Leveraging China & India for Global Competitiveness: Theme 1

October 31, 2010

by Glenn Hodges and Bill Russo

In our last posting, we introduced four clear China-India themes which provide insight into the nature of the challenges and opportunities for creating value in and through these markets. Each of these themes stands on its own to provide insight for companies looking to maximize value from China and India. The real value of these themes, however, is that collectively they demarcate a range of options for maximizing value within China and India as well as globally.

Background On The Automotive Sector In China & India

As explained in our prior posting, we chose to focus on the automotive sector. Rapidly moving from a low cost source of supply for parts and components, China has become a global automotive powerhouse with increasing activity along the entire value chain. As a car market, China is now unsurpassed as it eclipsed the US in sales for the first time in 2009. The China Association of Automobile Manufacturers (CAAM) projected in September 2010 that China will achieve 25 million vehicle sales by 2015. In 2009, China’s auto market stood at 13.64 million units, and is expected to surpass 17 million units in 2010. These projections lead to the same conclusion: that China will be far and away the largest vehicle market for the foreseeable future.

India’s automotive story is very compelling in its own right. India’s already substantial vehicle market is rapidly growing, and the country has quickly becoming a major center for the development and manufacture of A and B segment vehicles. According to Global Insight, sales of just over 2 million units in 2009 are projected to increase to over 2.5 million units in 2010 and 4.2 million units by 2015. As will be explained, a combination of economic and non-economic factors account for the difference in vehicle sales between India and China, and the markets have rather significant pricing potentials in certain segments.

THEME 1: Differentiated demand profiles across markets provide limited opportunity for leveraging a common product portfolio in both markets

This was a consistent finding across all the companies examined and at both a vehicle level and at a part and component level. In fact, demand profiles across China and India were radically different with much lower volume price points found in the Indian market. This finding has significant implications for both OEMs and suppliers. Companies hoping to achieve scale across China and India with common parts and components or vehicles will find limited opportunity to do so, though there are exceptions at the top and bottom ends of the market.

Based on income differentials alone, vehicle sales across China and India would be expected to be more comparable than they have been. Analysis of socio-economic data suggests that approximately one half of the difference in the Chinese and Indian personal vehicle markets can be explained by economic factors. Of six socio-economic classes, only the top four exhibit high levels of vehicle purchases[1]. There are slightly greater than three times the number of Chinese households in these socio-economic categories than Indian households. However, personal vehicle sales in China are more than six times those in India. Fuel cost differentials across China and India could also play a small role in vehicle sales and a significant role in vehicle size across the two countries given that the price is 50% higher in dollar terms in India than in China[2]. This leads to the conclusion that while the varied demand profiles are strongly impacted by economic factors, they are more likely the result of more than economic differences alone.

A non-economic factor impacting differentiated vehicle demand profiles is the nature of the Chinese and Indian vehicle infrastructures. Although there are large rural areas within China where roads remain in poor condition, there has been a dramatic improvement in the vehicle infrastructure in Tier 1 and 2 cities. In addition, China now has over 65,000 kilometers of mostly new expressway for drivers to enjoy. In contrast, the vast majority of Indian roads remain in poor condition, including those in major cities. Also, India has only 200 kilometers of expressways to facilitate inter-city travel[3]. The net result is lower four-wheel personal vehicle utility for Indian consumers relative to Chinese consumers.

Taken collectively, both the economic and non-economic factors result in highly differentiated demand profiles for China and India. On average, Chinese purchase more vehicles per capita than Indians and at higher average price-points. The Chinese also purchase larger vehicles on average than Indians. Based on global Insight data, more than 60% of light vehicles purchased in India are in the A & B segments as compared to around 15% in China. In addition, a notably larger proportion of SUVs are sold in India than in China to help navigate the poor road infrastructure. Even within the same vehicle classes, Indians are spending less than Chinese for vehicles.

Over time, there is potential for vehicle demand profiles to become more similar as Indian incomes rise and the road infrastructure improves, and as Chinese government policy creates incentives for Chinese to purchase a larger proportion of A&B segment vehicles.

In our next posting, we will address THEME 2: Differentiated and complementary supply profiles create “islands of opportunity” for leveraging unique capabilities of the resources available in each country.

[1] Canback Dangel data and Booz & Co. analysis

[2] www.nationmaster.com

[3] National Highways Authority of India

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