Winning the BRIC Auto Markets - BCG · Winning the BRIC Auto Markets ... the future of the automotive ... Brazil is the most mature and stable of the BRIC mar-

Winning the BRIC Auto Markets

Achieving Deep Localization in Brazil, Russia, India, and China

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Winning the BRIC Auto Markets

Achieving Deep Localization in Brazil, Russia, India, and China

bcg.com

Nikolaus S. Lang

Stefan Mauerer

With regional contributions by

Marcos Aguiar (Brazil)

Ewald Kreid (Russia)

Arindam Bhattacharya (India)

Christoph Nettesheim (China)

January 2010

© The Boston Consulting Group, Inc. 2010. All rights reserved.

For information or permission to reprint, please contact BCG at:E-mail: [email protected]: +1 617 850 3901, attention BCG/PermissionsMail: BCG/Permissions The Boston Consulting Group, Inc. One Beacon Street Boston, MA 02108 USA

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Contents

Executive Summary 4

Localizing in the BRIC Markets 6Diverse Market Size, Growth, and Structures 6Varying Degrees of Localization 8

Taking a Close Look at the BRIC Markets 11Brazil 11Russia 15India 20China 24

Prioritizing Investments Across the BRIC Markets 31

Formulating a Cross-BRIC Strategy 33Evaluating Current Localization Profiles 33Developing an Optimal Localization Profile 35

Six Key Lessons from the BRIC Markets 40

For Further Reading 41

Note to the Reader 42

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Executive Summary

For the next decade, the future of the automotive industry lies in the BRIC countries. Together, Bra-zil, Russia, India, and China will account for some 30 percent of world auto sales in 2014—while also off ering signifi cant opportuni-

ties for cost-eff ective R&D, sourcing, and manufacturing. Yet, although virtually all multinational automotive OEMs and suppliers are now conducting operations in the BRIC coun-tries, they are not fully capturing those markets’ strategic po-tential. Why is that? And what should auto companies be do-ing diff erently?

In this report, the second in our series on capturing global ad-vantage in the automotive industry,1 we examine the strate-gies employed by leading OEMs and suppliers in localizing their R&D, sourcing, manufacturing, and sales in the BRIC countries. Specifi cally, we analyze the degree of localization of 49 OEMs and suppliers in each BRIC country for each func-tion, compare localization across the BRIC countries, assess the future development of these markets, compare local capa-bilities and resources, identify particularly promising combi-nations of functions and countries, and defi ne numerous best practices that can help automotive OEMs and suppliers oper-ate eff ectively in the BRIC countries.

Industry participants can use the observations presented in this report to develop new localization strategies for individ-ual BRIC countries, refi ne existing strategies, design an over-all cross-BRIC strategy, and profi t from other companies’ ex-periences. The analyses and best practices presented here, while focusing on the BRIC countries, are applicable also to other rapidly developing economies.

Auto markets in three of the four BRIC countries have strongly outperformed triad markets (Europe,

Japan, and North America) during the crisis—and will continue their strong growth.

While the economic crisis plunged many of the world’s ◊ automotive markets into free fall, markets in the BRIC countries were generally less aff ected and now off er prospects for exceptional growth.

Whereas auto sales in the most developed markets ◊ will grow only moderately from year-end 2009 through 2014, at an average rate of some 2 percent per year, sales in the BRIC countries will grow at rates ranging from 3 to 15 percent per year, to end up accounting for some 30 percent of the global auto market in 2014.

Auto companies are not fully realizing the strategic potential of the BRIC countries as locations for con-ducting R&D, sourcing, manufacturing, and sales.

Although the BRIC countries off er advantageous con-◊ ditions for conducting R&D, sourcing, manufacturing, and sales, less than 10 percent of leading automotive OEMs and suppliers are deeply localized in all four countries.

This is not to say that more localization in a particular ◊ country is necessarily better than less, or that all auto-motive companies should localize all their operations in all four BRIC countries. Nonetheless, it is clear that there is considerable room for deeper—and more prof-itable—localization.

1. Our first report in the series was Winning the Localization Game: How Multinational Automotive OEMs and Suppliers Are Realizing the Strategic Potential of China and India, BCG report, January 2008.

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Companies that are localized are o en operating in ◊ ways that are less than optimal. Some 55 percent of foreign automotive companies’ R&D centers in China and India, and 30 percent of those in Brazil, are “engi-neering nuclei” that have little or no autonomy from global R&D centers and only low levels of project re-sponsibility. In sourcing, volumes remain low: foreign OEMs’ sourcing from China, for example, typically av-erages just 1 to 5 percent of their overall sourcing. And in manufacturing, companies are generally paying a premium of 5 to 15 percent to manufacture in the BRIC countries, mainly because of diseconomies of scale and higher quality-assurance costs; only in Brazil do they actually save money on manufacturing.

The four BRIC countries diff er dramatically in mar-ket development and local capabilities, as well as consumer preferences.

Brazil, China, and India are the BRIC countries’ safe ◊ bets. All three will continue growing through 2014. While Brazil will grow moderately at about 3 percent per year, China will grow at about 5 percent per year and India at about 9 percent per year.

In contrast, Russia is the BRIC countries’ roller coaster. ◊ Sales dropped by an estimated 50 percent in 2009 but are expected to stabilize in 2010, achieving growth of some 15 percent per year through 2014. Russia’s devel-opment is hard to anticipate, however, because it will depend greatly on external factors, such as prices of raw materials.

China will remain by far the largest of the four auto-◊ motive markets, expanding its share of total BRIC sales volume from 53 percent in 2008 to 61 percent in 2014.

Brazil is the most mature and stable of the BRIC mar-◊ kets and is likely to remain the second largest of the four through 2014.

India will outpace both Brazil and China in growth ◊ throughout our forecast period, occupying third place in terms of market size until 2014, when Russia’s strong postcrisis recovery is likely to propel it to that rank, nudging India down to fourth place.

Companies must understand that there is no standard ◊ BRIC car: Brazilian consumers favor sporty hatch-backs, Russians prefer Western sedans and sport-utili-ty vehicles without visible local adaptations, Indians seek ultra-low-cost minicars, and the Chinese enjoy af-fordable luxury-style sedans with fl air.

Our recommendations to auto companies fall under three general headings:

In terms of country strategies, make China the corner-◊ stone of any BRIC strategy, strengthen the company’s presence in Brazil and India, and invest selectively in Russia with a view to its long-term potential.

Until each BRIC country provides enough scale to jus-◊ tify completely individualized products, adapt standard platforms signifi cantly to meet local requirements, and engage local partners as needed to help develop appro-priate local sales-and-marketing concepts.

Expand sales networks in all four BRIC countries and, ◊ depending on the company’s capabilities and pros-pects, invest selectively in particular countries to in-crease local R&D, sourcing, and manufacturing where those activities are most advantaged.

About the AuthorsNikolaus S. Lang is a partner and managing director in the Munich offi ce of The Boston Consulting Group; you may contact him by e-mail at [email protected]. Stefan Mauerer is a project leader in the fi rm’s Munich office; you may contact him by e-mail at [email protected].

Regional contributors: Marcos Aguiar (Brazil) is a senior partner and managing director in BCG’s São Paulo offi ce; you may contact him by e-mail at [email protected]. Arindam Bhattacharya (India) is a partner and managing director in the fi rm’s New Delhi offi ce; you may contact him by e-mail at [email protected]. Ewald Kreid (Russia) is a partner and manag-ing director in BCG’s Moscow offi ce; you may contact him by e-mail at [email protected]. Christoph Nettesheim (China) is a senior partner and managing director in the fi rm’s Beijing offi ce; you may contact him by e-mail at [email protected].

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The world’s leading automotive OEMs and tier 1 suppliers, facing stagnating or declin-ing sales at home in the triad markets (Eu-rope, Japan, and North America), are turn-ing their attention to the BRIC countries.

Auto markets in other rapidly developing economies (RDEs) in Eastern Europe, Latin America, and Southeast Asia are either stagnant or still relatively small. In con-trast, Brazil, China, and India are showing above-average resistance to the current economic crisis. All three mar-kets have grown, and together with Russia they will achieve exceptional growth through 2014. (See Exhibit 1.) Specifi cally, the four BRIC countries together will provide approximately 30 percent of global automotive sales in 2014. To capture that growth, automotive companies must be present in each BRIC market, selling vehicles that local consumers want to buy.

Most leading OEMs and tier 1 suppliers have localized at least some of their R&D, sourcing, manufacturing, and sales in the BRIC countries. Many of these companies have attempted to standardize their products, processes, and localization approaches across the BRIC countries, on the assumption that standardization would ensure a cost-eff ective market presence. However, in view of these markets’ highly diverse capabilities and requirements, companies should take diff erentiated approaches to them in order to realize the full value of localization.

Diverse Market Size, Growth, and Structures

The four BRIC automotive markets have developed—and will continue developing—quite diff erently. (See Ex-hibit 2.) During the current fi nancial crisis, China’s mar-ket has achieved strong sales growth, while markets in

Brazil and India have also continued growing. All three will continue to grow through 2014. The Russian market, in contrast, will achieve very high recovery rates a er having contracted by approximately 50 percent in 2009. However, forecasts for Russia must be viewed with some caution because of the Russian market’s strong depen-dence on the prices of raw materials, including oil and gas.

Of the four markets, Brazil’s will likely be the most stable, with comparatively slow postcrisis growth through 2014; Brazil has already overtaken Russia to rank as the second largest of the four markets and will retain that rank throughout our forecast period. India’s market will show the second-highest growth rates, outpacing both Brazil and China; however, as it is growing from a relatively small base, it will remain third in rank through 2013 and will then be surpassed by the Russian market in 2014. And China’s massive market, bullish in 2009, will likely experience a slowdown in sales growth from 2010 on, as government incentives end, but will nonetheless expand its share of BRIC sales volume from 53 percent in 2008 to 61 percent in 2014. (See Exhibit 3.) A er 2014, the Rus-sian market will grow more moderately. In contrast, In-dia’s market will continue to boom and will likely be-come the second largest of the BRIC markets by year-end 2018, followed by Russia and then Brazil.

Like market size and growth, market structures also vary across the BRIC countries. While imports and vehicles made by localized foreign OEMs will continue to account for virtually the entire Brazilian market over the forecast period, local OEMs will likely gain market share in China and India. The market share of imported vehicles will stay relatively stable in Brazil, China, and India and will decline signifi cantly in Russia, partly because of Russia’s

Localizing in the BRIC Markets

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4–12 4–8

12–1723–27

78–87

55–60

62

19

43

70

15

55

0

10

20

30

40

50

60

70

80

90

Automotive marketa

(millions of units)

Worldmarket,

2007

BRICmarkets’ gain,

2007–2009b

Rest of worldmarket’s loss,2007–2009b

Worldmarket,2009b

BRICmarkets’ gain,

2009b–2014b

Rest of worldmarket’s gain,2009b–2014b

Worldmarket,2014b

While the world market shrank, the BRIC

markets grew

The BRIC markets will drive 31 percent of world

growth through 2014

BRIC Rest of world

Exhibit 1. The BRIC Automotive Markets Will Grow Strongly Through 2014...

Sources: IHS Global Insight, November 2009; BCG analysis.aPassenger cars and light commercial vehicles up to 3.5 tons.bEstimates.

Estimatedperformance

2008–2009(%)

–48

11

4213

EstimatedCAGR

2009–2014(%)

15

3

59

2008 2009b 2010b 2011b 2012b 2014b

Brazil

ChinaIndia

Russia

0

200

180

160

140

120

2013b

80

60

100

Sales indexa (2008 = 100)

Exhibit 2. ...But Growth Patterns Will Differ Among the Four Markets

Sources: IHS Global Insight, November 2009; Economist Intelligence Unit, November 2009; BCG analysis.aPassenger cars and light commercial vehicles up to 3.5 tons.bEstimates.

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negative incentives against imports, which were institut-ed at the beginning of the 2008–2009 downturn, but prin-cipally because foreign OEMs will expand their local pro-duction capacity.

In the context of the BRIC countries’ varied market size, growth, and structures, how are leading automotive OEMs and suppliers participating in these markets? The answer is that they have been entering them in a number of ways, achieving varying degrees of localization, and learn-ing many valuable lessons along the way.

Varying Degrees of Localization

Assessing the degree to which foreign companies are lo-calized in a given country or region is far from simple. In Winning the Localization Game, our earlier report in this series, we introduced the BCG localization framework, which lays out the typical progression of automotive OEMs and suppliers as they become increasingly local-ized in an RDE market. (See Exhibit 4.)

