NEW DELHI, 25 September 2006 – While several mature markets will grow over the next four years, the biggest breakthrough growth will come from BRIC countries. They will account for more than 40% of forecast global light vehicle assembly increases and represent 52% of the industry’s forecast global capacity expansion. These factors are reflected in the fact that nearly all major global automakers are pursuing a BRIC strategy in some form as they attempt to gain competitive advantage by tapping the potential of these emerging markets.
This is just one of the findings included in the annual ‘Global Automotive Financial Review’ by PricewaterhouseCoopers. It is the eighth edition of an extensive collation of research on the sector, which also includes summaries of financial data, trends and practices as reported by forty leading global vehicle manufacturers and suppliers.
Recent years have brought corporate bankruptcies, restructuring efforts and plant closures. Massive structural changes are simmering which will only heat up as the entire automotive value chain struggles to adapt to new market realities. These include high raw material prices and razor thin profit margins, which are emerging against a backdrop of intense increases in the level of global competition.
Ramesh Rajan, Automotive Industry Leader, Price Waterhouse said, “The Indian automotive manufacturing sector is poised to grow, with increasing domestic market and India being projected as the "hub" for small cars. All the major global vehicle manufactures have either established or are in the process of establishing their presence in India. The industry however needs to work with Government to address some of the key areas such as inadequate infrastructure, high direct and indirect tax regime, inflexible labour laws, etc., to ensure that the industry is able to seize the opportunity and achieve the potential growth. ”
As per the report, the emerging strength of the BRIC countries is common to all manufacturing sectors. What makes the automotive industry so different is the additional dynamics of consumer tastes and demands, which vary so much from market to market. The challenge is responding to these with new strategies and products. Companies that maintain a ‘business as usual’ strategy or wait too long to act will find it extremely challenging to sustain momentum as the competitive environment transforms around them. As the auto industry becomes more global and markets more competitive, the winners will tend to be those companies that fully capitalize on the opportunities in emerging markets - from the perspective of both sales growth and cost reduction.
Additional key findings of the Global Automotive Financial Review include:
Brazil
The Brazilian market represents one of the most challenging operating environments for global automotive manufacturers. Its intensively competitive environment is exacerbated by excess capacity, high rates of taxation and interest, weakening consumer purchasing power and a lack of adequate consumer financing tools.
A unique characteristic of the Brazilian automotive market is the predominance of flex-fuel engines, which run on gasoline, ethanol or any blend of the two. Soaring oil prices around the world are prompting many global markets to study the potential benefits of Brazil’s experience, creating opportunity to export their vehicles, components and expertise.
Brazil, however, cannot sustain its position without robust local market demand. This is currently below expectations and looks unlikely to change in the near future. Despite all the risks and challenges, Brazil continues to be a key market for global automakers but automotive companies must have a well-defined, integrated supply chain strategy supported by government investments for infrastructure, financing and tax breaks.
Russia
The automotive market is one of the most dynamic sectors of the Russian economy. In dollar terms it has increased in value by 27% over the last three years and further growth is expected. It is at the beginning of an exciting battle as competition heats up and market participants seek to strengthen their positions.
The favourable economic outlook and demand for foreign brands makes Russia one of the most attractive regions for the auto industry. Growth of local production of foreign brands looks set to increase by as much as 375% in the next seven years. To support this growth many more global suppliers are expected to invest in Russia. This increased competition will challenge Russian brands, which could be forced out either by high value global brands or cheap vehicles produced by Chinese and other ambitious manufacturers from developing markets. Russian producers need to revise price and quality strategies to maintain market share.
India
As with Russia, the Indian automotive manufacturing sector is projected to increase and almost every major global vehicle manufacturer is establishing assembly facilities there. Companies are increasingly establishing design and research centres in India, in addition to its more established role as a low cost global sourcing destination.
With a reduction in the rate of excise duty on the manufacture of small cars, (engines with a maximum displacement of 1,200cc and an overall length under four metres) India is seen as a new global manufacturing hub for small cars.
Like other markets, there remain challenges: inadequate infrastructure, rising input costs and a high level of corporate taxation. The automotive industry will need to work closely with the Indian Government to address these challenges and leverage advantages to market the ‘made in India’ brand.
China
China is the fourth largest auto producer in the world, following the US, Japan and Germany and is expected to overtake Germany in 2006. Already in 2005, China contributed 23% of the total growth of the global automotive industry.
A fundamental driver of sustainable growth in the domestic automotive market is the growth of the ‘middle class’ earnings bracket ($7,400 to $14,800). Currently this represents 50 million people and is expected to triple by 2010.
However, consumer behaviour is changing. Where cars were once considered status symbols they have largely become a means of transportation. When this is coupled with soaring fuel prices, consumers have shifted their focus toward economical vehicles leading to highly competitive price wars, which have pressed prices downwards. The traditional dominance of the passenger vehicle segment by global automakers is also shifting as consumers are starting to purchase more domestic vehicle brands.
ENDS
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