Automotive Industry Is Not Yet Fully Capturing the Benefits of Operations in India and China, BCG Study Finds

Localization Is Proving More Challenging Than Expected: Manufacturing Costs Often Match or Exceed Unit Costs in Home Countries; R&D and Sourcing Remain Small-Scale and Underutilized; and Products Are Only Partially Adapted to Local Needs; The Lessons Can Be Applied to Other Industries

BOSTON, MA--(Marketwire - January 30, 2008) - The world's leading automotive OEMs and suppliers have been racing to move products, assets, and people to China and India -- not only to sell cars in these fast-growing economies but also to conduct R&D, sourcing, manufacturing, and sales. Despite significant progress, many are finding it difficult to capture the full strategic potential these countries offer, according to a new study by The Boston Consulting Group (BCG).

Based on in-depth interviews with more than 40 European, Japanese, and North American automotive companies, the BCG study highlights a host of challenges -- from small R&D bases and limited sourcing volumes to a lack of locally adapted production sites -- that have prevented manufacturers from taking full advantage of potential cost savings and resources in China and India. These challenges, in turn, have constrained their efforts to become more competitive globally.

The report's findings underscore the long road Western and Japanese OEMs and suppliers must travel before they can claim to have established truly localized operations in those countries. Among the key takeaways:

-- Manufacturing. A large number of established multinational OEMs and suppliers have launched manufacturing operations in China or India, building or expanding more than 150 factories in the two countries since the mid-1990s. Still, nearly two-thirds of the companies BCG interviewed are manufacturing at similar or even higher unit costs than in their home countries, because of diseconomies of scale, nonlocalized production processes, and the relatively high cost of local quality control.

-- Sourcing. The substantial savings available by sourcing from China and India have lured dozens of multinational OEMs and suppliers to establish sourcing offices in those countries. But, on average, China and India still represent less than 5 percent -- a tiny fraction -- of those companies' overall sourcing volumes.

-- R&D. Offshoring R&D activities to China or India presents real opportunities because those countries are home to large pools of engineering graduates. In many cases, however, the local R&D centers that automotive OEMs and suppliers have established in China or India remain small and have only very limited autonomy from the parent company.

-- Sales. For foreign OEMs operating in China or India, selling cars to a larger share of local customers is a strategic imperative. Yet most foreign OEMs serve these markets with European or U.S. models that are only partially adapted to local requirements. In contrast, local OEMs such as Chery in China and Tata in India focus on their local customers' needs -- at relatively low prices.

"While real progress has been made, localization in China and India is proving to be a lot tougher than expected," said Nikolaus Lang, a partner in BCG's Munich office and coauthor of the report, "Winning the Localization Game." "In order to become truly localized and reap the benefits of localization, foreign auto makers have to work more closely with local partners along the whole value chain instead of exporting expatriates, production processes, and car types from their home countries. They also need to make better use of local resources and talent, and learn from each other's mistakes and successes."

In comparing the localization efforts of automotive companies in China and India, the study identifies two patterns that have emerged: first, localization in China is more advanced than localization in India; and second, suppliers have progressed further in the localization process than OEMs have.

The issue of how successful multinational OEMs and suppliers have been at embedding their local operations in China and India is important, because competition from domestic players is intensifying, and the stakes are huge. From 2001 through 2007, car sales soared at dazzling compound annual growth rates: 25 percent in China and 15 percent in India. By 2015 China is expected to represent 17 percent of the global car market (up from 12 percent in 2007) and India, 5 percent (up from 2.5 percent).

"Considerable increases in vehicle sales in India and China are a strategic necessity for the Western automotive manufacturers," said Bernd Loeser, a principal in the firm's Zurich office and coauthor of the study. "But foreign companies need to do a better job of understanding the requirements of local consumers and customize their products accordingly, instead of trying to sell only slightly modified Western products. For example, wealthy Chinese expect DVD players and entertainment controls in the back seats of a premium car. And in India, demand for small, low-cost cars is growing rapidly among the vast lower middle class. Hence Tata's unveiling recently of the no-frills 'Nano' -- the world's cheapest car, priced at 100,000 rupees or about $2,500."

The report notes that some "localization champions" are successfully pioneering new approaches to capturing the benefits. For instance, some have set up smart models for global R&D, such as international development teams that operate on the same topic around the clock linking Chinese, U.S., and German research centers. Other manufacturers are modifying their production facilities, replacing robots with manual labor and using less expensive, locally made equipment.

"Although our analysis focused primarily on the auto industry, many of the lessons can be applied to other industries, such as consumer goods and industrials goods, and to other emerging markets," pointed out Christoph Nettesheim, a senior partner in BCG's Beijing office and coauthor of the study.

To obtain a copy of the report, please go to:


For this study, BCG interviewed about 100 senior executives from more than 40 European, Japanese, and North American automotive OEMs and suppliers. Eight of the ten leading automotive manufacturers took part, as well as half of the major suppliers. The study aimed to gain insight into the difficulties they face in localizing the key steps in their value chains -- R&D, sourcing, manufacturing, and sales -- and to identify best-practice approaches in each area.

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