In general, companies localizing in RDEs (including the BRIC countries) occupy one of fi ve localization stages:

Home players ◊ serve the local market only by exporting low volumes from their home bases, which are gener-ally in Europe, Japan, or North America

Exporters◊ have a minor presence in the local market but keep all localized functions under tight control from their headquarters

Explorers◊ have localized some independent functions in the RDE, but their headquarters still have a strong impact on local strategies

Settlers ◊ have localized all their core functions in the RDE and have empowered them to act relatively inde-pendently from headquarters

Global players ◊ give their operations in the RDE not only considerable autonomy but also global responsibility for particular functions and products—for example, making a given BRIC country the sole production hub for a product line sold globally

It should be noted that a company’s various functions—R&D, manufacturing, sourcing, and sales—can occupy

2.3

0.4

Brazil2.7

4.2

4.1

Russia3.0

1.6

0.6

0.8

India1.7

1.2b

0.5

China8.6

0.3

<0.1

<0.1 <0.1

1.4

1.1

Russia3.1

0.6

Brazil3.5

8.4

6.6

0.3China15.3

1.0

2.0b

India3.0

0.6

2.9

Total: 16.1 million units

Estimated 2014 Salesa

(millions of units)2008 Salesa

(millions of units)Total: 24.9 million units

Imports

Local OEMs’

vehicles

Localized foreign OEMs’

vehicles

Imports

Local OEMs’

vehicles

Localized foreign OEMs’

vehicles

<0.1

Exhibit 3. China’s Automotive Market Will Continue to Dwarf Other BRIC Markets in 2014

Sources: IHS Global Insight, November 2009; Economist Intelligence Unit; BCG analysis.aPassenger cars and light commercial vehicles up to 3.5 tons. bIncluding Maruti.

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diff erent stages of localization in diff erent countries or even within the same country. A company can be de-scribed as having attained “deep localization” in one or more of its functions when it has localized those func-tions to the settler or global player stage.

We identifi ed the degree of localization of all 49 top in-ternational automotive OEMs and suppliers in the BRIC markets, and then combined those scores to show overall patterns of localization. (See Exhibit 5.) Interestingly, none of the companies have reached the highest level of localization across all four markets. Each company’s pat-tern of localization varies signifi cantly across the BRIC countries and across functions within each country.

Typically, companies’ sales and manufacturing functions are more localized than their sourcing, and far more so than their R&D. The few exceptions to this general rule refl ect distinctive business models. For example, a Euro-pean power-train-engineering company has localized its R&D and sales in China to a greater extent than its sourc-ing and manufacturing because this company is partner-ing with local Chinese OEMs in the development of their power-train technology.

Looking country by country at the levels of localization that foreign auto companies have achieved, we again see distinctive patterns:

China shows the highest levels of localization, ◊ thanks to the vast size of its current and potential market

Brazil follows closely a er China, in part because for-◊ eign OEMs have such a long-established presence there

India trails China and Brazil in the degree of foreign ◊ auto companies’ localization, mostly because its rela-tively small market size and specifi c requirements pose challenges for industry participants

Russia has the lowest level of localization to date, part-◊ ly because the international automotive industry be-gan entering the Russian market even later than it en-tered India

As these major diff erences among BRIC markets suggest, auto companies cannot succeed in them by off ering one-

Exhibit 4. Companies Typically Move Through Five Stages of Localization

Source: BCG analysis.1CKD = completely knocked down.

Func

tion

s in

the

valu

e ch

ain

Home players Exporters Explorers Settlers Global players

Characteristics

Serve the BRIC markets only through low-volume exports

Minor presence in the BRIC markets; key functions under tight control from headquarters

Some independent presence in some functions; head-quarters still exert strong impact on development

Fully independent from headquar-ters; all key func-tions managed by local staff and organization

Fully independent from headquarters, with global respon-sibility for some or all functions

R&D

No presence No presence; vehicles exported with only minor adaptations

Conduct minor lo-cal R&D activities

Conduct major local R&D activities

Maintain major R&D centers with global responsibility

Sourcing

No presence Source simple parts

Source submodules

Source a wide array of products

Conduct full-scale sourcing to serve the company worldwide

Manufacturing

No presence CKD production or small local production1

Operate one or two full-scale plants

Operate several plants

Operate several large plants for local and export markets

SalesLow-volume exports

Only key functions localized

Sales network serves tier 1 and tier 2 cities

Sales network serves fi rst- to fi h-tier cities

Sales department also manages exports

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size-fits-all BRIC products, processes, or approaches. Nonetheless, companies are creating signifi cant value by pursuing cross-BRIC learning, synergies, sharing of best practices, and investments—while also respecting the unique characteristics of each market. In the following

section, we look at Brazil, Russia, India, and China indi-vidually.

Average degrees of localization in each country

R&D

Sourcing

Manufacturing

Sales

Home players Exporters Explorers Settlers Global players

Russia India China Brazil

Exhibit 5. Foreign Automotive Companies Are Most Deeply Localized in China and Brazil

Sources: Corporate information; company interviews; BCG localization database; BCG analysis.Note: Forty-nine companies were evaluated.

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The four BRIC countries diff er dramatically in their market development and local ca-pabilities, as well as in consumer prefer-ences. Each off ers a unique constellation of challenges and opportunities for auto-

motive companies.

Brazil

The Brazilian automotive market can be considered the most mature and stable of the four BRIC markets and the front-runner in terms of auto companies’ localization. In 1921, the Ford Motor Company began producing its Mod-el T there. Later, as in many European countries, Volkswa-gen introduced its Beetle to spearhead the country’s mo-torization, winning a peak market share of close to 80 percent in the late 1960s. The Brazilian auto market was dominated by the “fi rst wave” OEMs—Fiat, Ford, General Motors, and Volkswagen—through the 1980s. Subsequent-ly, a second wave brought companies such as Daimler, Honda, Hyundai, Land Rover, Mitsubishi, PSA, Renault, and Toyota into the market. Thanks to this long history, Brazil has a relatively stable automotive market, in which most OEMs and suppliers are localized to a high degree.

This is not to deny that there has been considerable mar-ket volatility in recent years, with annual sales expanding and contracting by as much as some 30 percent. None-theless, of the four BRIC automotive markets, Brazil’s is now the most mature and very likely will remain so throughout our forecast period. We expect sales to climb by some 5 percent in 2010, a er having grown by a strong 10 percent in 2009, and then to stabilize at around 2 per-cent per year through 2014. (See Exhibit 6.) A er 2014, we expect the Brazilian market to achieve continuous moderate growth but to be overtaken eventually by the

faster-growing Indian and Russian markets, which will rank second and third among the BRIC markets, respec-tively, in 2018.

Brazil’s market structure diff ers signifi cantly from those of the three other BRIC countries. Unlike China, India, and Russia, Brazil did not block international automotive OEMs from gaining access to the country’s auto market during the early decades of the industry’s development. Therefore, the presence of highly competitive foreign companies has historically hindered the establishment of local automotive OEMs. Apart from a few small-volume niche players—including Agrale and Marcopolo—the Brazilian auto market belongs entirely to foreign OEMs. We expect distribution of market shares to remain stable throughout our forecast period.

Manufacturing is concentrated in the southern part of the country, in four main automotive clusters, as shown in Ex-hibit 6. Recently, several automakers have also opened factories outside these clusters. Examples include Ford’s factory in Camaçari, Hyundai’s in Anápolis, and Mitsubi-shi’s in Catalão. Within these clusters—and beyond them—the overall degree of localization is high. The four foreign OEMs that arrived in the fi rst wave are far ahead of their competitors, having achieved deep localization in all four major functions. These companies typically have local R&D centers with international reach, operate sev-eral production plants for both local sales and export, and manage broad sales networks not only in the largest cities but also in third- to fi h-tier cities, such as Lagarto, Rodonopolis, and Santarém.

Such OEMs have established signifi cant footprints. For ex-ample, Volkswagen is operating four large plants in Bra-zil—in São Bernardo do Campo, São Carlos, Taubaté, and

Taking a Close Look at the BRIC Markets

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São José dos Pinhais. And Fiat’s plant in Betim, with a ca-pacity of 700,000 units, is not only the company’s largest but one of the industry’s fi ve largest in the world. Like these leading OEMs, the top suppliers in Brazil have very advanced localization profi les, and each top supplier typ-ically supplies most of the OEMs.

In contrast to the front-runners, however, most other for-eign OEMs and suppliers are pursuing little or no R&D activities in Brazil. In general, their sourcing activities are limited to buying submodules for their international needs. Their plants tend to be relatively small, and their dealers serve mainly fi rst- and second-tier cities, such as São Paulo, Rio de Janeiro, Belém, and Cuiabá.

On average, then, the international automotive industry in Brazil has attained a medium level of localization in

R&D, manufacturing, and sourcing, and an advanced lev-el in sales. We discuss these four functions individually below.

R&DIn localizing R&D to RDEs, companies typically set up four kinds of R&D centers: off shore units, engineering nu-clei, local R&D hubs, and centers of competence. (See the sidebar “Four Roles for Localized R&D Centers.”)

In Brazil, specifi cally, companies can benefi t from the more than 40,000 well-trained engineers who graduate each year, as well as from Brazil’s large population of ex-perienced engineers who have acquired deep familiarity with the automotive industry over decades. Drawing on these strengths, foreign auto companies in Brazil main-tain three of the four types of R&D centers:

2008

14%

86%

2.7<1%

<1%<1%

2009b

19%

81%

~3.0

2014b

17%

83%

~3.5

OEM plants: 19Tier 1 plants: ~50

Minas GeraisOEMs: Daimler, Fiat,

IvecoSuppliers: Delphi, Magneti

Marelli

São PauloOEMs: Ford, General

Motors, Honda, Nissan, PSAPeugeot Citroën, Renault, Toyota, Volkswagen

Suppliers: Bosch, Bridge-stone, Delphi, Goodyear, Magneti Marelli, Mahle, Pirelli, TRW, Valeo

Moderate growth aer a strong 2009 Currently four main production clusters(selected examples)

Sales volumea

(millions)

3% per year

Local OEMs’vehicles

LocalizedforeignOEMs’

vehicles

Imports

Rio Grande do SulOEMs: Agrale, General

Motors, Marcopolo, Navistar

Suppliers: Delphi, Pirelli, Valeo

ParanáOEMs: General Motors,

Nissan, Renault, Volkswagen, Volvo

Supplier: Delphi

Exhibit 6. Brazil’s Automotive Market Will Grow Moderately Through 2014

Sources: IHS Global Insight, November 2009; Economist Intelligence Unit; corporate information; company interviews; companies’ annual reports and press releases; BCG analysis.Note: Includes only OEMs and international suppliers with significant production footprints in Brazil.aPassenger cars and light commercial vehicles up to 3.5 tons.bEstimates.

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R&D centers in the BRIC countries—and in other RDEs—typically play one of four roles. (See the exhibit below.)

Off shore Unit. ◊ This kind of R&D center takes advantage of low local factor costs to develop specifi c contents for products; typical examples include so ware program-ming and electronics engineering. Off shore units have local autonomy in executing projects and managing lo-cal human resources; however, the company’s R&D headquarters defi nes their processes, standards, and interfaces and monitors the quality of their work.

Engineering Nucleus. ◊ This kind of center adapts world-wide products to local requirements; an example would be designing exterior body adaptations to a global mod-el to make it more appealing for the Chinese market. Engineering nuclei have local autonomy in exploring customer needs and managing day-to-day projects. The company’s R&D headquarters ensures that these units have appropriate capabilities and arranges internation-al exchanges of best practices and R&D staff .

Local R&D Hub. ◊ A local R&D hub develops products for the local market; for example, developing fl ex-fuel ap-plications for Brazilian customers. Local R&D hubs have autonomy in defi ning business cases and product spec-ifi cations; the company’s R&D headquarters acts as a consultant and facilitates exchanges of best practices.

Center of Competence. ◊ This kind of center has global lead-ership responsibility for developing products or technol-ogies for worldwide use. An example might be develop-ing a small, low-cost SUV for markets around the globe. The company’s R&D headquarters ensures each cen-ter’s integration into the company’s global network.

It is generally not advisable for a given R&D center to try to play more than one of these roles at the same time. Of-ten, a localized R&D center in an RDE will progress from the fi rst, simplest role through the subsequent roles and eventually evolve into a center of competence.

Four Roles for Localized R&D Centers

Low

High

Autonomy fromglobal R&D center

Projectresponsibility

GlobalLocal

20%

Brazil

10%

India

5%

ChinaNA1

Russia

50%

Brazil

25%

India

10%

ChinaNA1

Russia

Brazil IndiaChina RussiaBrazil IndiaChina Russia

30%

55% 55%

NA1 0%10%

30%

NA1

Share of OEMs and suppliers operating in each type of R&D setup

Center ofcompetence

Local R&D hub

Engineering nucleus Offshore unit

Localized R&D Centers in RDEs Are of Four Types

Sources: Company interviews; BCG analysis. Note: Total number of OEMs and suppliers interviewed = 49. Most were interviewed in all four BRIC countries.1NA = not applicable.

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Engineering Nuclei. ◊ Thirty percent of the industry’s R&D centers focus on adapting (also referred to as “tropicalizing”) the company’s worldwide products to local requirements under tight control from the com-pany’s R&D headquarters. Example: A European sup-plier of heating, ventilating, and air conditioning sys-tems uses its 55 engineers and 20 support staff to build prototypes and operate testing facilities to adapt its products to specifi c local conditions, including high heat and humidity.

