Leveraging the Rapidly Emerging Markets for Global Competitive Advantage


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Presentation on leveraging the China and India markets for competite advantage in the global auto industry. Delivered March 31, 2011 to the International MBA class at Renmin University in Beijing.

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Leveraging the Rapidly Emerging Markets for Global Competitive Advantage

  1. 1. March, 2011 Shanghai, ChinaThe 21st Century Challenge:  Leveraging the Rapidly Emerging Marketsfor Global Competitive AdvantageMarch 31, 2011Renmin UniversityBill Russo 1
  2. 2. The distribution of global wealth has been historically skewedtowards mature markets… Emerging and Mature Markets Emerging Markets Mature Markets Population Distribution in Emerging & Mature GDP Contribution by Emerging and Mature Markets Markets (2010; Total = 6,809 MM) (2010; Total = $62 Tn) Mature markets Emerging 17% markets Mature 31% markets Emerging markets 69% 83%Source: Global Insight; Booz & Company analysis 20110323 Leveraging the Rapidly Emerging Markets.ppt 2
  3. 3. ...but a structural shift of economic power from the West to the Eastis taking place In past three decades, China Percentage of World GDP by PPP1) and India markets have been growing dramatically and (Last 500 years) returning towards its historic share of world GDP 100% US: 22% 80% China: 12% 60% Western Europe: 21% 40% Latin America: 8% Japan: 7% India: 5% 20% All other countries: 25% 0% 1500 1550 1600 1650 1700 1750 1800 1850 1900 1950 2000Source: Literature research 20110323 Leveraging the Rapidly Emerging Markets.ppt 3
  4. 4. China and India have witnessed stunning economic growth overthe past twenty years… Key Shifts Shanghai §  Shift of global centers of gravity for some industries 20 Years Ago Now –  e.g., China is now the largest automotive market and producer in the world, and India is among fastest growing countries §  “Must Consider” gaming dynamics for some others –  e.g., both China and India are low cost souring countries for most international manufacturers §  Breeding ground for innovations driven by market demand and/or local competition –  e.g., Coke does more product innovations in China than any other markets except Japan §  Emergence of real wealth (HNWI’s and middle class) and New Delhi grand-scale urbanization 20 Years Ago Now –  e.g., China soon to become the world’s largest luxury goods market §  Huge infrastructure still ongoing –  US$300 billion plan to build a nationwide high-speed rail network by 2025 §  Increasing prominence of local companies on a global scale –  Resources, capabilities, market positions, etc. §  Significant capital flow to China and India, in particular private equity funds 20110323 Leveraging the Rapidly Emerging Markets.ppt 4
  5. 5. …and both of them are predicted to continue their growthmomentum and become the most important economies in theworld GDP growth vs. GDP/capita (2007 – 2015, 2050) 0% United Russia States 2% China (2050) (2050) GDP growth (2007 – 2015 and 2050) (2050) India (2050) United States UK (2007) 4% Russia(2007) (2007) Brazil Brazil(2007) (2050) 6% India (2007) 8% China (2007) 10% $0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 $70,000 $80,000 $90,000 $100,000 GDP Per CapitaNote: Size of bubble is proportional to GDP of the economySource: EIU; Goldman Sachs BRIC Report 2003 20110323 Leveraging the Rapidly Emerging Markets.ppt 5
  6. 6. Asia, driven by China, has become an important market for U.S.and European MNCs (multinational companies)… U.S. and European MNCs Total Revenue 2009; US$ Billion Asia US Europe Others Asia US Europe Others ABB 27% 10% 41% 22% 31.8 Siemens 16% 27% 56% 98.9 Emerson 21% 45% 21% 14% 20.9 GE 17% 24% 46% 13% 156.8 Eaton 13% 53% 23% 11% 11.9 VW1 9% 11% 71% 9% 136.3 Tyco 27% 9% 17.2 27% 12% 32.3 16% 48% Caterpillar 22% 38%International Flowserve 19% 32% 25% 24% 4.4 Honeywell 11% 49% 28% 12% 30.9Note 1): Sales revenue of the JVs in China are not included as they are accounted for using the equity method and recorded as an operating profitSource: Literature search; company annual reports; Booz & Company analysis 20110323 Leveraging the Rapidly Emerging Markets.ppt 6
