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Published: May 26, 2009

 
 

The Best Years of the Auto Industry Are Still to Come

Daimler-Benz is already differentiating its vehicle designs accordingly. The company plans to launch an all-electric Mercedes for urban consumers. For suburban drivers, its new S-Class lithium-ion battery hybrid claims 30 miles per gallon (mpg) (compared with 12 mpg for a gasoline-powered S-Class); reportedly, a forthcoming hybrid will get 45 mpg. And it has developed an efficient, clean diesel engine for long-haul travel.

Some car companies will undoubtedly go further. They might sell refueling stations for batteries and hybrids or hookup rights for those vehicles. They could reconceive dealerships as services that coordinate the intracity use of shared vehicles. For many U.S. auto dealers, particularly those at the low end of the market, the vehicle is already a loss leader intended to establish a relationship that leads to the sale of more profitable products and services, including long-term repair contracts. Such strategies will grow in popularity in the REE nations, where automobile dealer franchises must invent themselves from scratch.

Among the incumbent VMs from Europe, Renault SA appears to have made the most progress in developing vehicles specifically for emerging markets. The Logan is a no-frills car produced jointly by the French manufacturer and its subsidiary the Dacia Group of Romania. Launched in 2004, the Logan has seen sales rapidly increase; for example, its sales rose almost 20 percent (about €1.5 billion, or US$1.9 billion) between 2005 and 2006. The car has been manufactured at Dacia’s plant in Mioveni, Romania; in Colombia; in Brazil; and at other sites around the world. An Indian launch took place in June 2007 in collaboration with Mahindra & Mahindra Ltd., which helped Renault cut costs by 15 percent.

Designed from the outset as an affordable car, the Logan keeps costs low with simple features, 50 percent fewer parts than a high-end Renault, and a limited number of electronic devices. This simplicity serves the dual purpose of lowering costs and making the car easier and cheaper for owners to repair themselves. Most importantly, the Logan is not just a stripped-down version of Western design. The car’s engineers took into account differences between road and climate conditions in emerging and mature economies. The Logan’s suspension is soft and strong, and the chassis sits higher than on most other superminis to help negotiate dirt roads and potholes. The engine is designed to handle lower-quality fuel, and the air conditioning system is powerful — no small benefit in sweltering climates and slow-moving traffic.

A Developmental Path for Vehicle Makers
Success stories like those of the Renault Logan involve a long time horizon. It can take years to recruit and develop local executives, make a long-term commitment, and establish an in-depth presence in the countries being entered. The first step is to change the company’s own mission from selling cars — a relatively narrow, engineering-driven focus — to solving mobility problems. For companies that can embrace this broader, more market-oriented purpose, a wide vista of opportunity opens.

The second step along this path is getting to know the REEs where much of this initial future growth will occur. China’s dense urban centers, with their breakneck construction and strong central planning, present opportunities quite different from those offered by Russia’s vast geography, aging infrastructure, and rural poverty. Car companies may also have to adapt to cultural differences among the REEs that affect the management of factories and distribution centers. Hyundai, for example, has a command-and-control culture that works well in some countries (India, for example) but doesn’t necessarily mesh well elsewhere.

The third step is thinking freshly about the value chain. To find the best local approaches, a VM must draw on technology, practices, and experience from across the globe. This means developing a sophisticated international value chain. A manufacturing process developed in China today might help solve a problem in the U.S. tomorrow or in Indonesia the next day. Even a cursory survey of the BRIC nations reveals many ways automakers can adapt.

 
 
 
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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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