Emerging Countries Will Dominate International Markets

Paradigm Shift Continues at Home and Abroad

This is the ninth in a 12-part series of ``The Korea Times - the Boston Consulting Group (BCG) Joint Project'' designed to identify new realities in the post-crisis world and provide winning strategies for leading Korean firms in 11 key industries. In cooperation with BCG, The Korea Times will look into a wide variety of issues both in the global economy and major industries. - ED.

By Kim Tae-gyu

Staff Reporter

Over the past century, the United States has been the world's foremost car market by any measure. But China nudged past America last year in the aftermath of the global financial crisis.

The fast growth of emerging countries such as China, India, Brazil and Russia, which are collectively dubbed BRIC countries, is expected to continue in the international automotive landscape.

Their polar opposites are most of the developed economies such as the U.S., Japan and European nations where the sales of vehicles are stagnant after the markets have hit their saturation points.

``The BRIC countries will rack up double-digit growth rates over the next decade in sales of cars. But conventional powerhouses are highly likely to stagnate,'' KB Securities analyst Shin Chung-kwan said.

``I think that the global market will explode by 50 percent from 60 million units per year of today to 90 million in 2020 on the strength of emerging economies. Without penetrating them, none will be able to chalk up major successes.''

Other observers point out that figures outright demonstrate the exponential potential of the BRIC nations.

For example, the number of cars registered in the U.S. accounts for approximately 80 percent of its population. By contrast, the current rate is merely about 5 percent for China, the world's most populous nation.

Diseconomies of Scale

One of the most basic economic rules is economies of scale, which refers to the cost advantages generated thanks to their expansion. Simply put, the more they produce, the less they spend to manufacture each item.

With more products being cranked out, companies can spread out their overhead charges including financing, marketing, purchasing and managerial costs, thus cut down on the per-unit cost.

Economies of scale was also a rule of thumb in the global auto markets before the financial distress. Before the recessions, main players strived to mate through brisk mergers and acquisitions.

But things have changed once and for all after the financial tsunami swept the world in late 2008 and early 2009.

Those who praised economies of scale turned to opposite rationale of diseconomies of scale ― the more a company manufacturers, the higher per-unit cost it burdens for some reason.

``Think of Toyota Motor. In order to reduce costs by adding weight, companies are required to integrate their production platforms and source the same components for many of its models,'' Prudential Securities analyst Kong Jeong-ho said.

``What if some car parts proved to be faulty. Then, the damage would be more than great because they have to recall all the models using those same parts. This risk prompts people in the auto industry to believe diseconomies of scale and such a trend is expected to linger down the road.''

Toyota, the top global automaker, carried out massive recalls earlier this year across the world due to braking pedal problems. This brought about lasting damages to its reputation and subsequently, the Japan-based outfit lost some of its market share.

KB Securities' Shin concurs.

``I don't think companies will go all out to increase their size through organic growth or mergers with diseconomies of scale reigning. In my view, there is an optimal size in the vicinity of 5 million cars per annum and carmakers seem to realize it,'' he said.

Mirae Asset economist Lee Sok-je said that diseconomies of scale should be dubbed the risk of scale.

``It is not exactly diseconomies. It is risks entailing the size-based cost effectiveness. No matter what the title is, global firms learned from the Toyota case that low costs are not the only Holy Grail for the industry to pursue,'' Lee said.

Electric, Hybrid Cars

Another consensus is that the world's automotive industries would eventually move into the eco-friendly markets over the long haul. But the question is when such a shift would materialize in a full-fledged manner.

Hybrid cars are powered by both a conventional internal combustion engine and an electric propulsion system. They are touted as being by far more eco-friendly in comparison to traditional models on the road.

Despite its promises in the long run, the electric or hybrid cars currently struggle to find their feet as amply shown in Korea.

When Hyundai Motor, the country's primary automaker, launched the Avante hybrid midway through last year, it sold around 1,000 every month as the government offered tax incentives amounting to 3 million won.

Yet, the monthly sales plunged this year to 526 in January and 266 in February. The tally rose somewhat on 2.9 million won subsidies by Hyundai to exactly 800 last month but it still remains below the 1,000 mark.

``Eco-friendly vehicles including electric cars or hybrid models would be boosted by related regulations rather than their competitiveness for the time being,'' KB Securities analyst Shin said.

``By 2020, they will not be able to join the mainstream. Instead, they will carve out just a small niche. It would explain about 5 percent of annual sales in a decade, or around 4.5 million vehicles a year.''

Prudential analyst Kong is on the same page as Shin.

``For electric cars to gain the spotlight there are two big challenges. The one is the short life of rechargeable batteries currently available. With today's technologies, electric cars cannot move far without frequent recharging. People are unlikely to tolerate such inconveniences,'' Kong said.

``The other is that it has to be price competitive without the subsidies, which might be offered voluntarily by manufacturers themselves or forcefully under government regulations.''

With this reasoning, Kong projected that the short-term innovations in the auto industry would come from the improvement of the existing gasoline-based combustion systems rather than electric cars although he also admitted the future lies with electric cars.