BCG - The Boston Consulting Group

• Note to the Reader
• Preface
• Rethinking Localization Strategies for Success in China and India
• Leveraging R&D Capabilities
• Sourcing from the Local Supply Base
• Managing Manufacturing Operations
• Driving Sales: The Challenge for OEMs
• Driving Sales: The Challenge for Suppliers
• Orchestrating the Value Chain
• Seven Key Lessons from Across the Value Chain
• For Further Reading

Automotive markets in China and India are growing at breakneck speed. From 2001 through 2007, markets for passenger cars and light commercial vehicles achieved compound annual growth rates (CAGRs) of 25 percent in China and 15 percent in India, delivering 2007 sales of 8.1 million and 1.7 million vehicles, respectively. By 2015 these two countries are expected to represent a combined market of about 19 million vehicle—slightly more than the 17 million vehicles that will be sold in all of Western Europe. Clearly, China and India will play a key role in shaping the future of the automotive industry.

Little wonder, then, that these countries have attracted virtually all the world’s leading automotive OEMs and suppliers. Major players from Japan, North America, and Western Europe have been racing to move products, assets, and people to China and India—not only to sell cars in these rapidly developing economies (RDEs) but also to conduct one or more of the four basic steps in their value chains there: research and development (R&D), sourcing, manufacturing, and sales.

Despite all this activity, it is not clear whether—or to what extent—these international OEMs and suppliers have actually arrived in China and India. How effectively are they managing their localized operations, and how fully are they realizing the potential for value creation that these two countries offer?

Our recent analysis yielded the following observations about OEMs and suppliers seeking to localize steps in their value chains:

R&D. Offshoring R&D activities to China or India presents real opportunities because these countries are home to large pools of engineering graduates. In most cases, however, the local R&D centers that automotive OEMs and suppliers establish in China or India remain small and have very limited autonomy.

Sourcing. The substantial savings available by sourcing from China and India have lured dozens of multinational OEMs and suppliers to establish sourcing offices in these countries. However, on average, China and India still represent less than 5 percent—a tiny fraction—of those companies’ overall sourcing volumes.

Manufacturing. Although a large number of established multinational OEMs and suppliers have launched manufacturing operations in China or India, building more than 150 factories in the two countries since the mid-1990s, cost savings have been disappointing. Nearly two-thirds of the companies we studied are manufacturing in China or India at similar or even higher unit costs than in their home countries, because of diseconomies of scale, overengineered production processes, and the additional cost of ensuring product quality.

Sales. For foreign OEMs operating in China or India, selling cars to a larger share of local customers is a strategic imperative. Yet most foreign OEMs serve these markets with European or U.S. models that are only partially adapted to local requirements. In contrast, local OEMs such as Chery in China and Tata in India focus on their local customers’ needs, providing, for example, smaller engines, larger trunk space, and rear seating with more comfort features—at relatively low prices.

Clearly, the automotive industry is still on its “long march” to establishing effective operations in China and India. Notably, some players are pioneering new approaches in various functions. For instance, some have set up smart models for cooperation; one example is international development teams that operate 24-7, linking Chinese, U.S., and German R&D centers. In addition, a number of companies are employing production-related practices that contribute to competitive advantage, such as setting up factories for flexible manufacturing, replacing robots with manual labor, stringently using local equipment, and conducting international quality exchanges among employees. But these localization champions are rare. Companies working toward true localization in the local—and global—markets of the future still have a long way to go.

Nikolaus S. Lang is a partner and managing director in the Munich office of The Boston Consulting Group.

Bernd O. Loeser is a principal in the firm's Zurich office.

Christoph Nettesheim is a senior partner and managing director in the firm's Beijing office.