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

Click here to view article at GLGNews


Profits plunge at Buffett-backed BYD

Financial Times, October 26, 2010

By Patti Waldmeir in Shanghai

BYD, the Chinese electric carmaker backed by Warren Buffett, has announced a 99 per cent drop in third-quarter earnings after its growth strategy plunged the company into fierce competition with Chinese rivals, according to analysts.

Shares in the carmaker fell more than 10 per cent after its earnings statement. News of the profits drop came on top of other setbacks. BYD was recently forced to scale back plans to double sales this year, delay plans to export vehicles to the US, and surrender seven factories after Beijing said they had been built illegally.

After starting life as a maker of rechargeable batteries, BYD built its first branded car in 2005. By last year, the company was China’s fastest-growing carmaker and had taken first place in the Chinese market for compact cars. BYD forecast sales of 800,000 cars this year, up from 400,000 last year, but recently cut that forecast to 600,000 after sales began to slide when government tax incentives for small cars were partially withdrawn.

Shanghai-based analysts said BYD’s growth strategy had backfired, with dealers forced to slash prices to meet the company’s over-ambitious sales target. BYD sales fell 25 per cent in September year on year, as growth in the China market slowed. Sales in the rival joint venture between General Motors and Shanghai Automotive Industry Corporation rose by 41 per cent in the same period.

“They are finding out the hard way just how difficult it is to maintain momentum in the hyper-competitive China market,” said Bill Russo, former head of Chrysler in China and head of Synergistics, a Beijing car consultancy.

Tax incentives on small vehicles and the high-profile Buffett investment are no longer providing the same sustaining force as last year, he added, and BYD must begin to compete on the strength of product offerings, which is proving to be more challenging than they may have anticipated.

They are also learning that moving into a mature market like the US with a new brand and distribution network “is not as straightforward as they originally thought,” he adds.

Mike Dunne of Dunne & Co, an Asian auto consultancy, said the recent setback over illegally built factories is not a major cause for concern. “The main issue is this: the car business accounts for 70 per cent of BYD revenues and there is no evidence that BYD has advantages over other companies when it comes to the business of building and selling cars”.

Mr Buffett, who owns 10 per cent of the company through Mid-American Energy Holdings, affirmed his support for BYD last month when he visited several of its facilities in China, saying it would be a leader in electric cars.

Additional reporting by Shirley Chen in Shanghai

Toyota to produce Prius in Thailand

Marketplace Public Radio, October 22, 2010

Toyota has announced it'll start producing the Prius in Thailand next month. This is the first time the hybrid will be produced outside of Japan.


STEVE CHIOTAKIS: A day after the company announced a massive recall of a million and a half of its vehicles, Toyota has announced it'll start producing the Prius in Thailand next month. That's going to mark the first time the hybrid will be mass-produced outside of Japan. Marketplace's China Bureau Chief Rob Schmitz explains why.

ROB SCHMITZ: A move to sunny, tropical Thailand may seem like the perfect therapy for a company plagued by recalls. But Toyota is not going to Thailand for the beaches. Auto industry expert Bill Russo says a rise in currency is cutting into profits at home and Toyota needs to lower production costs because it's through selling with selling the Prius to a niche market.

BILL RUSSO: If you're going to be successful in mass marketing these types of vehicles, you need to seek economies of scale which comes from larger production footprints in low-cost markets like Thailand.

The move is part of a broader plan at Toyota to sell a million hybrid vehicles a year. So why not seek that economy of scale in a low-cost market like China? First, China forces foreign automakers to enter into joint ventures with Chinese companies. Secondly, hardly anyone in China wants to buy a Prius. Toyota shut down a small assembly plant in China last year due to terrible sales there.

In Shanghai, I'm Rob Schmitz for Marketplace.