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


The Best Years of the Auto Industry Are Still to Come

  • Innovation. In China, the government’s direct management of urban planning and technology development may yield advancements in alternative power-train technologies applicable there and elsewhere. In India, low engineering salaries ($3 per hour, compared with $48 in western Europe and $36 in Japan and Korea) make the country attractive as an offshoring destination for R&D. Russia benefits from a legacy of expertise in science and research and a history of respecting intellectual property. Brazil is a leader in agriculture-based fuel, particularly ethanol made from sugarcane.
  • Supply base development. China and, to a lesser degree, India will likely become significant bases for component exports. The sheer size of China and its large market segments provide distinct advantages to companies choosing that country as a global supply base. India’s smaller segment focus uniquely positions it for niche plays in components. Brazil, with its well-established base of foreign VMs, is well positioned for marketing to the Americas.
  • Assembly. The labor cost arbitrage for China and India will likely be significant for decades to come. Companies in these markets pay as little as $1 or $2 per hour in wages, versus $37 in western Europe, $26 in North America, and $19 in Japan and Korea. Russia, at $18 per hour, cannot compete on wages, though its proximity to western Europe is valuable. Brazil, meanwhile, offers scale advantages in South America.
  • Distribution. Given the massive population in China across urban, suburban, and rural areas, improvements in distribution are likely; in India, distribution is already advancing. To reduce shipping costs, Tata does not fully assemble the Nano in factories; instead, the cars are shipped in parts and assembled in regional centers. Russia’s urban population demands high variety in low volumes; its vast rural expanse, in contrast, requires high volume but low variety to be economical. Brazil is expected to lead the way in creating distribution networks for alternative fuels.
  • Sales and marketing. China must craft marketing techniques to sell low-cost car models to its vast rural and urban population. Automobile marketing in India may well follow the example of mobile phones, which have been widely adopted there. In Russia, multiple automobile models will demand niche marketing, everything from “ultra VIP” in urban areas to “no frills” in the rural reaches.

In the face of a challenging business environment, VMs can take heart in this fact: They operate in a dynamic global industry full of promise. Indeed, for all its frustrations, the automobile industry is the kind of industry in which one should aspire to be. At the end of the horse-and-carriage and steam train eras, executives must have been similarly frustrated. Most automakers already understand the need for change, but not all of them have translated this into the organization and approaches they will need in the future. Today’s economic climate is woeful and auto sales are declining worldwide, but VMs that persevere could be rewarded by another 100 years of prosperity.

The BYD Aspiration

Could an unknown company from an emerging economy take advantage of a major technology disruption to become a leader in the automotive industry? That’s precisely what BYD Company has announced it intends to do by 2025.

BYD (“Build Your Dream”) was founded in 1995 in Guangdong, China, as a manufacturer of rechargeable batteries for portable electronic devices. It is now the world’s leading producer of lithium-ion batteries for mobile handsets, with a 33 percent market share worldwide. In 2003, BYD became China’s first privately owned company to independently acquire an automobile factory. The company quickly developed its own line of vehicles, including a minicar and a convertible. By 2007, it was China’s sixth-largest producer of cars, with a 1.9 percent market share.

BYD President Wang Chuanfu recently announced the company’s two major targets: to become the largest automaker in China by 2015 and largest in the world by 2025. In pursuing these goals, BYD is placing an enormous bet on the viability of electric power trains and its own core expertise in lithium-ion battery technology.

BYD’s strategy is based on at least three premises: that the demand for electric vehicles will grow, that integrated battery technology will be a critical component (perhaps in a branded fashion, as with Intel or Windows in personal computers), and that this core technology is not easily replicated by or tradable to others.

If these premises turn out to be correct (and it isn’t certain that they will), BYD would still face major challenges. It would have to take advantage of its lead in lithium-ion batteries to rapidly introduce prototype electric vehicles and hybrids, thus establishing itself as one of the first leading brands. And it would have to design and introduce new ways of manufacturing, selling, and servicing electric vehicles, probably starting with China’s enormous market. If the company leapfrogged past conventional auto industry practices and developed derivative designs (instead of spending money on original designs), it might become easier for other automakers to cooperate with BYD than to compete against it.

— R.H. and J.J.

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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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