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 / Summer 2009 / Issue 55(originally published by Booz & Company)


The Best Years of the Auto Industry Are Still to Come

Now, however, the auto markets are becoming far more diverse and complex than those of previous decades. Henceforth, VMs cannot expect to succeed by stripping down models they sell in western Europe and shipping them to Asia or Latin America. REEs are different from industrialized countries, and different from one another as well. They have widely varied population densities, geographies, and natural resources. Their governments have diverse priorities that have led to different configurations of urban land use, public transportation, roadways, and energy infrastructure. Each country that an automaker enters has distinctive consumer demand patterns; distributor networks; and regulations on imports, foreign direct investment, safety, and transportation in general.

Competition is also becoming much more intense. The global automotive industry began in Europe and North America and, in the 1970s, expanded to Japan with the advent of Toyota, Honda, and Nissan (then Datsun) as car exporters. Korea’s Hyundai followed in the 1980s. Now, manufacturers from China, India, and perhaps other emerging nations will be significant sources of supply, and customers around the world will demand new vehicles at ever-decreasing prices. Subcompacts like the Tata Nano are designed to be affordable and practical in Asian and African cities that previously had almost no vehicle traffic.

In addition, the imperative of the climate change problem and the volatile price of oil have made automakers around the world realize that alternatives to petroleum-fueled power trains are inevitable. For the first time since the demise of electric- and steam-powered cars in the early 20th century, motor vehicles based on diverse technologies will coexist on the same roads. The most progressive manufacturers also recognize that automobiles, in the future, must fit into a broader transportation system. Many governments, for instance, are investing in intermodal systems that make it easier for travelers to switch from privately owned and operated vehicles to other forms of transportation.

Succeeding in this business environment will not be easy. But established vehicle makers have not yet come to terms with the wholesale transformation that they will face. They will have to design and market vehicles to a wider range of consumers than ever before, often at prices that now seem breathtakingly low. They will need to incorporate suppliers, assemblers, and distributors from around the world into their value chains, and design products and processes with unprecedented flexibility and responsiveness.

Global vehicle makers will also need to develop speedier innovation, with locally inspired solutions to local problems. For instance, marketers in some nations may need to reach consumers who cannot read. The auto brand names of today may adorn a variety of products in the future — engines, car bodies, or mass transit vehicles. Popular car models may well be produced with several power-train options available: electric in major Chinese cities struggling to reduce air pollution, ethanol in sugarcane-rich Brazil, diesel in oil-rich Russia.

Not all of today’s automakers will survive this transition, but those that innovate appropriately will enjoy the prospect of hundreds of millions of new customers.

Getting to Know the REEs
Our confidence in this immense market potential is based on a worldwide phenomenon: the well-documented nonlinear relationship between economic growth and personal mobility. In any industrializing nation, as per capita income rises, so does per capita car ownership — not in a straight line, but in a classic “S-curve.” (See Exhibit 1.) Rates of vehicle ownership stay low during the first phases of economic growth, but as the GDP or purchasing power of a country reaches a level of sustained broad prosperity and as urbanization reshapes the work patterns of a country, vehicle sales take off. (At this point, you see fewer families packed onto a single motorcycle and more families in inexpensive subcompact sedans.) Eventually the growth rate levels off as the country becomes saturated with automobiles, but at a much higher level per capita than before.

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  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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