  7. 7. …especially after the global economic downturn Sales Growth for Major VMs China Sales Share for Major VMs 2009 vs. 2010 2010, % of Global Sales Ranking of China sales by importance China #1 34% 29% VW Global VW 10% 47% 22% #1 Audi Audi 14% 73% 11% #3 BMW BMW 14% 101% 11% #3 Mercedes Mercedes 14% China s growth is much faster Sales in China are becoming more than global average and more important to major VMSource: Global Insight; Booz & Company analysis 20110323 Leveraging the Rapidly Emerging Markets.ppt 7
  8. 8. The center of gravity of global market has shifted to the emergingmarkets - take the Auto market as an example Monthly Motor Vehicle Sales Shanghai: A Lean, Green DetroitNote: The Emerging 16 are Argentina, Brazil, China, Czech Republic, Inida, Indonesia, Korea, Malaysia, Mexico, Poland, Russia, South Africa, Taiwan, Thailand, Turkey and VenezuelaSource: CEIC; Haver; UBS; Booz & Company analysis 20110323 Leveraging the Rapidly Emerging Markets.ppt 8
  9. 9. The world has entered a new era since 2008, more than half of thepopulation lives in urban areas Global Urban Population China’s Urban Population Mil. 2000-2050 Mil. 1980-2020 People Forecast People Forecast10,000 1,500 8,000 Rural 1,200 Rural 6,000 900 4,000 600 70.0% Urban 58% Urban 2,000 300 47% 52% 49.5% 50.7% 36% 46.7% 26% 19% 0 0 2000 2007 2008 2050E 1980 1990 2000 2009 2015E 2020E §  More than half of the global population live in urban §  At start of reform era, more than 80% of China s area since 2008 population was in rural areas §  Majority of China s population will reside in urban areas by 2015 §  Creation of urban middle class fuels demand for personal mobilitySource: National Bureau of Statistics, UN, Booz & Company 20110323 Leveraging the Rapidly Emerging Markets.ppt 9
  10. 10. China exceeded US to become the world largest Auto market in2009 and maintained leadership in 2010 Top Five Auto Market in the World(1) Total China Auto Sales 2008 - 2009, in million units 2005 - 2010, in million units 66.0 63.6 US market sales in 2010 is only 11.58 Million, 36% less than China sales 45% Others 18.06 50% +23% 13.64 5% Brazil 4% 6% Germany 9.67 5% 7% 8.98 8% Japan 7.34 16% US 5.90 20% 20% China 13% 2008 2009 2005 2006 2007 2008 2009 2010Note 1): Data does not include heavy truckSource: Global insight; CAAM auto market press release; Literature research; Booz & Company analysis 20110323 Leveraging the Rapidly Emerging Markets.ppt 10
  11. 11. China and India are entering the accelerated growth phase typicalof emerging markets Canada 600 Australia Discussion Germany The S- U.K. §  A country s threshold 500 curve of mobility lies near US U.S. $10,000 GDP per capita Poland (PPP), whereCars per 1,000 People 400 Malaysia automobile ownership accelerates Russia 300 Argentina §  China is at the early Mexico taking-off stage of the S- curve Brazil 200 India Turkey §  India remains fairly Thailand distant from the mobility 100 Iran inflection point, but continues to make Indonesia steady progress China 0 India 1,000 10,000 100,000 China GDP Per Capita (Logarithmic Scale)Note: Each line of symbols represents a 19-year progression for one country, from 1990 through 2008, GDP Per Capita is in Purchasing Power Parity (PPP)Source: Booz & Company analysis 20110323 Leveraging the Rapidly Emerging Markets.ppt 11
  12. 12. As a result, China and India have emerged as the world’s largestand fastest-growing automotive markets in recent years Size and Growth of Global Passenger Vehicle* Market (Major Countries) CAGR 40% 2001-2009, % 35% China 30% 25% Argentina 20% Iran Turkey India 15% Saudi Arabia 10% Indonesia Brazil Thailand Russia Germany 5% France Korea Global Average :1.6% 0% Spain UK Italy Japan -5% US -10% 0 1 2 3 4 5 6 7 8 9 10 11 2009 Market Size (Million Units) Bubble size:Note: * includes segment of A, B, C, D, E, F, MPV SUV 2009 market sizeSource: Global Insight 2010; Booz & Company analysis 20110323 Leveraging the Rapidly Emerging Markets.ppt 12
