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Published: May 26, 2009

 
 

The Best Years of the Auto Industry Are Still to Come

Even as they struggle through the economic meltdown, vehicle makers can look ahead to a high-growth, flexible, global future.


  
Illustration by Marc Burckhardt
 

Automobiles designed for emerging economies are getting some attention these days. In March 2009, Business Week covered the launch of the celebrated US$3,000 microcar by Tata Motors Ltd. with the headline “What Can Tata’s Nano Teach Detroit?” A number of other vehicle makers, such as Mahindra & Mahindra and Maruti in India, Chery in China, and global auto companies such as Renault, Volkswagen, and GM, have been noted for the inexpensive cars they are designing for new markets.

But the inexpensive microcar is only one small part of a much larger and more diverse trend. The motor vehicle manufacturing industry, which is 100 years old, is only now emerging from its infancy. Its time of greatest growth is yet to come. Automakers that are willing to think freshly about their markets and their business models will be in a position to benefit from the greatest wave of expansion that the industry has ever seen.

It takes fortitude to make this assertion in 2009. Few people see the auto industry as poised for growth at all. Even before the devastation of the credit crisis, motor vehicle manufacturing was considered a mature sector, with static (or even eroding) markets and too much competition. Since the crisis began, the industry has been portrayed as beleaguered and hapless, with jaded consumers and deeply discounted products, and needing billions of taxpayer dollars just to stay afloat.

But the reports of the industry’s death, and even the perception of decline, are greatly exaggerated. Look beyond its current challenges, and you can see increasing levels of productivity and capability, significant innovations in both the power train and the look and feel of motor vehicles, and — most important of all — a wave of accelerating economic development in many countries that will, sooner or later, produce immense new demand for personal mobility.

To grasp these dynamics, we must first understand the automobile market, not as it is often perceived, but as it really is. Millions of people around the world are making their way into cities and seeking automobiles as a means to a better life. That momentum may have slowed in 2008 and 2009, but it hasn’t vanished. Research conducted recently by Booz & Company shows that the global customer base for automobiles over the next 10 years falls into three broad categories, based primarily on which countries customers live in.

  1. The rapidly emerging economies (REEs) consist of the so-called BRIC nations (Brazil, Russia, India, and China) and a group of other relatively wealthy developing nations, such as Malaysia, Argentina, Mexico, Turkey, Thailand, Iran, and Indonesia. Millions of families in these countries are making or contemplating the purchase of their first automobile.
  2. The lower-growth economies (compared to the REEs) consist of about 100 nations with relatively impoverished populations and poor economic prospects. However, their political leaders are interested in building up the middle class and see personal mobility as a major stepping stone. These countries may become markets for motorized transportation after 2020.
  3. The mature economies include the established industrialized nations in North America and Europe, and Japan. Population growth and vehicle replacement, rather than economic growth, will determine the market for automobiles there.

These three groups add up to an enormous amount of market potential: Booz & Company estimates suggest that more than 370 million additional vehicles could be sold by 2013 and more than 715 million by 2018. But business models in the auto industry are not currently equipped to capture these increases. During their first 100 years, vehicle manufacturers (VMs) grew used to applying a single dominant approach to assembling and selling automobiles around the world. They sold similar vehicles with the same power trains through remarkably similar franchised dealer networks, with 80 percent of automotive sales and production based in the United States, Europe, and Japan.

 
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Resources

  1. American Chamber of Commerce in Shanghai and Booz & Company, “China Manufacturing Competitiveness 2008–2009,” 2009: Overview of manufacturing in China, with a window into global strategies for the short and near term.
  2. Stewart Brand, “City Planet,” s+b, Spring 2006: Where the owners of those millions of new automobiles will live.
  3. Joyce Dargay, Dermot Gately, and Martin Sommer, “Vehicle Ownership and Income Growth, Worldwide: 1960–2030,” Energy Journal, October 2007: Further data and analysis on the threshold of mobility.
  4. Pankaj Ghemawat, Redefining Global Strategy: Crossing Borders in a World Where Differences Still Matter (Harvard Business School Press, 2007): Long-term view of international enterprise, with high relevance for global vehicle makers.
  5. Bill Jackson and Vikas Sehgal, “One Billion New Automobiles,” s+b, Winter 2006: Prescient glimpse of the forces described in this article.
  6. Barry Jaruzelski and Kevin Dehoff, “Beyond Borders: The Global Innovation 1000,” s+b, Winter 2008: How auto components company Visteon and others are building out worldwide R&D footprints.
  7. Art Kleiner, “Pankaj Ghemawat: The Thought Leader Interview,” s+b, Spring 2008: The seer of “semiglobalization” discusses how to recognize and manage the distance among nations.
  8. Jim O’Neill et al., BRICs and Beyond (Goldman Sachs Global Economics Group, 2007): From the team that coined the term BRICs, research on Brazil, Russia, India, China, and the “next 11” countries (similar to what we call REEs).
  9. Jessie Scanlon, “What Can Tata’s Nano Teach Detroit?” Business Week, March 18, 2009: Posits inexpensive cars in emerging markets as the wave of the future.
  10. Eric Spiegel and Neil McArthur with Rob Norton, Energy Shift: Game-Changing Options for Fueling the Future (McGraw-Hill, 2009): How the power train and other energy options may evolve, taking vehicle makers with them.
  11. IHS Global Insight Web site; Economist Intelligence Unit Automotive Briefing and Forecasts Web site: Sources of statistics on current and forecasted future automobile demand.
  12. For more business thought leadership, sign up for s+b’s RSS feed.
 
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