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 / Winter 2006 / Issue 45(originally published by Booz & Company)


One Billion New Automobiles

Three trends that will change the future of the automobile industry.

Imagine how the world would be transformed if the number of people who owned cars doubled in a decade. In fact, as the rate of personal vehicle ownership soars in Asia, a new kind of global automotive manufacturing industry is emerging to capitalize on this new customer base. Automakers (and the financial markets and supply chains that support them) already know their world is going to change; the media are beginning to pay attention to fledgling motor vehicle companies such as Chery (in China) and Mahindra and Mahindra (M&M, in India). But few people realize the full implications. If the auto markets of developing nations evolve on a par with established markets by, say, 2020, that development could upend today’s prevailing notions of what a car costs, how it is produced, and how it is used.

The trends that will shape this future — from automobile production to environmental impact to changes in working patterns — are proceeding at different speeds. But they are all interrelated, and their impact will be cumulative. These trends include:

• Social Mobility. In emerging markets, especially if the building of roads and fuel infrastructure continues, individual mobility and job opportunities will increase. This in turn will accelerate both the democratization and the industrialization of China and India.

We can assume that no emerging nation will become an automotive society on the U.S. model, with its suburban sprawl, subsidized fuel, and demand for large cars. Countries like India and China will likely impose strict regulations on vehicle size, fuel economy, emissions, and driving rights — and they will cut back or eliminate their current fuel subsidies. Excise taxes on larger engines and vehicles are also likely. The Shanghai government has already implemented a Singapore-style license-fee system that effectively rations drive time at peak periods in high-congestion areas.

As a result, people in relatively wealthy urban centers — such as Beijing, Guangzhou, Hyderabad, and Bangalore — will continue to rely on public transportation, since daily driving is impractical in dense cities without major highways. Rather than providing mobility during the week, cars in such locales will be used by residents to leave town on weekends, and they will also serve as status symbols.

For rural areas, however, motorization will open new horizons, and not just for car owners. For the first time, residents of remote villages will be able to reach urban centers in a half-day’s travel. Economic activity, be it agriculture, industrial production, or retail sales or distribution, will no longer be logistically isolated in rural regions. China’s automotive and steel sectors were once geographically segmented, with small clusters of suppliers and manufacturers duplicated in each major region. Now, the new highway system allows major players to consolidate in centralized locations, increasing their scale advantages.

• Environmental Impact. It’s still not clear whether emerging-country policymakers will take energy availability and environmental concerns into account as they promote growth. Why should they, since environmental concerns are a secondary issue in most developing countries? To date, many leaders in these nations have argued that they cannot afford the luxury of environmental accountability (particularly for greenhouse gas emissions and their impact on global climate change). This is a source of worry for many experts. China is already second only to the United States as a consumer of energy and producer of greenhouse gases. If driving habits in China, India, and other emerging nations duplicated those in the U.S., the environmental impact could be catastrophic.

But history suggests that rising economic growth leads to greater environmental awareness sooner or later, and this change may already be happening in the East. For example, China has just raised its fuel economy standards, and India’s metropolitan governments are beginning to tighten environmental regulations. “The challenge for developing countries,” says Dilip Chenoy, director general of the Society of Indian Automobile Manufacturers, “is whether to converge with European standards in the next few years, or just to maintain a one- or two-year gap behind Europe.” The latter option, he said, “may allow us to develop indigenous technologies at lower cost, making the cars more affordable but still meeting emission norms.”

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