  13. 13. For the Global Auto market, Asia pacific represents the greatestopportunity for growth… Eastern Europe Western Europe Growth thru 2020: 2,835K NAFTA Growth thru 2020: 1,527K CAGR (2010-2020): 6% Asia Pacific Growth thru 2020: 5,528K CAGR (2010-2020):1% Growth thru 2020: 12,626K CAGR (2010-2020):4% CAGR (2010-2020): 5% Africa/Middle East Growth thru 2020:1,264K = Area Reflects Size Of 2009 Actual PV Sales Latin America CAGR (2010-2020):4% Growth thru 2020: 2,899K = Area Reflects Size Of 2020 Forecasted PV Sales CAGR (2010-2020): 6% 000 Units Market 2010 PV 2015 PV 2020 PV Asia Pacific 22,212 30,350 34,838 NAFTA 11,545 16,877 17,073 Western Europe 12,776 14,133 14,302 Eastern Europe 3,261 5,035 6,095 Latin America 4,030 5,570 6,929 Africa/Middle East 2,946 3,783 4,211Source: Global Insight Data 20110323 Leveraging the Rapidly Emerging Markets.ppt 13
  14. 14. …Within Asia pacific, the greatest growth opportunity is China China: Growth thru 2020: 8,653K CAGR (2010-2020): 6% Japan: = Area Reflects Size Of 2009 Actual PV Sales Japan Mongolia Growth thru 2020: -457K North Korea CAGR (2010-2020): -1% = Area Reflects Size Of 2020 Forecasted PV Sales China South Korea India Pakistan Nepal South Korea: Bhutan Bangladesh Myanmar Taiwan Growth thru 2020: 110K Laos CAGR (2010-2020): 1% 000 Units Vietnam Taiwan: Cambodia Market 2010 PV 2015 PV 2020 PV Growth thru 2020: 79K India: Philippines Thailand CAGR (2010-2020): 2% China 11,462 17,296 20,115 Growth thru 2020: 2,621K CAGR (2010-2020): 8% Malaysia Japan 4,254 4,075 3,797 ASEAN: Growth thru 2020: 1,074K India 2,240 3,700 4,862 CAGR (2010-2020): 5% Indonesia ASEAN* 1,634 2,185 2,709 South Korea 1,302 1,407 1,412 Australia 807 1,020 1,117 Australia Australia: Taiwan 299 337 378 Growth thru 2020: 310K CAGR (2010-2020): 3% New Zealand 63 82 87 New Zealand Rest of Asia Pacific 152 247 328 Total 22,212 30,350 34,838Note: ASEAN figures include top 5 ASEAN member countries, including Thailand, Malaysia, Indonesia, Singapore, and Philippines Rest of Asia-Pacific includes Hong Kong and PakistanSource: Global Insight Data 20110323 Leveraging the Rapidly Emerging Markets.ppt 14
  15. 15. However, with great growth prospect shared, China and Indiahave demonstrated different market opportunities and challenges China India Sales volume is only 20% of Car demand is across all China, A&B segment is segments, while 1.6L and below is predominant predominant (60%+) Fairly relaxed restriction of foreign Strong government investment ownership, less supportive policies and highly restricted market Lower Scale Economies, High Highly competitive manufacturing Taxes on materials cost advantage and capabilities Less R&D expertise, and poor IPR Highly Competitive Engineering environment Expertise and less IPR issues “Manufacturing in China”? Opportunity Challenge “Engineering in India”?Source: Global Insight-India Country Report 2007 20110323 Leveraging the Rapidly Emerging Markets.ppt 15
  16. 16. Local Chinese brands are growing market share significantly,but international OEMs still dominate INTERNATIONAL/ LOCAL OEM CHINA PV MARKET SHARE International OEMs/Brands International OEMs/Brands Top 8 Domestic OEMs Local OEMs/Brands VW 17.76% 3.87% 16.77% Chery 4.47% TOYOTA 10.31% China PV sales 2008-2010 7.14% (incl. import, million units) 5.67% GM1 8.80% FAW 9.68% 5.04% 8.47% 11.5 Hyundai 9.29% 3.34% Geely 8.29% 3.69% Honda 5.66% International 6.46% 69% 2.86% Nissan 5.99% BYD 5.7 4.65% FORD 2.74% 2.58% 1.67% 75% Brilliance PSA 3.18% 1.66% 3.19% 31% Local 3.14% 25% 1.08% Suzuki 2.28% Greatwall 2.16% 0.53% 2008 2010 MMC 0.47% 1.54% 1.14% Chang’an2 BMW 1.39% 1.92% 2008 20101) Excluding CV volumes from SAIC-GM-Wuling2) Including AVICSource: Global Insight China Report 20110323 Leveraging the Rapidly Emerging Markets.ppt 16
  17. 17. In India, the market is dominated by a few OEM’s in the rapidlygrowing A/B segments International / Local OEM’s Share of India PV Market Top 8 International OEMs/Brands 2009 Total Market Share, by Sales Domestic OEMs (Incl. import) Total: 1,435K units (35.0%) (65.0%) (Including Maruti) SoM 2009 SoM 2008Source: Global Insight SP08 Asia Market Forecast – India 20110323 Leveraging the Rapidly Emerging Markets.ppt 17
