plunged many of the world's auto markets into free fall, markets in the BRIC countries generally performed strongly in 2009 and "now offer prospects for exceptional growth," says the report.

In 2009, Brazil's market grew 11 percent, India's 13 percent, and China's a staggering 42 percent—while Russia's market shrank by 48 percent. The first three markets will continue to grow steadily throughout 2014, driven by continuous strong GDP growth. And also Russia is expected to recover to pre crisis volumes by 2014.  China will remain by far the largest of the four BRIC markets. The overall share of the BRIC markets will increase from 53 percent in 2008 to 61 percent in 2014.

Ongoing Challenges to Localization

Despite the significant growth opportunities in the BRIC markets, few auto companies are positioned to fully realize the strategic potential of those markets. For example, less than 10 percent of leading auto OEMs and suppliers are deeply localized in all four BRIC countries, says BCG.

"One reason localization is not more advanced is that most companies are struggling with stiff challenges in the BRIC markets," said Christoph Nettesheim, a senior partner of BCG Greater China and the head of this study in China. In conducting R&D in BRIC countries, for instance, many companies are under pressure from strong central R&D management, which constrains the activities of local R&D centers and makes it difficult to find and retain local staff. Currently, some 55 percent of foreign auto companies' R&D centers in China and India—and 30 percent of those in Brazil—have little or no autonomy from global R&D centers and only low levels of project responsibility.

In sourcing, key challenges include logistics concerns and low-quality suppliers, both of which limit volumes. "Foreign OEMs' sourcing from China, for example, typically represents only up to 10 percent of their overall sourcing," said Marco Gerrits, a Beijing-based principal and a key contributor to this study in China.

In manufacturing, companies are generally paying a premium of 5 percent to 15 percent to manufacture in the BRIC countries, mainly because of diseconomies of scale and higher quality-assurance costs than they incur in the more developed markets. Only in Brazil do they actually save money on manufacturing. Challenges include small sizes of plants, limited conversion from automated to manual processes, and low quality.

And in sales, the diversity in national tastes and requirements drives the need for specific car offerings for each country. For example, Chinese consumers enjoy affordable luxury-style sedans with flair, the Brazilians favor sporty hatchbacks, Russians prefer Western sedans and sport-utility vehicles without visible local adaptations, and Indians seek ultra-low-cost minicars, according to the report.

Untapped Potential for More Profitable Localization

"To date, companies have tended to approach Brazil, Russia, India, and China opportunistically rather than systematically, and to consider them individually rather than as elements of a global strategy," said Lang. "What's needed is a new management approach—one that combines cross-BRIC strategies; active sharing of best practices among relevant locations; and country-specific R&D, sourcing, and products." BCG recommends three general guidelines:

• In terms of country strategies, make China the cornerstone of any BRIC strategy, strengthen the company's presence in Brazil and India, and invest selectively in Russia with a view to its long-term potential.
• Until each BRIC country provides enough scale to justify completely individualized products, adapt standard platforms significantly to meet local requirements and engage local partners as needed to help develop sales-and-marketing concepts appropriate to each locale.
• Expand sales networks in all four BRIC countries and, depending on the company's capabilities and prospects, invest selectively in particular countries to increase local R&D, sourcing, and manufacturing where those activities are most advantaged.

Looking specifically at China, BCG's China team finds that the level of competition in the Chinese market will increase even further between the global and local OEMs. While global OEMs are now entering lower-price segments, Chinese OEMs will improve their product portfolio, The question is, Who will win the mid-market sweet spot?

"To Win, Global OEMs need to deeply understand the target segment and its competitors. They need to offer products that truly meet the Chinese customer's taste and requirements," urged Nettesheim. "Those who find the right balance between localization and global scale will advance in the Chinese Mid-market".

For Chinese OEMs striving for globalization, the question is, How could they globalize? The BCG China team suggests that these companies can advance their global growth in several ways: by further gaining strength in their home market China first, by actively building required capabilities for globalization, by carefully choosing where and how to compete,  and by leveraging strong local partners as well as a proactive Chinese commerce policy to gain momentum.
 
To request a copy of Winning the BRIC Auto Markets: Achieving Deep Localization in Brazil, Russia, India, and China, or to arrange an interview with one of the authors, please contact Ms. Gu Li at +8621 23064069 or gu.li@bcg.com.

About The Boston Consulting Group

The Boston Consulting Group (BCG) is a global management consulting firm and the world's leading advisor on business strategy. We partner with clients in all sectors and regions to identify their highest-value opportunities, address their most critical challenges, and transform their businesses. Our customized approach combines deep insight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable competitive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with 69 offices in 40 countries. For more information, please visit www.bcg.com and www.bcg.com.cn