Local R&D Hubs. ◊ Half of the industry’s local R&D cen-ters not only adapt worldwide products but also de-velop products to meet the needs of Brazilian con-sumers. Example: A North American supplier of engine and transmission components used a local R&D hub to develop a low-cost torque control for small front-wheel-drive cars.

Centers of Competence. ◊ Only 20 percent of the industry’s Brazilian R&D centers have full responsibility for de-veloping products and technologies for both local and global use. Example: Foreign OEMs’ and suppliers’ lo-cal R&D centers have been given global responsibility for low-cost four-wheel-drive technology, small multi-purpose vehicles (MPVs), and sporty, ultra-low-cost hatchbacks.

Contributing to the potential value of conducting R&D in Brazil is local market demand for vehicles and technolo-

gies that are also attractive for worldwide use, such as ultra-low-cost small cars and fl ex-fuel. Familiarity with R&D projects in these areas is positioning Brazilian R&D centers to serve global markets as well. (See Exhibit 7.)

Sourcing International OEMs’ high volume of production in Brazil provides suffi cient scale to justify the local production of some 80 percent of the parts used, mostly by internation-al suppliers with generally high levels of quality and pro-ductivity. However, auto companies do not yet source from Brazil a signifi cant percentage of the parts used in their global operations. Brazil exported just $9.1 billion worth of parts in 2008—far less than China’s $30 billion.

Some OEMs operating in Brazil are sourcing from lower-cost suppliers in other Latin American countries or even in China. For example, one OEM has launched a China sourcing strategy for its Brazilian production in order to profi t from favorable exchange rates between the Brazil-ian real and the Chinese renminbi. It plans to source 50,000 tires and 15,000 light wheels from China, where it manufactures products similar to the ones it makes in Brazil.

ManufacturingAs mentioned above, Brazil is the only BRIC country in which production costs are lower than those in the triad markets—and far lower than those in the three other BRIC countries. Our interview partners confi rmed that

Exhibit 7. R&D Hubs in Brazil Excel in Applications for Global Market Niches

Sources: Company interviews; BCG analysis.

Global niches Examples Contributing

circumstances

Flex-fuel technologies

Electronic control ◊ unitsFlex start systems◊

Domestic sugar-cane ethanol production and government energy policies led to the development of key expertise in flex-fuel engines and related power trains

Low-costoff -road

technology

Torque-controlling ◊ differentials

Rough local road conditions, the popularity of off-road vehicles and vehicle styling, and the local focus on affordability led to the development of competencies in low-cost off-road technology

Small cars and engines

1.0-liter engines◊ The dominant share of the 1.0-liter “popular” car led to the development of key competencies and specialization in the design of B-segment cars and small, efficient engines

Local low-cost

materials

Low-cost plastics, ◊ alloys, and textiles

The focus on affordability, together with consumer preferences and local climate conditions, led to specialization in less expensive materials that are better adapted to local use

W BRIC A M

Brazil’s cost advantage rests on the market’s relatively large scale of production, reliable product quality, and largely manual performance of processes not critical to quality. Furthermore, in response to past market volatil-ity, the Brazilian industry has developed a specifi c local competence: production fl exibility. Brazilian plants are now generally more fl exible than plants in the triad mar-kets. One interview partner—a U.S. supplier—told us: “High spending on robotics is not justifi able. The core of the business is balancing the tradeoff s between automa-tion and fl exible manual labor.”

Nonetheless, despite Brazil’s attractive manufacturing cost position, most automotive production is dedicated to the domestic market. Only 18 percent of vehicles man-ufactured in Brazil are exported, of which some 85 per-cent go to other Latin American markets owing to pro-duction strategies focusing on these countries. Exports outside Latin America are low largely because of Brazil’s relatively volatile currency, its only partially developed export infrastructure, its bureaucratic customs proce-dures, and its complex taxation system, which discour-ages exports.

SalesThe fi rst-wave OEMs have now built up extensive sales networks with wide regional coverage and a strong pres-ence even in third- to fi h-tier cities. The sales networks of OEMs that began operating in Brazil more recently are less extensive.

The cars being sold by the fi rst-wave OEMs and by some later-wave OEMs refl ect the highest degree of product ad-

aptation to local requirements among the BRIC countries. For instance, most OEMs off er a version of the carro pop-ular—a small, inexpensive hatchback with a one-liter en-gine. Examples include the Chevrolet Celta, the Fiat Palio, and the Volkswagen Gol. The largest OEMs off er more than one carro popular. As is typical in maturing markets, OEMs in Brazil have begun to identify and target market niches. (See the sidebar “OEMs Are Targeting Market Niches in Brazil.”)

In contrast to new-car sales, used-car and a er-sales net-works are considerably less developed in Brazil than in the triad markets. However, OEM pioneers in Brazil’s car-fi nancing market have reached a high level of maturity. One OEM has developed a car-fi nancing off ering that cov-ers a wide range of both automotive and unrelated prod-ucts; some of its off erings involve partners.

While most suppliers in Brazil serve multiple OEMs, some have not yet managed to level out demand among their various OEM clients. Because they are overly dependent on one or a few companies, they are not yet realizing the full potential of the Brazilian market. However, the lead-ing suppliers are successfully serving most or all OEMs and have started off ering parts and systems designed spe-cifi cally to meet local requirements for low cost and the ruggedness to withstand rough terrain.

Russia

In contrast to Brazil, with its long experience of hosting international automotive companies, Russia has a history of solely domestic production. Most of that production

One sign that a market is maturing is that OEMs begin to seek market “white spaces”—niches of previously uniden-tifi ed consumer demand for specifi c products and fea-tures—and introduce low-volume models designed to meet that demand. Over the past 15 years, OEMs in Brazil have targeted several such niches. For example:

Fiat gained market leadership in entry-level cars with ◊the ultra-low-cost Uno/Mille

Japanese OEMs successfully introduced midsize sedans, ◊including the Honda Civic and the Toyota Corolla

Ford attacked the unexplored niche for small, low-cost ◊SUVs with the EcoSport

GM successfully created the small-MPV market with the ◊Chevrolet Meriva

Thanks to these and other pioneering forays into niche markets, the market share of so-called white-space vehicles swelled from 0.2 percent in 1996 to 22 percent in 2008.

OEMs Are Targeting Market Niches in Brazil

T B C G

has emanated from what was once the world’s largest auto factory, the AvtoVAZ (Lada) plant in Togliatti. The plant opened in 1969, initially producing a single mod-el—the Lada 2101—which was based on the Fiat 124. From the mid-1970s through the mid-1980s, the mar-ket for Lada vehicles exceeded 1 million units per year; therea er it stagnated and fell to between 600,000 and 1 million units per year until the beginning of this century.

With the deregulation of the Russian automotive market in the late 1990s, international companies began export-ing into the Russian market, some OEMs and suppliers began localizing sales there, and sales volumes resumed growing, driven almost entirely by imports and localized foreign companies. Russian carmakers were able to maintain their production volumes, but as the market

expanded, they lost share to the newly arrived outsiders. Among the fi rst to begin localizing operations in Russia were Ford, GM, Hyundai, and Renault; others soon fol-lowed.

Because of Russia’s relatively short history as an interna-tional automotive market, it is more volatile than the other BRIC markets and its future development is less predictable. It has also been hardest hit by the economic downturn. While auto sales in China skyrocketed by some 40 percent in 2009, and auto sales in Brazil and In-dia grew strongly, sales in Russia dropped by approxi-mately 50 percent. Even when the economy recovers, sales will attain 2008 levels only in 2014. (See Exhibit 8.) Meanwhile, as Russia’s market contracted in 2009, it fell to fourth place among the BRIC markets. It will likely re-main there until 2014, when its strong postcrisis recovery

Saint PetersburgOEMs: Ford, General

Motors, Hyundai, Nissan, Opel, Toyota

Suppliers: Asahi Glass, Toyota Boshoku, Denso, Johnson Controls, Lear

Togliatti and SamaraOEMs: AvtoVAZ, General

MotorsSuppliers: Bosch, Delphi,

Federal Mogul, Johnson Controls, Tenneco, Woco

Nizhny NovgorodOEM: GAZSuppliers: Benteler,

Faurecia, Ficosa, Johnson Controls, Lear, Magna, Valeo

Greater Moscow and KalugaOEMs: Mitsubishi, PSA

Peugeot Citroën, Renault, Škoda, Volkswagen

Suppliers: Continental, Hella, Magneti Marelli, Michelin

KaliningradOEMs: Avtotor, BMW,

Chery, General Motors, Kia

Supplier: Brisk

2008

54%

19%

3.0

28%

36%

20%

2009b

36%

28%

~1.5

2014b

36%

44%

~3.1

15% per year

OEM plants: 13Tier 1 plants: 23

Shi away from imports

Sales volumea

(millions)

Currently five main production clusters(selected examples)

Local OEMs’vehicles

LocalizedforeignOEMs’

vehicles

Imports

Exhibit 8. The Russian Market’s Contraction Will Be Followed by a Strong Growth Surge

Sources: IHS Global Insight, November 2009; Economist Intelligence Unit; press research; corporate information; company interviews; companies’ annual reports and press releases; BCG analysis.Note: Includes only OEMs and international suppliers with significant production footprints in Russia; also includes completely knocked down (CKD) and semi-knocked-down (SKD) production.aPassenger cars and light commercial vehicles up to 3.5 tons.bEstimates.

W BRIC A M

should propel it into third place, displacing India. A er 2014, however, India’s market will outpace Russia’s, while Brazil’s will grow more slowly, so that by year-end 2018 the Russian market is likely to be smaller than Chi-na’s and India’s but larger than Brazil’s.

Moreover, in Russia the downturn has brought a signifi -cant shi in market share between imports and local pro-duction. While localized foreign OEMs have been increas-ing their market shares considerably, the share of imports has been decreasing, for two main reasons:

Local production has become much more attractive ◊ economically, given the devaluation of the ruble, the imposition of import barriers for used cars, and the in-creased duties on imported new cars

International OEMs have increased their localized pro-◊ duction volumes signifi cantly, using existing plant ca-pacity and expansions that had been planned before the downturn

The indigenous Russian automotive industry is focused in two clusters, where some international suppliers have also localized, whereas the localized foreign OEMs and suppliers are focused in three main clusters, as shown in Exhibit 8. The international automotive industry overall is considerably less localized in Russia than in the other BRIC countries, and the focus of its localization is on manufacturing and sales. Most foreign companies have no local R&D activities in Russia and do not source there for either domestic or international purposes.

In Russia, unlike in Brazil, the diff erence in localization between the average localized foreign automotive com-panies and the localization front-runners is comparative-ly small. For example, one of the fi rst OEMs to have en-tered Russia—a company that now has R&D centers totaling more than 1,000 employees in Bangalore, São Paulo, and Shanghai—conducts no major R&D in Russia. The major distinction between front-runners and aver-age industry participants, in terms of localization, is that the front-runners no longer do completely knocked down (CKD) production exclusively but have built large plants for full-fl edged production; they have also extended their sales networks to include more of the smaller cities. The localized foreign suppliers, meanwhile, primarily serve localized foreign OEMs; only a few have begun cooperat-ing with indigenous Russian OEMs.

R&DAlthough Russia graduates an impressive 400,000 engi-neers a year, and thus provides a large pool of qualifi ed R&D talent, no international OEMs or suppliers have built up R&D centers in Russia to a signifi cant scale. There are a number of reasons why they have not felt the need to do so:

Russian consumers prefer triad-market vehicles. ◊ In the Russian market’s SUV and Western sedan segments, the slogan “Equal to the West” is an important selling point. Russians demand virtually the same models that are sold in Europe, Japan, and the United States and will not accept adapted versions. In the low-cost segment, international competitors have gained mar-ket share by selling low-cost models from other coun-tries.

Local engineers lack automotive R&D experience. ◊ Russia’s signifi cant numbers of well-educated engineers are fo-cusing on other industries, such as electronics and the military. Local OEMs have not provided a strong foun-dation for developing automotive experience; instead, they have focused their product-development activity on updating existing product designs.

Engineers’ wages are rising. ◊ Engineers’ wages have been rising by approximately 20 percent per year; by 2008, they had reached fully half the level of wages in West-ern R&D centers.

SourcingHere, too, the international automotive industry is only slightly localized in Russia. Many OEMs still operate on a semi-knocked-down (SKD) or a CKD basis and import more than 80 percent of their components.

Russian exports of automotive parts totaled just $1.7 bil-lion in 2008—a very minor amount in the overall picture of global automotive sourcing. A major challenge to grow-ing this percentage is that less than 5 percent of Russian suppliers meet international OEMs’ global sourcing poli-cies and quality standards. Moreover, few international suppliers have entered Russia so far, mainly because low production volumes, together with an existing stock of ve-hicles that have short remaining life spans, combine to limit suppliers’ likely return on their investments. Those international suppliers that have localized in Russia pro-duce mainly low-value-added products.

T B C G

For these reasons, most localized OEMs are struggling to meet Russia’s offi cial requirement that they achieve 30 percent local content a er three years of operations. However, localizing sourcing in Russia could become easier as the country’s suppliers of raw materials increas-ingly meet international standards. (See the sidebar “Creating Conditions for Higher Local Content in Russia.”)