  18. 18. To win in China and India, a general approach could be adoptedby MNCs to integrate these markets into their global value chain Stage 1 Circa early Product Sales & R&D Sourcing Manufacturing Marketing Service to mid 1990s Development Distribution §  Start a few, isolated production facilities Stage 2 Circa mid to Product Sales & R&D Sourcing Manufacturing Marketing Service late 90s Development Distribution §  Began to use China and India as §  Began to integrate §  Built brand for the local market a procurement source production facilities and local sales & distribution Stage 3 Product Sales & Early 2000s R&D Sourcing Manufacturing Marketing Service Development Distribution §  Integrate China and India into §  Integrate China and India into §  Transfer global best practice global sourcing network global manufacturing network Stage 4 Present to Product Sales & R&D Sourcing Manufacturing Marketing Service 5-10 years Development Distribution hence §  Build R&D and PD centersSource: Booz & Company analysis §  Integrate China and India into global value chain 20110323 Leveraging the Rapidly Emerging Markets.ppt 18
  19. 19. While sharing great growth prospects, China and India have verydifferent market demand profiles, leading to different competitivestrategies In China auto market, there are demands in In India auto market, there is only strong market different markets demand in the low-end market Market demand No High margin Global players demand High-end High-end market market Weak Global and Chinese players Mid-end market Mid-end market Low Global and local Low margin Low-end market Chinese players players Low-end market margin Strong Different players could target different market All they players have to compete with low price and low cost, leading players have big scale 20110323 Leveraging the Rapidly Emerging Markets.ppt 19
  20. 20. The demand profiles for China and India are fundamentally different... Auto Market by Segments (2009, in thousand units) China Market 000 Units 16,000 15,124 2009§  Very large market with Sedans continues to dominate significant regional variation in 14,000 the China market with strong 2015E demand patterns growth, though SUVs are 12,000 2020E§  Demand shifting from more 5,758 gaining share developed coastal cities to 6,000 4,826 lesser developed interior 4,000 2,741 3,291 3,646 markets 2,210 1,937 2,000 1,107 1,141 1,274 1,231 268 766 69 582 424 758 709 274 0 A B C1 C2 D1 D2 E1 E2 MPV-MPV-MPV-MPV-PUP-PUP-SUV-SUV-SUV-SUV-HVAN MVAN B C D E C D B C D E India Market 000 units§  Huge income gap and low 2009 6,000 purchase power limit the room 5,149 A and B segments account for 2015E of product price & OEM 5,000 the majority share of the market, 2020E profitability while other segments remain§  Poor infrastructure and 2,066 small increased fuel price could not 2,000 support medium to large size 894 vehicles 1,000 458 443 467 323 264 274 56 77 43 32 7 1 57 13 0 A B C1 C2 D1 D2 E1 E2 MPV- MPV- MPV- PUP- SUV- SUV- SUV- SUV- HVAN Source: Global Insight data, Literal search; Booz & Company analysis B C D C B C D E 20110323 Leveraging the Rapidly Emerging Markets.ppt 20
  21. 21. …and analysis of value chain capabilities indicate very differentsupply profiles for China and India IT & Product Sales & R&D Development Sourcing Manufacturing Marketing Distribution Service Back-Office +  Govt. support +  Cost +  Cost +  Cost +  Cost advantage ▬  Research +  Strength of +  Level of +  Cost +  Competitiveness ▬  Depth of Str. / Weak. advantage advantage advantage learning customer advantage +  Govt. support +  Component +  Quality of ▬  Quality customer curve orientation ▬  IT skills ▬  Linkage to development parts understanding ▬  No. of Major ▬  Expertise ▬  Fin. skills Univ. capabilities +  Commodities dealership coverage groups China ▬  English skills ▬  Major breakthrough Trend Asses. +  IT skills +  Cost +  Engineering +  Cost +  Cost advantage ▬  Research ▬  No. of major +  Level of +  Fin. skills Str. / Weak. advantage and low-cost- advantage ▬  Logistics ▬  Depth of dealership customer +  English skills +  Engineering orientation +  Quality of ▬  Scale (with customer groups orientation outsourcing +  Systems +  Cost parts comparison to understanding ▬  Logistics ▬  Expertise advantage experience integration +  Commodities China) skills coverage (weaker than India China) ▬  Scale Trend Asses. 20110323 Leveraging the Rapidly Emerging Markets.ppt 21
