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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
| Source: The Boston Consulting Group
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:
www.bcg.com/impact_expertise/publications/files/Winning_Localization_Game_Jan_2008.pdf
Methodology:
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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