To address the scale disadvantage by bundling volumes, one international OEM has developed a joint sourcing task force with a Russian OEM. The international OEM is introducing international quality standards and provid-ing supplier development, while the Russian OEM is con-tributing broad knowledge of and access to the Russian supply base. An additional goal is to jointly attract new international suppliers to invest in Russia.

ManufacturingIn manufacturing, as in R&D and sourcing, foreign auto-motive companies are still in relatively early stages of lo-calization in Russia. Those that have set up production there are operating primarily in low-scale SKD or CKD modes. Currently, most of their Russian plants are sub-scale, leading to a signifi cant cost disadvantage compared with triad markets.

One factor driving high costs in Russia is that most for-eign companies have duplicated their home-country pro-duction processes there, using large amounts of costly au-tomation. Before the downturn, this approach made sense because the cost of skilled labor was increasing sig-

nifi cantly, productivity was relatively low, and employee attrition was high. Today, however, with both wage levels and attrition rates declining, companies need to explore opportunities to replace costly automation with lower-cost manual processes. Companies willing to take this ap-proach can learn from best practices in Brazil, China, and India.

Another way to address the cost issue is by adopting more fl exible approaches to automotive manufacturing. As in Brazil, where historical market volatility led companies to develop special competence in fl exible manufacturing, in Russia companies are beginning to hedge against fluctuating demand with highly flexible production systems. (See the sidebar “Addressing Volatility by Ex-panding the Model Range and Employing Flexible Pro-duction.”)

Sales Most global OEMs are present in Russia. They have em-ployed independent multibrand dealer networks to cover tier 1 and tier 2 cities, such as Moscow, Saint Petersburg, Nizhny Novgorod, and Samara, where the bulk of current demand is located. OEMs are now expanding into third- to fi h-tier cities, which are home to some 70 percent of the Russian population—and some 55 percent of the country’s income. These regions will increase their share of demand as incomes rise. A best-practice example in this market is a North American OEM that has located 35 percent of its more than 120 dealerships in third- to fi h-tier cities—almost as many as the 39 percent of its deal-ers that are in tier 1 cities.

Despite Russia’s role as a net exporter of raw materials, OEMs making cars there still tend to rely on imported steel, chemicals, and other materials and parts. This could change soon. Local and international automotive suppli-ers are building up the infrastructure that will allow OEMs operating in Russia to reduce their dependence on im-ports. The goal is to encourage these OEMs to benefi t from Russia’s cost advantages—and in turn benefi t the economy—by buying locally.

For example, to address the issue that the quality of Rus-sian-produced steel has not been high enough for stamp-ing body parts for foreign OEMs’ cars, Magnitogorsk Iron

and Steel Works is opening a new plant especially de-signed to produce automotive steel. The quality of the steel should meet the standards of the entire Russian au-tomotive industry.

Similarly, to address the problem that it has not been pos-sible to source polypropylene parts in Russia because of the absence of polyolephines (chemical elements that are essential to polypropylene production), a European petro-chemical company has announced plans to open a plant that will produce polyolephines in Russia.

Creating Conditions for Higher Local Content in Russia

W BRIC A M

Before Russia’s tax on imported used cars jumped to 30 percent in 2009, one Japanese OEM actively fostered its used-car imports into Russia. The company is now lever-aging the resulting heightened brand awareness, positive brand image, and sales infrastructure—especially in re-mote areas—for its new-car sales.

Some OEMs adjust their products to local requirements—for example, by outfi tting them with “bad road” suspen-sions. However, Russia-specifi c adaptations are limited. This is partly because Russian consumers prefer cars very similar to those driven in Europe and the United States,

rather than those common in the other BRIC countries. As a consequence, the Russian market’s segmentation re-sembles that of the U.S. market. (See Exhibit 9.)

International suppliers have been hesitant to enter Rus-sia, largely because OEMs’ production volumes for each model are low, making potential supplier volumes sub-scale. Suppliers that have localized in Russia tend to fo-cus mainly on simple, low-value-added products.

The Russian market remains immature and volatile, in part because international companies entered the mar-

In 2007, the Volkswagen Group opened its fi rst production plant in Russia in Kaluga, near Moscow. The plant, oper-ated by Volkswagen Group Rus, is part of the Volkswagen Group’s international expansion strategy in one of the world’s most important long-term growth markets. In the project’s fi rst stage, the plant began assembling SKD kits in November 2007. As of late 2009, the plant had reached a capacity equivalent to 85,000 vehicles annually.

To comply with Decree 166, which governs the share of lo-cal content of vehicles manufactured in Russia, Volkswa-

gen Group Rus recently began full production using local content. In October 2009, 11 months ahead of schedule, it began employing the plant’s own body shop, paint shop, and assembly lines to manufacture the Volkswagen Tiguan and the Škoda Octavia. During 2010, the plant is expected to attain its maximum production capacity, equivalent to 150,000 vehicles annually. Volkswagen Group Rus intends to expand local production to add three more models, including a Volkswagen notchback es-pecially developed for the Russian market.

Addressing Volatility by Expanding the Model Range and Employing Flexible Production

0

20

40

60

80

100

Hatchbacks

India

Hatchback markets Sedan markets

Brazil Russia UnitedStates

Sedans SUVs MPVs Others

60

17

11

60

26

7

52

89

18

66

10

23

49

21

6

46

32

Hatchbacks, sedans, SUVs, and MPVs sold in 2008 (percentage of total sales)

ChinaWesternEurope

Exhibit 9. Russian Preferences for SUVs and Sedans Resemble U.S. Preferences

Sources: IHS Global Insight, November 2009; BCG analysis.

T B C G

ket so recently. But Russia off ers considerable potential for localization, if only because it is starting from a small base. As India’s example shows, market stability can contribute to deep localization of the automotive industry.

India

For decades, India’s automotive market consisted almost entirely of vehicles produced domestically by Indian com-panies, using designs based closely on European models. Foreign automakers entered the Indian market only a lit-tle over a decade ago. Before they arrived, Indian con-sumers achieved automotive mobility largely by means of models such as the Hindustan Ambassador and the Premier Padmini, whose designs changed only slightly over the decades. Car production volumes grew from 19,000 in 1960 to 44,000 in 1983, then increased substan-tially a er the 1983 founding of Maruti, a joint venture between the Indian government and Suzuki. (Suzuki held a minority stake until 2002 and now holds a 54 percent stake, qualifying Maruti for inclusion in our analysis of localized foreign auto companies.) A er the Indian gov-ernment deregulated the automotive market, the growth in sales accelerated, sometimes reaching rates as high as 50 percent per year. Growth was driven primarily by the entry of foreign companies and by emerging local com-petitors, such as Tata Motors.

That rapid growth is likely to continue. Despite some his-torical similarities between India’s automotive history and Russia’s, their markets are very diff erent. India’s stricter import regulations, more distinctive consumer re-quirements, and less saturated market have positioned the Indian market for healthy growth. (See Exhibit 10.) Even during 2009, a particularly diffi cult year, sales grew by more than 10 percent; we expect that they will contin-ue growing at approximately 9 percent per year through 2014—faster than either Brazil’s or China’s markets. Al-though the Russian market is likely to overtake the Indi-an market in 2014, thanks to its strong postcrisis recovery, we expect that by 2018 India will have surpassed both Russia and Brazil to become the second largest of the BRIC auto markets.

Imported vehicles’ share of the national market is by far the smallest among the BRIC countries because of India’s signifi cant barriers to market entry and Indian consum-ers’ exceptional price sensitivity. The Indian carmakers’

share of the market will increase from 30 percent in 2009 to 33 percent in 2014. The ability of local OEMs, such as Tata, to ensure that their vehicles perfectly meet Indian consumers’ demands for ultra-low-cost cars will drive this growth. In addition, foreign OEMs are planning to ramp up their production signifi cantly and to launch less ex-pensive vehicles in order to retain as much market share as possible.

Currently, production takes place in India’s three main automotive clusters, as shown in Exhibit 10. Foreign au-tomotive companies have already achieved, on average, a medium degree of localization in India in all four func-tions. However, the localization front-runners, such as Bosch, Hyundai, and Maruti, are far more localized than the rest of the foreign companies operating in the coun-try. The front-runners have distinguished themselves from their competitors by adapting their products to local market requirements. They also establish strong local R&D hubs, which o en undertake so ware development, among other projects. In addition, localization front-run-ners use local sourcing for much of their products’ con-tents; this includes sourcing some components (o en metal parts) for international use. They all engage in large-scale local production. Front-runner OEMs have ex-tensive local sales networks, which o en include third- to fi h-tier cities such as Dharmapuri, Godhra, and Secun-derabad. Front-runner suppliers sell large shares of their production to local OEMs. However, the localization front-runners are far from representative of all the foreign au-tomotive companies operating in India.

R&D With Indian universities graduating some 500,000 engi-neers a year, and wages well below those in the triad markets, one might expect that foreign automakers would choose to conduct large portions of their R&D in India. However, most foreign auto companies operating in India have not localized their R&D there signifi cantly. Although many have established R&D centers in India, some 30 percent of those centers are “off shore units,” typically de-veloping so ware, electronics, and other contents—rath-er than entire cars or engines—for vehicles to be pro-duced outside India. Generally, the company’s R&D headquarters executes tight control over these centers, defi ning processes, standards, and interfaces and moni-toring quality. Another 55 percent of foreign auto compa-nies’ R&D centers in India are engineering nuclei, which have local responsibility for adapting hardware compo-

W BRIC A M

nents such as suspensions, front ends, and seats. Only 15 percent of the R&D centers are local R&D hubs or centers of competence and have more autonomy from the global R&D headquarters.

Although Indian consumers have the most distinctive au-tomotive requirements among the BRIC countries—for instance, a growing demand for vehicles that cost well be-low $5,000—foreign OEMs have so far made few local ad-aptations to those requirements. Moreover, they generally lead whatever adaptations they make from their R&D headquarters in the triad markets.

In contrast, pioneering suppliers have transferred R&D responsibility for local products to their Indian R&D cen-ters. (See the sidebar “Shi ing Responsibility for R&D to India.”) As one interview partner from a European sup-

plier told us: “Our engineers at headquarters are not trained to develop low-cost products. Only by developing products locally, with local engineers, could we gain sig-nifi cant volume from local Indian suppliers.”

SourcingWhile pioneering OEMs and suppliers have established full-fl edged local production based on signifi cant levels of local sourcing, a number of other companies still conduct CKD production or rely on high levels of imported parts and raw materials. In 2008, India exported only $3 billion worth of auto parts—one-tenth as much as China. None-theless, “local for global” sourcing is growing fast.

Clearly, companies have not yet realized the full potential of sourcing from India. This is partly because most for-eign OEMs and suppliers have just recently set up their

2008

69%

1.7

31%30%

33%

2009b

70%

~2.0

2014b

66%

~3.0

OEM plants: 22Tier 1 plants: 60

<1% <1% <1%

Local OEMs’ share will increase Currently three main production clusters(selected examples)

9% per year

Sales volumea

(millions)

Local OEMs’vehicles

LocalizedforeignOEMs’

vehicles

Imports

Delhi and GurgaonOEMs: Honda, MarutiSuppliers: Continental,

Delphi, Denso, Lear, Visteon, ZF

Pune and MumbaiOEMs: Mahindra, Škoda,

Tata, VolkswagenSuppliers: ArvinMeritor,

Bosch, Continen-tal, Dana, Johnson Controls, Lear, Magna, TRW, Visteon, ZF

Bangalore and ChennaiOEMs: BMW, Daimler,

Ford, General Motors, Hyundai, Mahindra, Toyota

Suppliers: Aisin, ArvinMeri-tor, Bosch, Dana, Delphi, Denso, Faurecia, Toyota Boshoku, TRW, Visteon

Exhibit 10. The Indian Automotive Market Will Grow Fast from a Relatively Small Base

Sources: IHS Global Insight, November 2009; Economist Intelligence Unit; press research; corporate information; company interviews; companies’ annual reports and press releases; BCG analysis.Note: Includes only OEMs and international suppliers with significant production footprints in India; also includes CKD production.aPassenger cars and light commercial vehicles up to 3.5 tons.bEstimates.

T B C G

Indian sourcing offi ces, and partly because their sourcing is focused on commodities rather than on technologies, and on localized foreign suppliers rather than on local suppliers.

ManufacturingMost foreign OEMs and suppliers have localized produc-tion, though their volumes are below the levels they pro-duce in Brazil and China. Our interview partners con-fi rmed that production costs are somewhat higher in India than in the triad markets because of low scale ef-fects, far higher quality costs, and higher costs for the lo-gistics involved in importing parts.

To address the cost challenges, auto companies are un-dertaking a number of initiatives to do more production manually and to improve quality. Several competitors, particularly local suppliers, are applying the latest quality approaches and succeeding in bringing failure rates to within international standards. (See the sidebar “Sona Koyo Steering Systems Sets the Quality Standard.”)