  22. 22. VW, GM and Hyundai are leaders in the largest and fastestgrowing China market Passenger Vehicle Sales by Top 10 Manufacturers (2002 Vs. 2010) 000 Unit 000 Unit Shanghai Volkswagen 31% 302 SGM 9% 1,039 Faw-Volkswagen 22% 208 SVW 8% 1,001 Shanghai GM 12% 111 FAW-VW 8% 870 Tianjin Faw 10% 96 Beijing Hyundai 7% 703 Peugeot Citroen 9% 85 Dongfeng Nissan 6% 661 Changan Suzuki 7% 65 Chery 5% 682 FAW- 520 Guangzhou Honda 6% 59 5% Toyota Chery 5% 50 BYD 5% 510 Guangzhou 405 Geely 5% 46 5% Honda Dongfeng Nissan 4% 41 Changan Ford 4% 403 Others 21% 197 Others 37% 4,471Source: China PV Database; Booz & Company analysis 20110323 Leveraging the Rapidly Emerging Markets.ppt 22
  23. 23. Across the development path for R&D and productiondevelopment capability… PRELIMINARY R&D and Product Development Capability Development - China Automotive Industry Stage - I (1970s-80s) Stage - II (1980s - 90s) Stage - III (1990s - Current) Stage - IV (2015 & beyond) Localization: 40% Localization: ~70% Localization: ~100% Go Global §  SKD or CKD kits shipped to §  Localization of products to suit §  Increased activities in setting- §  Global OEMs start setting-up China, assembled with the help the China market needs up of R&D centers with joint - 100% owned R&D centers in of JV partners and sold in the ownership of JV partners in China to develop global market. China (close to manufacturing products §  Sparse development of JV R&D facilities or key markets centers §  Limited engineering, supply §  Achieve concept - launch chain and sourcing capabilities §  Engineering and product capabilities for products prevented global OEMs to take development for products targeted for China with almost any risks with performing PD in targeted for Chinese market is 100% content sourced locally China performed within the R&D centerSource: Literature research; Booz & Company analysis 20110323 Leveraging the Rapidly Emerging Markets.ppt 23
  24. 24. …all three firms are the clear leaders PRELIMINARY R&D and Product Development Capability - Global OEMs in China Stage - I Stage - II Stage - III Stage - IV Localization: 40% Localization: ~70% Localization: ~100% Complete PD Capability •  IP rights, Technology GM: Developed GL8 for the protection, etc. are some of China market with 100% the concerns that prevented localized content. PD and rapid investments in Continuing to increase the engineering changes led by development of R&D / PD Focused on meeting local content as supply chain PATAC minimum local content develops in China. R&D capabilities in China. requirements to preserve plans are unclear at this quality, engineering and point. brand differentiation. Product development and launch of VW Lavida done in China for the domestic Hyundai: Almost 100% localmarket content for Elantra. Highly Audi: Reached ~70%-80% established relation-ships localization content (by with local supply base and value), designed products JV ventures for domestic to meet China market ER&D and PD activities Followers LeadersSource: Literature research; Booz & Company analysis 20110323 Leveraging the Rapidly Emerging Markets.ppt Booz & 24
  25. 25. They adopted more advanced R&D center models in China… R&D Center Models Adopted By Various OEMs - Product Development R&D Center in R&D Center in the Region JV R&D Center R&D Center in Mature Market (outside Home country & in China China (Europe or USA) China) §  OEMs do not have China- §  R&D facility in Asia region §  OEMs developed strong JV §  OEMs setting-up 100% owned specific R&D center and supports PD of vehicles for the R&D centers with the help of R&D center in China products are developed in the entire region - including China their JV partners §  R&D center plays an active global R&D center or HQ §  Localization is performed in §  No restrictions to develop R&D role in development of vehicles §  Typically, customer China with help of strong capabilities of the JV facility - targeted for China preferences are rolled-up to sourcing / purchasing presence with development of PD §  China R&D center is part of global R&D center and any in China. capabilities to support local global / regional product product modifications are products development, product / made only if released globally platform strategies (across all products) The path seems reflective of their sales success in ChinaSource: Literature research; Booz & Company analysis 20110323 Leveraging the Rapidly Emerging Markets.pptBooz & Company Booz &July 16, 2010 25
