Automotive

To achieve significant growth in developing markets major auto companies need regional production strategies.

Global presence

Globalisation and growth in the international car markets have had a significant effect on the development of the production process. Forecasts suggest that, by 2016, total sales will reach between 67 million and 75 million cars.

Markets in India, Russia, China, Brazil and south east Asia are expected to see considerable growth by this date. India's car market is predicted to rise by 117 per cent to 2.6 million units, Russia's by 84 per cent to 3.5 million, China's by 68 per cent to 10.4 million, and Brazil's by 50 per cent to 2.7 million. The ASEAN countries (Malaysia, Singapore, Thailand, Vietnam and others) will rise by 58 per cent to three million.

To meet these market needs companies must decide where to manufacture. It would be an obvious solution for a manufacturer to choose its home country and export to the respective markets.

However, such a model assumes that freedom in global trade is just around the corner. Unfortunately, this is evidently not the case. There are still tariff barriers and other obstacles to manufacturing trade in all regions of the world - and some of these restrictions may change overnight in some countries.

Heavy duty

In China, for example, there are contract requirements in place that mean that three out of five main assembly parts have to be sourced locally - out of body, engine, gearbox, suspension, and electrics. Some 40 per cent of the value of the car has to be locally sourced. Moreover, the current import duty for fully-built cars is 28 per cent. In Russia there is a 25 per cent duty on each imported vehicle. For component imports the duty is around 15 per cent. Even after Russia's expected accession to the World Trade Organisation (WTO), rates will only be reduced, rather than disappearing. There will be no free trade in sales of cars in Russia for about seven years after Russia's WTO accession.

In India the duty on car imports is 60 per cent, and on components 10 per cent. As the country is already a WTO member, further reductions in these duties are not likely. In order to import a car into ASEAN countries you have to pay a duty of 10 to 30 per cent. You then have to pay a tax of 60 to 125 per cent of the value of the car, depending on the engine size. So importing cars in ASEAN countries is almost impossible.

This illustrates how, for most of the countries currently defined as emerging markets that are of interest to the West, major import barriers are in place. The governments of these countries are using local taxes to protect themselves against international competition. At the same time, such governments offer manufacturers opportunities to invest in local production plants. This, in turn, contributes to the development of a competitive supply industry.

We can assume that these trade barriers will continue to exist in their current or a similar form for years to come. This has implications for international manufacturers. If they want to participate in the growth of these emerging markets in a substantial way, they can only do so with local production facilities. This applies, above all, to high-volume manufacturers. In terms of where to locate a local plant, the key issues are: the nature of the target market; where you're based and the nature of the outbound logistics; and where you're sitting in relation to your suppliers and the supply chain.

India vs China

So how is the global car manufacturing industry positioning itself in relation to the two biggest markets by population - China and India? In China, all car manufacturers are planning substantial volume increases, according to analysts. Among high-volume producers, General Motors (GM) is planning output of more than one million units by 2010, while Toyota and Hyundai are each planning close to 600,000 units.

However, there are significant differences in the companies' sales strategies. GM is planning to export almost half its output in China, while Toyota and Hyundai are planning to produce cars in China almost entirely for the local market.

The picture for India is different. All the global car makers are planning major increases in production there but, unlike China, India has a strong indigenous automotive industry, with companies such as Tata and Mahindra & Mahindra. These local car makers are, in total, planning an increase in output of nearly 50 per cent to around 600,000 units by 2010. Suzuki plans to almost match this output, while Toyota and Hyundai each plan output of around 200,000. The vast majority of these outputs will be for the Indian market.

Volkswagen is planning to increase passenger car output in India by 157 per cent to 3.6 million units by 2016. The rise for ASEAN will be 78 per cent to 4.1 million, China 71 per cent to 10.8 million, Brazil 28 per cent to 2.3 million, Russia 24 per cent to 2.1 million, and South Korea 23 per cent to 1.6 million. This compares with single-figure percentage rises for North America, western Europe and Japan.

Volkwagen started its globalisation strategy very early. The first international subsidiaries were set up in Brazil in 1953, South Africa in 1956, and Mexico in 1964, to name a few. A China enterprise started back in 1985, and there are now two plants in joint ventures. The company set up in India in 1999 and plans to start production at a second plant in 2008. In Russia a plant for Volkwagen and other of the group's brands began operating in 2007.

Global strategies

So what will be the global production strategies of car makers? The need to provide products meeting regional customer needs, together
with the impact of trade barriers that will be in place in the next ten to 15 years, will force global car makers to pursue regional strategies rather than global ones. The regional borders for these strategies may be defined by country, as in India and China, or trading areas such as ASEAN.

Having a car production network that is regionally located around the globe is key to being able to produce high-volume outputs to take advantage of the growth in emerging markets. Customer-specific requirements can be satisfied by operating regional facilities offering precise equipment specification and pricing.

These regional structures will be based on a set-up of full-scale factories, assembly plants and component plants, together with regional supplier bases to serve the local market. The idea, then, is that these regional structures will mainly support their regional markets. But, as is the case with Volkswagen, where the regional production is at low volumes, the output will also go for export.

But how does a global car maker decide which regional strategy to adopt? This will depend on a range of factors such a local tariffs, exchange rates, logistical costs, labour costs, local supplier costs and competencies, and so on.

For example, a few years ago manufacturers were looking to eastern Europe as a low labour-cost environment; but this creates competition and suddenly we see that wages there are rising. In defining your strategy you also have to look ahead and consider what might happen in the future in a particular area.

Therefore, in my view, the globalisation that everyone is talking about is developing into regionalisation with global players. Volkswagen's regional production network, together with its multi-brand strategy, have given the company two firm pillars for boosting production volumes and market share.

The multi-brand strategy gives clear market positioning. The regional strategy provides stability amid fluctuating exchange rates and enables us to approach geographical markets via local production, with the ability to target different market segments. This will enable the company to remain successful in an increasingly competitive global market.

Dr Christof Spathelf is head of overseas manufacturing for Volkwagen group. This article is based on his presentation to European Manufacturing Strategies Summit 2007

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