SalesIn this area also, foreign auto companies have reached a medium level of localization in India. Some foreign OEMs, including Ford, GM, Hyundai, and Maruti, have expanded their sales networks to tier 3, tier 4, and tier 5 cities, refl ecting the distribution of market potential. Hyundai is a front-runner in this area, along with Maruti. Other foreign OEMs tend to focus their sales eff orts on tier 1 cities. To tap into previously uncovered regions, OEMs may fi nd a er-sales satellites useful. One inter-view partner from an international OEM told us: “Indian consumers may travel long distances to buy a car, but not to repair it. Without a nearby option for service and re-pair, they won’t buy even the most attractive car. Outlets

specialized in a er-sales or ‘fl y-in’ technicians are the so-lution.”

Foreign OEMs have not yet developed vehicles specifi -cally to meet local Indian requirements, nor have they entered the rapidly developing ultra-low-cost microcar segment. Instead, they mostly adapt global models to In-dian consumers’ requirements—for example, by fi tting the vehicles with diesel engines and by increasing their utility (for instance, with larger storage space) and stabil-ity (for instance, with “dog bars” in the front to protect the vehicle from accidents involving animals). Even mar-ket leader Maruti has been focusing on older Suzuki models, such as the Maruti 800 or the Maruti Omni, or on newer designs, such as the Swi or the SX4; and only re-cently has Maruti started to off er models based on sub-stantial development by Indian engineers, such as the A-star. In contrast, local automaker Tata has boldly bro-ken new ground with the Nano, for which it has also de-veloped innovative approaches not only to the product itself but also to its manufacture and sales. Suppliers sup-ported Tata signifi cantly in meeting the vehicle’s low cost targets. (See the sidebar “Tata Mobilized Suppliers to Meet Indian Requirements.”)

As in the Nano example, suppliers in India have begun to serve local OEMs with ultra-low-cost components that were developed locally, at least in part. Thus they are ex-panding their market shares with local OEMs, increasing their volume, and contributing to the further localization of the industry.

Foreign automotive companies operating in India have managed to achieve a medium degree of localization de-spite their relatively short tenure in the country. In con-trast to Russia, India’s stable development in the past and

In 2007, one North American supplier inaugurated a tech-nology park in Chennai that included an R&D center that was given global responsibility for the company’s so ware development. The center also has sole responsibility for the development and validation of electronic modules and a variety of additional business processes. According to plans, close to 1,000 so ware engineers and business process staff will be employed there.

Similarly, a European OEM uses its proprietary Indian R&D center for, among other activities, conducting basic and applied research in encryption, image and signal processing, and telematics; doing so ware engineering and development; and consulting in technology, embed-ded so ware, and IT security.

Shifting Responsibility for R&D to India

W BRIC A M

Sona Koyo Steering Systems, an Indian supplier, has par-ticipated in a joint venture with a major Japanese partner since 1985. From the beginning, Sona Koyo has always stressed quality management initiatives.

In 1988, it began implementing total quality management and total productive maintenance practices throughout the organization. Thanks to these measures, the company was able to reduce customer rejection rates from 1,579 parts per million in 1998 to 112 parts per million in 2004. In parallel, it invested in tier 2 supplier development and implemented quality programs at its suppliers. These ef-forts led to a reduction of supplier rejection rates from 35,000 parts per million to 932 parts per million during the same period. (See the exhibit below.)

In 2003, Sona Koyo’s achievements were honored with the Deming Prize, which is awarded by the Union of Japanese Scientists and Engineers to companies that make major contributions to the advancement of quality. Since then, the company has launched several new initiatives, such as just-in-time production, fl ow management, break-through management, risk hazard analysis, and kaizen. Its objective is to lower customer rejections to 5 parts per million and supplier rejections to 300 parts per million. Sona Koyo is seen as the benchmark for quality manage-ment in India.

Sona Koyo Steering Systems Sets the Quality Standard

35,000

25,000

15,000

Past

932

35,000

0

20,000

30,000

5,000

10,000

18,000

9,000 17,300

3,000

15,000

12,000

6,000

0

800

1,600

1,200

400

0

1,579–97% –95% –93%

Aerintroduction

of qualityprogram

Past Aerintroduction

of qualityprogram

Past Aerintroduction

of qualityprogram

112876

Supplier rejections(parts per million)

In-house rejections(parts per million)

Customer rejections(parts per million)

Sona Koyo’s Quality Program Has Achieved Extraordinary Performance Improvement

Sources: Sona Koyo; BCG analysis.

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anticipated strong growth in the future give automotive companies a sound planning horizon, and thus a good basis for investing in further localization.

China

Among the BRIC automotive markets, the Chinese mar-ket has experienced the most radical transformation over the past three decades. When foreign carmakers fi rst en-tered China in the early 1980s, the automotive market—with sales of less than 10,000 units annually—consisted mainly of two models, both domestic: the Hongqi and the Shanghai. By the early 1990s, despite the localized pro-duction of vehicles such as the Volkswagen Santana and the Audi 100, China still had the smallest sales volume of the four BRIC auto markets. But from the early 1990s to the early years of this century, the explosive growth of China’s auto market took it soaring past the other BRIC markets, from fourth place to fi rst. Today China makes up more than half of the total BRIC market volume—and its share is steadily increasing. Moreover, no country on earth has more foreign OEMs and suppliers localized within its borders: virtually all major OEMs and suppliers now have localized production in China.

China’s economic stability during the current downturn, coupled with its strongly growing demand for cars, mean that China’s prominence among the BRIC automotive markets will continue to expand. Clearly, China needs to be the cornerstone of every international automotive company’s BRIC strategy. However, a er operating very

successfully through the downturn in 2009, the Chinese automotive market will experience more moderate growth, owing partly to the expected discontinuation of sales stimuli. (See Exhibit 11.) Over the fi ve-year period from the beginning of 2010 through 2014, the market will grow at approximately 5 percent annually, reaching sales of some 15 million units in 2014.

Because of Chinese restrictions on imports, their share of the Chinese automotive market is small and will remain so. Local Chinese OEMs and foreign OEMs with localized production currently divide up most of the market almost equally. We expect that over the next few years, the local automotive industry will expand its share by promoting inexpensive models tailored specifi cally to Chinese con-sumers’ needs, thus attaining a market share of 55 per-cent in 2014.

The Chinese automotive industry currently includes more than 100 plants belonging to foreign OEMs and tier 1 sup-pliers. While the Chinese government has expressed its intention to locate new plants in the north and especially in the west of the country, plants currently fall into four main automotive clusters along the east coast, as shown in Exhibit 11.

Despite China’s relatively brief history as a base for for-eign automotive companies, these companies have al-ready achieved a slightly higher degree of localization in China than even in Brazil. Nonetheless, that localization can still be characterized as medium, rather than ad-

In the Nano, Tata has succeeded in launching a car that can be aff orded by millions of Indians whose annual in-comes are below 2 lakhs of rupees ($4,300)—eff ectively, a car that competes in price with large motorcycles. The Nano’s features are not luxurious, but they meet Indian consumers’ requirements: a large interior space, four doors, and fi ve seats. The principal levers Tata employed to develop the Nano included a low-investment produc-tion strategy that avoids, for example, expensive welding; a distribution strategy that focuses on direct orders, direct sales, and avoiding dealer margins where possible; and an innovative supplier strategy whereby Tata selected some 100 suppliers on the basis of their ability to coinvest in R&D, ramp up their capacity, and perform in-house

testing. One large European supplier, which gained more than 10 percent of the Nano’s supply volume by locally adapting or developing low-cost components, is serving Tata, among others, with throttle position sensors, 35-amp generators, an engine management system, a motor start-er, and various electric body parts.

More than 70 percent of the Nano’s parts were designed and are produced in India. Eighty-fi ve percent of the parts were either developed from scratch or adapted from mo-torcycle applications. The scope and creativity of the Nano project demonstrate the level of fl exibility required of foreign and local suppliers alike when serving local Indi-an OEMs.

Tata Mobilized Suppliers to Meet Indian Requirements

W BRIC A M

vanced. And unlike the situation in Brazil and India, the top three localization pioneers in China are only slightly more localized than most others in the market. In short, there is signifi cant potential for auto companies to create value by pushing for further localization in all four major functions.

R&DMost foreign companies in China use their local R&D cen-ters mostly to adapt their existing models to meet local needs, rather than giving them responsibility for world-wide projects. But auto companies’ use of Chinese R&D centers is evolving fast, driven by the massive scale of the current and potential market and the specifi city of Chi-nese consumers’ automotive requirements. It is also help-ful that China graduates an astonishing 1.8 million engi-neers annually.

At present, some 55 percent of foreign auto companies’ Chinese R&D centers function as engineering nuclei. One European supplier, for example, transferred to its Chinese R&D center full responsibility for adapting gearboxes to local application needs; but the center remains under tight control from the company’s headquarters and serves China only.

Another 25 percent of these centers function as local R&D hubs. One supplier, for example, keeps its R&D cen-ter occupied primarily with applications engineering and only occasionally assigns it responsibility for more sophis-ticated work, such as developing backlights for a new model or adapting hardware or so ware.

Some localization pioneers have begun undertaking local development of models designed specifi cally to meet Chi-

2008

47%

8.6

49%

52%

55%

2009b

46%

~12.2

2014b

43%

~15.3

OEM plants: 32Tier 1 plants: ~70

3% 3% 2%

Stable and strong market growth Currently four main production clusters(selected examples)

Sales volumea

(millions)

Local OEMs’vehicles

LocalizedforeignOEMs’

vehicles

Imports

5% per year

Changchun and ShenyangOEMs: Audi, BMW,

General Motors, Toyota, Volkswagen

Suppliers: Autoliv, Continen-tal, Johnson Controls, Lear, TRW, Valeo, Visteon

ShanghaiOEMs: Fiat, Ford, General

Motors, Hyundai, Iveco, Kia, Škoda, Volkswagen

Suppliers: Aisin, Autoliv, Bosch, Continental, Delphi, Denso, Faurecia, Johnson Controls, Lear, Magna, TRW, Valeo, Visteon, Yazaki

Beijing and TianjinOEMs: Daimler,

Hyundai, Toyota

Suppliers: Aisin, Autoliv, Delphi, Denso, Johnson Controls, Lear, TRW, Visteon, Yazaki

GuangzhouOEMs: Honda,

Nissan, Toyota

Suppliers: Aisin, Autoliv, Continental, Denso, Johnson Controls, Lear, Magna, Valeo, Yazaki

Exhibit 11. China’s Auto Market Will Continue Its Impressive Growth Through 2014

Sources: IHS Global Insight, November 2009; Economist Intelligence Unit; press research; corporate information; company interviews; companies’ annual reports and press releases; BCG analysis.Note: Includes only international OEMs and suppliers with significant production footprints in China.aPassenger cars and light commercial vehicles up to 3.5 tons.bEstimates.

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nese market demand. One European OEM, with this goal in mind, is already managing multiple full-fl edged R&D centers in China. It operates two R&D centers, each with more than 500 employees; both focus primarily on local adaptation tasks, including developing products for local production on the basis of existing platforms. Some local-ized foreign suppliers are now serving not only foreign OEMs but also local Chinese OEMs, providing low-cost components either developed locally from scratch or heavily adapted from global products. To benefi t from China’s ambition to become a leader in electric-vehicle technology, some companies have started developing R&D capacities there. (See the sidebar “China Pushes for E-Car Leadership.”)

One of foreign auto companies’ main concerns about conducting R&D in China is the protection of their intel-lectual property (IP). Especially in China, it is essential to take precautions to ensure IP protection. The fi rst step is to secure the company’s know-how through licenses, pat-ents, and nondiff usion agreements. A German OEM was able to forestall the production of a copy of its small ve-hicle only because of previous patent and license protec-tion, while a North American competitor could not pre-vent such copying because the company lacked a design patent under Chinese law.

The second step to ensure IP protection is restricting ac-cess to critical or proprietary information. Several Euro-pean OEMs and suppliers take the precaution of denying

local staff access to their headquarters’ servers, while pro-viding their localized international staff access from off -site locations, such as their home offi ces.

The third step companies should take to protect their IP is promoting employee retention. One supplier makes a special eff ort to retain employees who are familiar with the company’s IP by implementing a mentoring program for them.

Although these measures by no means ensure total IP se-curity, they can reduce leakages and provide some safe-guards. Clearly, IP protection needs to be high on the agenda of all Chinese operations.

SourcingIn sourcing, foreign automotive companies have achieved high levels of localization in China. For instance, several OEMs and suppliers are investing signifi cant eff orts in supplier development. Far more than in Brazil, foreign OEMs and suppliers alike are already using China sourc-ing to meet not just local but also worldwide demand. In 2008, China exported some $30 billion worth of automo-tive parts, compared with Brazil’s $9.1 billion.

However, no automotive company has yet allowed its China local-for-global sourcing to represent a truly signif-icant share of its overall sourcing. Typically, even localiza-tion front-runners’ local-for-global sourcing in China amounts to just 1 to 5 percent of their total worldwide

China wants to become the technology leader in electric vehicles. Some 60 million electric scooters already travel China’s roads. The government has set the ambitious tar-get of producing and selling 500,000 electric, fuel-cell, and hybrid vehicles by year-end 2011.