  26. 26. 1 Case Example – GM’s Regional Adaptation Strategy…leading to more products geared to the local market EXAMPLE GM’s development of products geared towards China Buick Park Avenue Buick New Lacrosse Buick Excelle §  In China, it is strong competitor of L2 with §  In China, instrument panel, center §  In China, the Buick Excelle GT will be longer wheelbase of 3009mm, to replace console and door trim panels offered with the choice of either a 1.8- Buick Royaum (WB 2939mm) with additional interpenetrate with each other liter naturally-aspirated engine that rear passenger luxury content §  In China, the backseat was churns out 145 horsepower or a more designed in fastback streamline potent 1.6-liter turbocharged four- shape cylinder mill pumping out 181 hp §  The Excelle GT is built on the same platform that underpins the Chevrolet Cruze, Opel Astra and two-door Excelle XT Longer Wheel Base Upgraded Interiors and additional Rear Seat LegroomSource: Literature research; Booz & Company analysis 20110323 Leveraging the Rapidly Emerging Markets.ppt Booz & 26
  27. 27. 1 Case Example – Volkswagen’s Regional Adaptation StrategyVolkswagen is also leveraging their regional R&D centers todeliver products geared to local market CASE STUDY Examples: VW Group’s development of products geared towards China Audi A6L VW PASSAT VW LAVIDA §  Audi A6L is the first model, lengthened for §  In China, 6AT, aluminum interior §  Developed by Shanghai-Volkswagen, and China market. Audi A6L has a wheelbase of decoration, three steering wheel targeting specifically to China market, 2945mm, 96mm longer than the original and DVD system are standard, LAVIDA has a wheelbase of 2610mm and model, with additional rear passenger luxury while the global model don’t luxury decoration in rear seat content §  In China, the automobile face is §  LAVIDA also has been equipped with redesigned to fit for local consumer Bluetooth, SD/USB terminal and GPS technology to satisfy the regional consumer preference Longer Wheel Base Interior Decoration and DVD System Longer Wheelbase than the Same Level Sedans Additional Rear Seat LegroomSource: Literature research; Booz & Company analysis Customized Front Face for China Market Equipped with Local Consumer Preference 20110323 Leveraging the Rapidly Emerging Markets.ppt 27
  28. 28. 2 Case Example – Hyundai’s Global Approach to R&DFor example, R&D and engineering centers established in Chinaand India have assured Hyundai’s local adaptation and salessuccess Hyundai Motors Worldwide R&D Centers Detroit, Michigan, US Russelsheim, German America Technical Center Namyang, Korea European R&D Center / Design Center Chino, California, US Central R&D Headquarter America Technical Center Chiba, Japan Hyderabad, India Hyundai Motor India Engineering Hyundai R&D Center Pvt. Ltd (R&D Center) Frankfurt, German Irvine, California, US Kia Design Center Europe Beijing, China America Design & Technical Center Beijing Hyundai Technical Center Kia Design Center America Design Function of R&D facility Technology & Design §  Korea R&D center: R&D headquarters, the overall R&D planning, the main vehicle design §  China and India R&D center: localization support, local product adaptation and modification Technology §  U.S. R&D Center: model design for the U.S. market §  Germany R&D center: product design for the European market, focusing on R&D of powertrains Headquarters §  Japan R&D center: the next generation of vehicle design and development of electronic systemsSource: Literature research; Booz & Company analysis 20110323 Leveraging the Rapidly Emerging Markets.ppt 28
