Post-Crisis Car Industry Pivots Round BRIC Nations

Electric Car Ready to Return to Automotive Landscape

By Yoon Kyung-eun

Key issues in the automotive industry in the aftermath of the economic crisis are localization in the BRIC markets ― Brazil, Russia, India and China ― and the possible comeback of the electric car. For auto companies, surviving the downturn it is critical to formulate a winning cross-BRIC strategy and include electric vehicles as an integral part of their portfolios.

Localization in BRIC Markets

While the economic crisis plunged many of the world's automotive markets into free fall, markets in the BRIC countries were generally less affected and now offer prospects for exceptional growth. Whereas auto sales in most developed markets will grow only moderately from the end of 2009 through 2014, at an average rate of some 2 percent per year, sales in the BRIC countries are expected to grow at rates ranging from 3 to 15 percent per year, to end up accounting for some 30 percent of the global auto market in 2014.

Although the BRIC countries offer advantageous conditions for conducting research and development (R&D), sourcing, manufacturing, and sales, less than 10 percent of leading automotive original equipment manufacturers (OEMs) and suppliers are deeply localized in all four countries. Companies that are localized are often operating in ways that are less than optimal.

For example, foreign OEMs' sourcing from China typically averages just 1 to 5 percent of their overall sourcing. And in manufacturing, companies are generally paying a premium of 5 to 15 percent to manufacture in the BRIC countries, mainly because of diseconomies of scale and higher quality-assurance costs.

The Boston Consulting Group's (BCG's) recommendations to auto companies fall under three general headings. First, in terms of country strategies, make China the cornerstone of any BRIC strategy, strengthen the company's presence in Brazil and India, and invest selectively in Russia with a view to its long-term potential.

Second, until each BRIC country provides enough scale to justify completely individualized products, adapt standard platforms significantly to meet local requirements, and engage local partners as needed to help develop appropriate local sales-and-marketing concepts.

Third, expand sales networks in all four BRIC countries and, depending on the company's capabilities and prospects, invest selectively in particular countries to increase local R&D, sourcing, and manufacturing where those activities are most advantaged.

Possible Comeback of Electric Car

Driven both by the ``sticks'' of increasingly stringent government regulations, energy security concerns, and higher oil prices, and by the ``carrot'' of enhanced public approval of their brands, virtually all leading carmakers are exploring ways to reduce their vehicles' carbon dioxide (CO2) emissions and increase their fuel efficiency. These forces are driving the development of alternative concepts for automotive propulsion as well as alternative fuels.

Clearly, consumers who care keenly about the environment and want to contribute to the sustainable use of the earth's resources can look forward to having some interesting automotive options in the next dozen or so years.

In BCG's view, internal-combustion engines will remain the dominant technology until 2020. Cars equipped with alternative propulsion technologies ― including hybrids, range extenders, and electric vehicles ― will together achieve market penetration somewhere between 12 percent under the slowdown scenario and 45 percent under the acceleration scenario.

To attain the goal of reducing CO2 emissions through increased vehicle efficiency, OEMs need to focus on three things. First, ensure access and build solid know-how across effective supply networks. Second, offer consumers attractive value propositions. Third, manage the high complexity of their R&D portfolios.

Even with all of the above, OEMs are unlikely to be able to create compelling value propositions for electric vehicles on their own. They will need to make it clear to regulators that governments must provide incentives to other stakeholders ― princi-pally power companies and consumers ― to help maximize the necessary infrastructure and viable business models.

Yoon serves as a project leader at Boston Consulting Group. Before joining BCG, she worked in management consulting and journalism. During her tenure with BCG, she has worked on various projects on mergers and acquirement due diligence, strategy and organization. Included in her specific experiences are shareholder value maximization strategy, business model innovation strategy development, asset optimization strategy and new organizational structure to name a few.