To achieve that goal, the Chinese government strongly supports the development of relevant technological com-petencies. Since 2008, it has issued incentives to foster the development of environment-friendly vehicles. In ad-dition, the government has dedicated some $1.5 billion to vehicles and parts that are based on new forms of energy. The government also subsidizes each purchase of an e-car with an incentive of $8,800. China’s ambition is sup-ported by its large reserves of raw materials, such as neo-

dymium, that are essential to the production of batteries for e-cars.

The Chinese battery-and-car producer BYD is seen as hav-ing signifi cant potential to become a future e-car leader. Drawing on its experience in both businesses, it recently launched its model F3DM. Priced at approximately $22,000, it promises a battery range of 100 kilometers, or 62 miles.

China’s strong incentives and relevant competence clus-ters may change the logic of where to conduct R&D for electric vehicles. Already some international automotive companies are considering localizing their e-car R&D cen-ters of competence in China.

China Pushes for E-Car Leadership

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spending. Only one North American supplier has grown its China sourcing to more than 10 percent of its total spending. At these volumes, the ambitious local-for-glob-al sourcing programs that auto companies have been con-ducting for many years have had relatively little impact.

As we learned from our interview partners, the world-wide crisis and the increasing need to reduce the cost of worldwide production provided signifi cant “tail wind” to existing programs for off shore sourcing, with targets ris-ing and new programs being set up. For successful local-for-global sourcing, a clearly delineated functional struc-ture is essential. (See Exhibit 12.)

Furthermore, foreign OEMs and suppliers source mainly from localized foreign suppliers rather than from local Chinese suppliers. Of these companies’ China-sourcing volumes, 56 percent is from localized foreign suppliers. But because these suppliers’ production sys-tems and cost positions in China closely resemble those in their home countries, the OEMs that source from them are not fulfi lling China’s potential for low-cost sourcing.

Many companies cite quality issues and unfamiliarity with international processes, such as ramping up produc-tion, as the core obstacles to increasing their sourcing from China. Some auto companies have surmounted these obstacles by building up supplier development ca-pabilities on the ground in China.

For example, one European company has created a sup-plier development unit that supports the company’s 40 core local suppliers in implementing improvements re-lated to quality, cost, manufacturing, logistics, and project management. The unit uses external and internal re-sources, and coordinates and monitors the initiative cen-trally across the company’s joint ventures.

Best-practice automotive companies have twice as many supplier development staff as purchasing staff . As a Euro-pean OEM in China put it: “Local Chinese suppliers usu-ally do not match the tight time frames of our strict R&D processes. For example, it takes them much longer to pro-duce samples that match our drawings. To keep deadlines within the R&D process, many companies choose inter-national suppliers instead of starting to develop local sup-

Purchasing Qualitya Logisticsa Productdevelopmenta

Supplierdevelopment

Planned sourcing volume: $100 millionto $150 million

Possiblehead count

Key activities

~6 to 8b ~2 to 4b ~3 to 5c ~1 to 3d ~1 to 3e

◊ Supplier identification

◊ Prequalification◊ Request-for-

quote support and negotiation

◊ Quality auditing◊ Quality training◊ Management

of local quality-control infrastructure

◊ Logistics auditing◊ Supplier-LLP

interface management

◊ Local logistics optimization

◊ Explanation of specs and drawings

◊ Codevelopment support

◊ Supplier productivity enhancement

◊ Supplier network structuring

Head of localsourcing office

Exhibit 12. Worldwide Sourcing Offices Need a Proven Structure and Clear Accountabilities

Source: BCG project experience.Note: LLP = lead logistics provider.aFunctional reporting to headquarters. bHead count will increase with sourcing volume. cStart-up team with broad functionality; only limited further increases in head count.dWill depend on type of sourced parts. eWill depend on nature of local supplier base.

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pliers up front. The consequence is that they pay higher prices over years.”

ManufacturingWhile all major international OEMs and suppliers have localized some of their production in China, the suppliers have established particularly wide production networks. For example, one supplier of suspension and power train modules has built up a network of some 20 production sites, which are coordinated centrally by a corporation set up to direct the network and identify synergies within it.

Thanks to China’s massive automotive market, which al-lows carmakers to produce very large volumes of each model, the benefi ts of scale are signifi cantly higher there than in the other BRIC countries, especially India and Russia, although they do not yet reach triad market lev-els. Meanwhile, China’s factor-cost advantages, including low wages, do not make up for the country’s higher costs in the areas of quality assurance and logistics. Taking all these conditions together, automotive production costs slightly more in China, on average, than it does in the tri-ad markets. Moreover, whatever is produced by localized foreign OEMs and suppliers goes almost entirely to meet demand in the Chinese domestic market. Almost none of it is exported, mainly because of the scale of internal de-mand and the higher logistics costs for exports.

Some companies have begun carefully replacing some of their automated manufacturing processes with manual ones—especially processes that have little impact on quality and allow the company to reduce its investment in machinery and tools. For example, one European OEM has, at least in part, switched to manual production processes for body welding, scribing of the chassis num-ber, and wheel mounting—in which minor variances in the process are unlikely to have a signifi cant impact on the product’s fi nal quality—but has kept quality-sensitive activities, such as merging the body with the power train and postproduction testing, as automated as in the com-pany’s home-country plants. (See Exhibit 13.)

SalesForeign automotive companies’ sales operations in China have almost reached the deep localization levels of their sales operations in Brazil, despite these companies’ much shorter history in China. As in Brazil, most of the major foreign OEMs in China have widespread sales networks that serve not only tier 1 cities but also smaller, third- to

fi h-tier cities such as Benxi, Kashi, and Wenchang. In contrast, the networks of smaller and premium foreign OEMs still focus only on fi rst- and second-tier cities.

To meet Chinese consumers’ demand for “high status” vehicles, OEMs have been extending their cars’ wheelbas-es, adding exterior chrome, and installing entertainment and control equipment in rear seats, where the car’s own-er can access it while the car is being driven by a chauf-feur. A number of OEMs, including premium carmakers, now off er such long-wheelbase versions of their products in China. Localization front-runners go one step further and develop China-specifi c vehicles rather than modify-ing existing designs. Market leader Volkswagen recently launched two models specifi cally developed for China: the New Bora and the Lavida. Both are based on the plat-form of the former Volkswagen Bora, but their new de-signs are geared specifi cally to Chinese tastes and they target two diff erent segments: consumers with conserva-tive tastes and consumers with sportier tastes.

Recognizing the growing signifi cance of the Chinese mar-ket and its specifi c needs, foreign companies have begun testing their new sales approaches in China rather than in their home markets. For example, some OEMs have es-tablished innovative incentive schemes for their dealers. One Japanese OEM pays out part of the margin for sales performance directly to the dealers’ employees, including the general manager and the sales, service, parts, and fi -nancial services staff .

Leading foreign OEMs in China have developed sophisti-cated off erings involving not only sales of new vehicles but also a er-sales services, fi nancial services, and used-car businesses. Some examples:

A◊ er-Sales Services: A North American OEM has estab-lished a layered, spun-off a er-sales network with ser-vice satellites.

Financial Services: ◊ Most European OEMs have devel-oped extensive fi nancing and insurance off erings.

Used-Car Businesses: ◊ A Japanese OEM is supportingits dealers by investing in their used-car businesses.

Like the major international OEMs, all the leading inter-national suppliers now have localized production capac-ity in China. Most have started to serve local Chinese

W BRIC A M

OEMs as well as localized foreign ones. However, their sales to those local OEMs remain far smaller than they could be. Although one European supplier of electronic parts now sells 60 percent of its production to local Chi-nese OEMs, this is an exception to the rule. Most localized foreign suppliers sell on average just 15 percent of their production to local Chinese OEMs—though a share of more than 50 percent would more accurately refl ect the number and purchasing power of local OEMs.

Expanding sales to local Chinese OEMs clearly represents a large opportunity for localized foreign suppliers. Sev-eral suppliers are adapting their existing product designs

to local requirements by reducing their specifi cations and contents, using lower-cost materials that can be sourced locally, and transplanting low-cost designs from other RDEs to sell to local Chinese OEMs. Chinese OEMs are especially interested in international suppliers’ engineer-ing and design capabilities, as well as their quality perfor-mance. As one of our interview partners—an internation-al supplier localized in China—put it: “We won contracts with the local OEM only because we could help defi ne its so-far nonexistent requirement specifi cation.”

Regulations in China have required foreign OEMs and suppliers to form joint ventures with local companies.

Body welding

ChinaGermany

Testing on the rollerdynamometer

ChinaGermany

Window mounting

ChinaGermany

Mounting

ChinaGermany

Scribing thechassis number

ChinaGermanyChinaGermany

Layout of a typicalautomotive plant

Selected steps in car manufacturing

Automated

s

s

s

s

ss

s

s

Semiautomated

m

m

m

mm

m

Manual

Level of automation

High

Medium

Low

Quality relevance

Body shop

Paint shop

Assembly Delivery

1. Liing of body part

2. Positioning3. Welding

1. Delivery of window to preassembly table

2. Application of glue3. Mounting of

window

1. Delivery of body2. Application of

scribing head3. Scribing of

chassis number4. Removal of

scribing head

1. Testing of◊ Driving

performance◊ Brakes◊ Controls◊ Electrical

functions2. Analysis of

failure data

1. Cockpit mounting

2. Wheel mounting

Merging the body withthe engine (“marriage”)

1. Lowering of body

2. Raising of platform

3. Joining with screw rod

a

a

a

aaa

a

a

a

a a

a

a a

a

aaa

aaa

a

aa

aa

a a

a

Exhibit 13. Converting Noncritical Processes from Automated to Manual Can Cut CostsProcess Overview

Sources: Company interviews; BCG analysis.

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However, many local joint-venture partners also repre-sent their partners’ suppliers, customers, and competitors at the same time, which generates confl icts of interest. For this reason, some companies question the merits of further localization. To manage their joint ventures suc-cessfully, foreign companies in this situation need to re-think them and adopt the following principles:

If possible, engage in more than one joint venture to ◊ avoid power plays and overdependence on a single partner

Ensure clarity and alignment on long-term strategic ◊ objectives

Clearly defi ne which joint-venture partner takes the ◊ lead in which role

Set up pragmatic escalation processes to solve strategic ◊ and operational disputes

Staff the joint ventures adequately from the board to ◊ the operational level

Be prepared for ongoing negotiation and regular re-◊ evaluation of each partner’s contribution to the joint venture

All four BRIC automotive markets off er opportunities. The art lies in determining which functions to localize in each country, and to what extent.

W BRIC A M

Automotive companies’ strategic approaches to the BRIC markets diff er tremendously. In general, companies have adopted de-tailed strategies for each BRIC country and each function in which they are active.

However, in our experience, such strategies are o en fl awed. For instance, some companies focus their invest-ments not on the countries that off er the highest poten-tial profi ts but on those in which their own operations are already most or least localized. But any investment strat-egy that is based on the company’s current pattern of lo-calization, rather than on a carefully thought out cross-BRIC strategy, is unlikely to realize the BRIC countries’ opportunities for growth and profi t. On the other hand, a strategy that focuses on standardized cross-BRIC ap-proaches is equally risky, because diff erent levels of local-ization require diff erent forms of investment.

In our view, companies can optimize their investment ac-tivity across the BRIC markets by focusing specifi cally on the “sweet spots” of localization. We recommend allocat-ing investments in each of the BRIC automotive markets on the basis of the following criteria:

The Market’s Current Degree of Automotive Industry ◊ Localization: How localized are foreign auto compa-nies’ R&D, sourcing, manufacturing, and sales in com-parison with their activities in the other BRIC coun-tries?

The Outlook for Profi t Opportunities: ◊ How will profi t drivers, such as market growth, cost-competitiveness, and the availability of local talent, evolve?

Future Market Size: ◊ How big will the market be when the investment becomes eff ective?

With these criteria in mind, it is critically important to de-average the localization process. Companies need to se-lect the particular functions in each of the BRIC countries that off er the highest potential benefi ts, as well as the particular BRIC countries that off er the best prospects for localizing functions. On the basis of our extensive re-search and fi rsthand experience, we have developed a matrix of investment attractiveness by country and func-tion. (See Exhibit 14.) Let’s look at the four BRIC markets individually.

Brazil, like India, is a prime choice for localizing R&D be-cause it has very specifi c customer requirements, highly qualifi ed local capabilities, and a relatively low risk of in-tellectual property loss or employee attrition. Given the relative stability of the Brazilian market and its likely fu-ture growth, OEMs and suppliers should reinforce their current positions in the country and invest in improving their cost positions even further. They should also con-sider the right balance between automated and manual processes in order to cope with the market’s volatility in terms of model demand. To avoid overcapacities, compa-nies should invest in expanding organically as well as in identifying and addressing all capacity bottlenecks in ex-isting plants and sales networks.

In Russia, with its highly unpredictable market, compa-nies should carefully consider investment decisions. Com-panies should also try to make their production and sales capacities more fl exible—for example, by importing best practices in fl exible manufacturing from Brazil.