  29. 29. 3 Case Example – General Motors’ Leveraging Regional Capabilities for Global ExpansionJV partnership and acquisition provide solutions for GM to gainaccess to China market, and to strengthen its presence in India GM’s Partnership with SAIC Implications to GM’s Expansion into India India §  SAIC and GM formed 50:50 R&D JV in August 2010 to: §  GM and SAIC also announced to set up a GM-SAIC Motor –  Jointly develop fuel-efficient engines and transmission Investment Co. to purchase 100% shares of GM India –  Deliver new power-train systems within 3 years §  YTD Oct. 2010, GM’s sales in India grows up almost 79% and will surpass 100,000 year end §  Products include small engine and front-wheel-drive transmission that are 10% more fuel-efficient and reduce §  Nov. 12, 2010, GM formally inaugurated the flexi-engine plant in emissions by 20% Talegoan, Pune. The plant will take total Talegoan output to 300,000 cars and 300,000 engines annually. §  A Chinese automaker and a foreign partner share intellectual property rights on a core technology for the first time §  The automaker has developed local suppliers and awarded component supply contracts worth $500million. It plans to §  Nov.,2010, SAIC announced to acquire 1% GM share through source components worth $1bn in the next two years for its investment of $500M during GM’s IPO global operations. “We are bringing in four passenger cars and two commercial vehicles in the next two years in 14 fuel variants,”…“We are planning to invest US $250m more in the Indian market.” - Karl Slym, President of GM IndiaSource: Literature research; Booz & Company analysis 20110323 Leveraging the Rapidly Emerging Markets.ppt 29
  30. 30. Yet, with evolution of economy and regulation, China and Indiapose new challenges and risks to vehicle makers-- success is not agiven Summary of Major challenges in China and India Auto Market Chinese Auto Market India Auto Market §  Very large market with significant regional variation in §  Huge income gap and low purchase power limit the demand patterns room of product price & OEM profitability §  Demand shifting from more developed coastal cities to §  Poor infrastructure and increased fuel price could not Market lesser developed interior markets support medium to large size vehicles Environment §  Deteriorated cost advantage due to surge in labor and §  Deteriorated cost advantage due to surge in labor and material cost material cost §  Insufficient investments in alternative energy vehicles § Currently the most competitive automotive market in the § Predominant local VMs based on Japanese technologies world are hard to challenge Competitive § Highly complex network of JVs and other partnerships § Newcomers have to overcome later comer disadvantage Environment § Significant industry consolidation already underway due to time consuming supply base building and volume ramp up § China government tend to slow down auto production § Increasingly stricter fuel economy and emission growth to tackle social problems such as energy crisis, gas requirement Regulatory emission and traffic jam § Local content and investment requirement Environment § Barrier still exist in foreign ownership and IP protection being § High taxation rate on materials and less supportive controlled by the Chinese government policiesSource: Literature research; Booz & Company analysis 20110323 Leveraging the Rapidly Emerging Markets.ppt 30
  31. 31. In summary, we believe that competitive advantage in the rapidlyexpanding Asian markets can be achieved through...§  A superior understanding of the local "mindset" (socio-demographic trends, consumer orientation, regulatory policies, etc.)§  A willingness to embrace localized solutions to extend product reach and grow share (providing access to the rapidly expanding mid-market by delivering market-relevant product adaptations and brand innovations)§  Targeted deployment of global expertise to address local capability gaps§  Leveraging “horizontal capabilities” resident in China / India to expand capabilities§  Positioning the business operations in China / India as the epicenter for business growth, as well as an "incubator" for efficient introduction of globally relevant innovations (e.g. "green" vehicles) Thank you! 20110323 Leveraging the Rapidly Emerging Markets.ppt 31