Although India is currently the second smallest of the BRIC automotive markets, its expected fast growth and entry barriers against imports qualify it as a good target for further investment, especially in R&D and manufac-

Prioritizing Investments Across the BRIC Markets

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turing. However, for foreign auto companies to profi t from local potential, they must undertake further localiza-tion—for example, by using local R&D capabilities to de-velop ultra-low-cost opportunities both for India and for global markets. To compensate for the relatively small scale of production, India could be considered as an export base, especially for low-cost components or ve-hicles.

Among the BRIC countries, China should be automotive companies’ primary target for low-cost sourcing. It off ers a lower risk of currency fl uctuations than the other three countries, stricter directives mandating local sourcing, and a much larger number of local suppliers that already perform at high levels and have the potential to ramp up production signifi cantly. China’s massive and growing market also makes it a prime contender among the BRIC countries as a site for both manufacturing and sales. Chi-na’s status as the current and future BRIC stronghold dic-

tates that auto companies should make it the primary fo-cus of their investment strategies. However, to maintain a competitive edge there in view of the Chinese market’s rapid growth and keen price competition, companies will need to move quickly to further localize, expanding fi rst their sales and a er-sales networks and potentially also their production facilities.

While China’s massive market makes it a particularly at-tractive locale for automotive sales, all four BRIC auto markets are more promising than most other markets. All of them should therefore be considered worthy targets for possible investment in sales infrastructure.

Once a company has determined its investment focus by country and by function, the next step is to decide pre-cisely where to invest and how to embed those invest-ments in eff ective cross-BRIC strategies.

Exhibit 14. Some Combinations of Functions and Countries Are Particularly Attractive

Sources: IHS Global Insight, November 2009; Economist Intelligence Unit; IMD World Competitiveness Yearbook; World Economic Forum, The Global Competitiveness Report 2008–2009; BCG analysis.

Functions Brazil China India Russia

R&D

Very attractive thanks to experience and need for country-specifi c models

Attractive as long as employees can be retained

Attractiveness lies primarily in India’s IT specialists

Lack of country-specifi c consumer needs makes R&D relatively unattractive

Sourcing

Local-for-local sourcing viable owing to trade barriers; currency makes local-for-global diffi cult

Very attractive owing to import barriers, large number of suppliers, and low factor costs

Attractive owing to low factor costs, but local-content requirements are low

Less attractive owing to small number of suppliers, relatively low quality, and currency risk

Manufacturing

Attractive regional hubs, skilled labor, and attractive cost position

Very attractive, as large local market can outweigh challenging cost situation

Very attractive owing to large and growing labor force, although local market is relatively small

Comparatively high labor costs, but presence useful as hedge against external factors

Sales Moderate growth

locally, but good potential for exporting to nearby markets

Largest BRIC market by far—and expand-ing relative to others

Very strong growth, but market is relatively small

Hardest hit by crisis, but likely to make a strong recovery

Most attractive combinations of functions and countries.

W BRIC A M

For many automotive companies, developing an integrated cross-BRIC strategy will be a new exercise. To date, companies have tend-ed to approach the BRIC markets opportunis-tically rather than systematically, and to con-

sider them individually rather than as elements of a global strategy. To arrive at an integrated cross-BRIC strategy, companies must take two important steps:

Evaluate the company’s current localization profi le ◊ across the BRIC countries, both in its own right and in comparison with competitors

Develop an optimal localization profi le on the country ◊ and function levels

Evaluating Current Localization Profiles

To assess the present status of a company’s localization in the BRIC markets, it is useful to apply a systematic framework. (See Exhibit 15.) We have conducted this evaluation for 49 automotive companies across the four BRIC countries and the four relevant functions. Our anal-ysis revealed that most of these companies follow one of four patterns of localization—BRIC champion, country champion, function localizer, or centralist—while one-quarter of them may be considered selective opportunity seekers, since they do not exhibit a clear pattern.

Only 8 percent of the companies we profi led are BRIC champions—companies that have achieved deep localiza-tion in all four BRIC countries. For example, one German supplier has established the following capabilities:

In Brazil, it has seven plants and runs a global suppli-◊ er-development program that enables the company’s

Brazilian suppliers to provide their products to all the company’s worldwide plants

In Russia, it participates in a local joint venture that ◊ has produced emissions control systems since 1995, selling principally to local OEMs

In India, it has engaged in local production since 1952 ◊ and currently operates 11 plants, exporting some 20 percent of their production; it also has a technical cen-ter that provides so ware and engineering solutions for locations in some 15 countries

In China, it operates 14 branch offi ces, seven joint ven-◊ tures, six trading companies, and four R&D centers

To extend their globalization further, BRIC champions such as this company could consider creating global cen-ters of competence for R&D, sourcing, and manufactur-ing, as well as enforcing the sharing of best practices across the company.

The largest proportion of companies (45 percent) are country champions—companies that focus their localiza-tion eff orts on one or two BRIC countries. For example, one supplier has no major activities in India or Russia but is strongly localized in Brazil and China.

In Brazil, where the company has been present since ◊ 1978, it operates 11 plants and two R&D centers, ex-porting some 20 percent of its production; it also does local development of products for production outside Brazil

In China, which it entered in 1996, it operates three ◊ plants and two R&D centers; local customers, includ-

Formulating a Cross-BRIC Strategy

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ing Chery, Geely, and Great Wall Motors, purchase more than half of its production

Companies in the country champion category need to re-view their current degree of localization country by coun-try and ensure the exchange of best practices from coun-tries in which they are more localized to those in which they are less localized.

Another 14 percent of the companies we evaluated are function localizers—companies that focus on localizing cer-tain functions. For example, one Japanese OEM heavily localizes its sourcing and sales in the BRIC countries while keeping local R&D under tight control from headquarters and applying standard Japanese production processes.

In R&D, all the company’s centers outside Japan off er ◊ only technical support and development that involves minor adaptations; they do not have research capa-bility

In sourcing, the company localizes signifi cant shares of ◊ its global spending in the BRIC countries (for instance, it sources in China fully 85 percent of the parts and

materials it needs for products for the Chinese market, while it sources in India some 75 percent of its spend-ing for new models that it produces in that country); it sources primarily from localized Japanese suppliers with which it has long-term relationships

In manufacturing, the company produces high vol-◊ umes in all four BRIC countries, generally employing standard production processes and high degrees of au-tomation

In sales, the company operates extensive networks ◊ that serve a number of third- to fi h-tier cities across the BRIC markets

Companies in the function localizer category need to re-view their current degree of localization of each function in each country, and to develop clear policies governing the eff ective distribution of roles between the company’s headquarters and local hubs.

Just 8 percent of the companies we evaluated are central-ists—companies that serve the BRIC countries mainly from their headquarters. One European premium OEM

BRIC champion

Countrychampion

Functionlocalizer

Description Percentage ofcompanies1

Localization pattern Samplelocalization curves

Centralist

Selectiveopportunityseeker

8

45

14

8

24

Deeply localized in all BRIC countries at settler level or higher

Localized primarily in one or two BRIC countries, oen China or Brazil; less present in Russia

More localized in some functions—oen manufacturing or sales—than in others

Localized to a low-to-medium degree—at or below the explorer level—in all BRIC countries

No discernible localization strategy (typically true of suppliers rather than OEMs)

Exhibit 15. Automotive Companies Follow Five Patterns of Localization

Sources: BCG localization database; BCG analysis.1Within the BCG study group.

W BRIC A M

takes this approach, maintaining only minor operations in the BRIC countries.

In Brazil, the OEM serves the market by means of im-◊ ports from its European and North American plants

In Russia and India, it operates local CKD plants that ◊ produce fewer than 10,000 units per year; it also main-tains an exclusive sales network in each country but conducts no signifi cant R&D or sourcing activities there

In China, it has a large CKD plant producing 50,000 ◊ units annually, as well as a sales network focusing on tier 1 and tier 2 cities; but it conducts no signifi cant R&D or sourcing activities

Companies that operate as centralists need to challenge their current degree of centralization and explore the po-tential advantages of extending their localization in spe-cifi c areas.

Almost one-quarter of the companies we evaluated (24 percent) are selective opportunity seekers—companies that either have no overall localization strategy or have one that is not evident. For example, one supplier appears to be focusing on diff erent combinations of countries and functions.

R&D in Russia. ◊ The supplier operates an engineering offi ce in Novgorod, where some 15 engineers develop technological solutions based on orders from the Ger-man headquarters.

Manufacturing in Brazil. ◊ The supplier operates plants in Campinas, Camaçari, Porto Real, and São José dos Pinhais to produce axes, suspensions, and body parts. The company also does local production in the other BRIC countries but is less localized there.

Sourcing from India and China.◊ In India, the supplier runs a global sourcing offi ce in Bangalore for automo-tive components. In China, its sourcing activities have achieved a local sourcing share of close to 70 percent.

Automotive companies that have no clear pattern of lo-calization can benefi t by reevaluating the attractiveness of their localization opportunities by country and func-

tion and then developing a master integration map and strategic plan.

Developing an Optimal Localization Profile

Once a company has identifi ed its current BRIC localiza-tion profi le, it can be helpful to compare that profi le with competitors’ profi les in order to identify areas where stra-tegic changes may be needed. However, more is not nec-essarily better: we do not generally recommend that all automotive companies localize all four functions in all four BRIC countries.

To decide which functions to localize to which degree in which BRIC countries, companies need to address certain core issues relevant to each function. The goal in each case is to achieve the optimal balance between taking a decentralized, market-specifi c approach and achieving global synergies.

In localizing R&D, automotive companies that are expe-rienced in conducting multinational R&D networks stress that it is crucial to assign clear local and global R&D re-sponsibilities that take advantage of each country’s par-ticular R&D expertise. Currently, the four BRIC countries have highly diverse areas of R&D focus. (See Exhibit 16.) So, for instance, it might make sense for a company to dis-tribute its R&D as follows:

So ware development in India◊

Electronics applications in China◊

Alternative fuel technologies in Brazil◊

Of course, these BRIC specializations would need to be aligned with the competencies in the company’s existing R&D centers.

A er having identifi ed the focus of R&D in each BRIC country, the company must defi ne the role of each local R&D center as one of the following: an off shore unit, an engineering nucleus, a local engineering hub, or a center of competence. It is generally not advisable for a center to be tasked with playing more than one of those roles. The company must also set forth the rules and mecha-nisms governing the centers’ interactions with the com-pany’s R&D headquarters.

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In sourcing, companies should identify their primary sourcing needs and determine which countries or regions off er the best combination of high quality and low cost for each category of sourced items. (See Exhibit 17.)

Armed with this awareness, a company might choose, for example, to localize its network of sourcing offi ces as follows:

Brazil for processed metal◊

India for IT and engineering services◊

China for electric modules and electronics◊

Russia for selected body parts◊

A er deciding where to locate each sourcing offi ce and what it should source, it is important to design a common blueprint and governance tools to link the offi ces across

functions and regions. (See the sidebar “Governance Tools Play a Key Role in a Worldwide Sourcing Network.”) At the same time, headquarters should ensure that each sourcing offi ce’s organization, available functions, and skills refl ect country-specifi c requirements.

In manufacturing, as noted above, costs are higher in most BRIC countries than in automotive companies’ home countries—Brazil being the one exception. To keep costs as low as possible, companies need to take full advantage of the following cost levers, adapting them to local condi-tions in each location: exploiting scale advantages; ben-efi ting from low-cost labor (for example, by performing noncritical processes manually, as discussed above); care-fully managing sourcing (for example, by conducting ex-tensive supplier-development programs); and applying proven quality-assurance techniques.

In designing a BRIC-based manufacturing network, com-panies should consider adopting one of the following

India

◊ Special vehicles◊ Electronic controls◊ CAD and modeling◊ Body design

◊ Cars designed for RDEs◊ Electrical components◊ Body and exterior◊ Vehicle design and

prototyping◊ Testing◊ Battery technology◊ Electronics

◊ Minicars and small cars◊ Soware◊ Embedded control systems ◊ CAD and virtual manufacturing◊ Materials

◊ Small SUVs◊ B-segment cars◊ Flex-fuel and related

combustion technology◊ Low-tech electronic parts◊ Small engines◊ Suspension◊ Materials

Brazil China

Russia1

Exhibit 16. R&D in the BRIC Countries Focuses on Different Products and TechnologiesRepresentative Areas of R&D Specialization

Sources: Corporate information; company interviews; BCG analysis.1Russia is not yet at the level of the other BRIC countries. The categories cited are those in which Russia is currently closest to achieving competitive parity.

W BRIC A M

India

◊ Batteries◊ Flat, cast, and

welded steel ◊ Glass◊ Paints◊ Plastic fittings◊ Stamping parts

◊ Brakes◊ Cabling and wiring◊ Electronic motors◊ Forged or die-casting

engine parts◊ Fuses and switches◊ Glass◊ Heating systems◊ Hydraulic parts◊ Plastic and rubber parts◊ Radios◊ Speakers◊ Wheels and seat parts

◊ Bolts◊ Cabling and wiring◊ Cast steel◊ Crankshas◊ Gearboxes ◊ IT and engineering services◊ Lamps◊ Weld nuts

◊ Aluminumparts

◊ Brakes◊ Crankshas◊ Cylinder blocks, valve

heads, and crankcases◊ Engine pistons◊ Gearboxes◊ Injection pumps

Brazil

China

Russia

Value of 2008 exports of automotive components

$9.1billion $3.0

billion

$30.0billion

$1.7billion

Exhibit 17. Sourcing in the BRIC Countries Focuses on Different Parts and TechnologiesPrincipal Automotive Exports and Representative Sourcing Categories

Sources: UN Comtrade Database; corporate information; company interviews; BCG analysis.

The backbone of every global sourcing strategy is a strong network of local sourcing offi ces. Typically, these offi ces are charged with implementing fi ve core functions: pur-chasing, quality assurance, logistics, product develop-ment, and supplier development. The allocation of func-tions may vary from country to country, depending on the kinds of commodities being sourced and the maturity of the local supply base. For example, a Japanese OEM that sources in all four BRIC countries has a ratio of one sup-plier-development employee per purchasing agent in Ja-pan, a ratio of two to one in China, and a ratio of three to one in India, refl ecting the greater need for supplier devel-opment in the BRIC countries than in Japan.

To coordinate such a global sourcing network, companies need a set of specifi c governance tools and techniques. Six types of tools have proved particularly eff ective:

A shared sourcing strategy developed jointly between ◊headquarters and sourcing offi ces, with local and global targets clearly specifi ed

Weekly conference calls among all sourcing offi ces and ◊sourcing headquarters to make major decisions

Weekly conference calls between sourcing offi ces and ◊sourcing headquarters to align organizational topics

Weekly or every-other-week functional conference calls ◊to review supplier panels

Global information sharing to exchange supplier infor- ◊mation and RFP documents

Global progress-tracking documents ◊

Governance Tools Play a Key Role in a Worldwide Sourcing Network

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three approaches, depending on whether their primary goal is to secure volume-related cost advantages, maxi-mize their localization, or achieve high quality at low cost:

The Global-Scale Network. ◊ To secure volume-related cost advantages, a company should consider establishing one to three large plants in the BRIC countries to sup-ply markets worldwide. One Korean OEM has made India its core manufacturing hub for low-cost minicars, serving all RDE markets from there and thus minimiz-ing investment and maximizing scale eff ects.

The Broken-Chain Network. ◊ To maximize a company’s localization, it should consider distributing pre- and fi -nal assembly in diff erent countries. For example, one Indian supplier is delivering relatively simple products from India and highly complex products—together with customer support—from the triad markets. This approach allows the company to realize the advantag-es of low factor costs without compromising quality or service.

The Isolated-Empire Network. ◊ To achieve high quality at low cost, a company should consider serving world markets from several regional hubs. One Japanese OEM has been able to shi the production of its pick-up-truck models from high-cost Japanese plants to plants in several RDE countries while maintaining its strict quality standards, thus off ering products with Japanese performance and quality at competitive pric-es in the RDE markets.

These three approaches represent diff erent forms of a de-centralized but synergistic network, ensuring that opera-tions in the BRIC markets profi t from those in the triad markets and vice versa.

In maximizing sales, the fi rst requirement is to gain an in-timate knowledge of local market tastes, preferences, and requirements so that products can be adapted according-ly. As noted above, consumers’ automotive preferences vary dramatically across the BRIC markets. (See Exhibit 18.) And taste is not the only issue. As one of our inter-view partners from a European OEM put it: “Not only are consumers’ tastes highly diff erent, but car buyers in all BRIC countries, and especially in Russia and China, may consider the manufacture and sale of a car that was orig-inally developed for another BRIC country as an insult.”

It is clear that there can be no such thing as a single, ho-mogeneous “BRIC car.” On the contrary, the diff erences in automotive tastes are much more pronounced among the BRIC countries than among countries in the triad markets. Brazilian consumers demand sporty hatchbacks, Russians want Western sedans and SUVs without adapta-tions, Indians require ultra-low-cost minicars, and the Chi-nese prefer luxury-style sedans with fl air. The challenge is to produce these various models at suffi cient scale to make them economically viable over the next few years, while the individual BRIC markets are still developing and before each one becomes large enough to justify the design and production of an individual, nonstandardized product. One possible way to meet that challenge is to develop a common platform that allows multiple local adaptations for BRIC markets, using local partners to help implement that solution.

For example, a European OEM has developed a vehicle platform for low-cost countries with a standard wheel-base of 2,630 millimeters and a standard track of 1,480 millimeters. To cater to individual market requirements, the company not only has made local product adapta-tions but also has undertaken country-specifi c branding and marketing, and has engaged in joint ventures with lo-cal partners where appropriate. To satisfy Brazilians’ pref-erence for sporty hatchbacks and small SUVs, the com-pany introduced, in addition to its sedan, a hatchback model and a model that resembles an SUV and is mar-keted as a sporty adventure car. In Russia, the company produces the sedan without major adaptations, collabo-rating on production and sales with a local partner and enjoying strong government support. The model is posi-tioned to compete successfully against top-selling local vehicles. To meet Indians’ need for low-cost products, the OEM redesigned the vehicle to pare away 15 percent of its costs. In China, the car is scheduled for production in 2010; there, too, the OEM will work with a local partner.

A er a company answers the core strategic questions for each key function and designs an overall BRIC strategy, the next step is implementation. In that eff ort, cross-mar-ket learning through the exchange of best practices can be invaluable in helping to get strategies “on the road.”

In the course of our study, we identifi ed many best prac-tices in every BRIC country. Most of them are found in only one BRIC country, despite the fact that transferring them to other countries could create value. Only rarely

W BRIC A M

are best practices not transferable because of local condi-tions. In almost all cases, companies can benefi t signifi -cantly from transferring best practices. For example, a European OEM holds regular dealer conventions in Bra-zil to identify issues on both sides and improve knowl-edge and data transfer. The company then convenes small work groups, composed of representatives from

both the OEM and the dealerships, to address each issue. This approach could be usefully applied in China, India, and Russia as well.

India

Western sedans and SUVs,

RDE-made sedans◊ Western sedans and

SUVs: no adaptation except kits for cold weather and rough roads

◊ RDE-designed sedans: robust technology, lower safety and emissions standards, less equipment

Examples: Lada Priora, Toyota Camry

Midsize and larger sedans◊ Extended wheelbases ◊ Luxurious rear-seat appoint-

ments (for larger vehicles)◊ Large trunks◊ Comfort and luxury items, such

as diode lights and chrome◊ Entertainment equipmentExample: Volkswagen Passat

Minicars◊ Ultra-low-cost vehicles ◊ Extra stability, such as “dog bars”1

◊ Improved capabilities for flooded roads

◊ Greater practicality, such as larger interior spaces and trunks

◊ High-temperature gear, including stronger air-conditioning systems

Example: Tata Nano

“Carro popular”—1.0-liter hatchback

◊ Ethanol and flex-fuel, no diesel

◊ Off-road-style vehicles and small SUVs

◊ B-segment car family◊ Hatchbacks rather

than sedans◊ Sporty pickupsExample: Chevrolet Celta

Brazil

China

Russia

Exhibit 18. Consumers in the BRIC Countries Demand Different Models

Sources: Corporate information; company interviews; companies’ annual reports; BCG analysis.1An iron bar on the front end to protect the vehicle from impact during a crash with an animal.

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Throughout this report, we have identifi ed six key lessons for leveraging a company’s pres-ence across the BRIC countries.

1. Actively allocate investment spending across BRIC countries and functions. Keeping in mind the compa-ny’s overall strategy, prioritize the relevance and value of conducting each of the four functions within each of the four BRIC countries. Take into consideration the compa-ny’s current degree of localization in each area, the pros-pects for profi table development of each particularly promising combination of function and BRIC country, and the future size and growth of the market.

2. Localize R&D to take advantage of local engineer-ing strengths. For instance, a company might focus R&D in India on so ware and IT, in China on electronics, and in Brazil on metal parts and low-cost components.

3. Seek opportunities to cut sourcing costs according to individual markets’ strengths. For instance, a com-pany might focus its sourcing in Brazil on processed met-al, in India on IT and engineering services, in China on electric modules and electronics, and in Russia on select-ed body parts.

4. Orchestrate BRIC manufacturing to optimize cost, localization, and quality. Use the global-scale approach to profi t from volume-related cost advantages, the bro-ken-chain approach to drive localization, or the isolated-empire approach to improve quality and cost.

5. Adapt standard designs to meet local needs. Benefi t from scale and off er tailored products by using standard platforms with signifi cant product adaptations, local part-nering, and market-specifi c sales and marketing con-cepts.

6. Accelerate localization by transferring best prac-tices among BRIC countries. Identify and transfer all applicable best practices across all functions and loca-tions.

A fi nal note: Although this report focuses on the BRIC markets because of their size and potential for helping auto companies recover sales volumes lost to the crisis, it is important to recognize that our analysis of eff ective strategies for achieving deep localization in the BRIC markets can be applied with equal success in other rap-idly developing economies, such as Argentina, Indonesia, Iran, Mexico, or Thailand. In all such markets, unique constellations of local capabilities and market tastes re-quire individually tailored approaches. That said, the smaller sales volumes in some RDE markets can exacer-bate scale-related localization challenges. The BRIC coun-tries, in which localization is relatively advanced, can serve as a valuable source of best practices and potential synergies with other RDE markets.

Six Key Lessons from the BRIC Markets

W BRIC A M

For Further Reading

The Boston Consulting Group pub-lishes other publications on captur-ing global advantage and on the au-tomotive industry that may be of interest to readers of this report. Some recent examples are listed here.

Batteries for Electric Cars: Challenges, Opportunities, and the Outlook to 2020A Focus by The Boston Consulting Group, January 2010

From Crisis to Opportunity: How Global Challenger Companies Are Seeking Industry Leadership in the Postcrisis WorldA White Paper by The Boston Consulting Group, September 2009

The 2009 BCG 100 New Global Challengers: How Companiesfrom Rapidly Developing Economies Are Contending for Global LeadershipA report by The Boston Consulting Group, January 2009

The Comeback of the Electric Car? How Real, How Soon, and What Must Happen NextA Focus by The Boston Consulting Group, January 2009

Winning the Localization Game: How Multinational Automotive OEMs and Suppliers Are Realizing the Strategic Potential of China and IndiaA report by The Boston Consulting Group, January 2008

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Note to the Reader

AcknowledgmentsThe authors would like to thank all the people who contributed to this report. In researching it, our multina-tional team of colleagues at BCG conducted more than 250 interviews with senior executives at the leading automotive OEMs and suppliers that are active in the BRIC countries. We spoke with high-ranking individuals at every automotive OEM, at 15 of the top 20 suppliers, and at many tier 2 suppliers—as well as at univer-sities, industry associations, and gov-ernment institutions. We are particu-larly indebted to all the people who spoke with us and generously shared their insights into the challenges of achieving deep localization. In addi-tion, we would like to thank the fol-lowing people:

The executives at the automotive ◊companies with which BCG has worked to shape their localization strategies in the BRIC markets, who kindly allowed us to include our insights from those experi-ences in this report

The project team of consultants ◊and researchers: Pascal Bruckner, Ilson Dal-Ri, Judith Eimanns-berger, Susanne Frick, Jonatas Garcia, Benjamin Gubitz, Kiyotaka Ishige, Nicole Landauer, Bernd Loeser, Karsten Meier, Tobias Mezger, Alex Mittelman, Raphael Pfältzer, Stefan Reiter, Arist von Harpe, Hadi Zablit, and Christiane Zorn

Kathleen Lancaster, for her assis- ◊tance in writing the report

Barry Adler, Gary Callahan, Kim ◊Friedman, and Sharon Slodki, for their editorial and production as-sistance

For Further ContactIf you would like to discuss our ob-servations and conclusions, please contact one of the authors:

Nikolaus S. LangPartner and Managing DirectorBCG Munich+49 89 2317 [email protected]

Stefan MauererProject LeaderBCG Munich+49 89 2317 [email protected]

You may also contact any of our se-nior industry experts:

Marcos AguiarSenior Partner and Managing DirectorBCG São Paulo+55 11 3046 [email protected]

Arindam BhattacharyaPartner and Managing DirectorBCG New Delhi+91 124 459 [email protected]

Ewald KreidPartner and Managing DirectorBCG Moscow+7 495 258 34 [email protected]

Xavier MosquetSenior Partner and Managing DirectorBCG Detroit+1 248 688 [email protected]

Christoph NettesheimSenior Partner and Managing DirectorBCG Beijing+86 10 8527 [email protected]

Georg SticherSenior Partner and Managing DirectorBCG Munich+49 89 23 17 [email protected]

This report was sponsored by BCG’s Industrial Goods and Global Advan-tage practices.

For further information about BCG’s Industrial Goods practice, please contact its global leader, Josef Rick, a senior partner and managing direc-tor in BCG’s Düsseldorf offi ce, at [email protected].

For further information about BCG’s Global Advantage practice, please contact its global leader, David Michael, a senior partner and man-aging director in BCG’s Beijing offi ce, at [email protected].

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