Industry Missing Full Potential of China, India

Many auto makers and suppliers are failing to realize the cost-savings bonanza and tremendous growth they initially envisioned in establishing operations in China and India, a new report from The Boston Consulting Group concludes.

“Despite the fact they have been there large and long, a lot of them face some serious difficulties along the value chain,” says Nikolaus Lang, a partner at Boston Consulting and lead author of “Winning the Localization Game.”

Based on in-depth interviews with more than 40 European, Japanese and North American automotive companies, the study highlights a host of challenges — from small research-and-development bases and limited sourcing volumes to a lack of locally adapted production sites — that have prevented manufacturers from taking full advantage of potential cost savings and resources offered by China and India.

These challenges, in turn, have constrained their efforts to become more competitive globally. The report's findings underscore the long road Western and Japanese OEMs and suppliers must travel before establishing truly localized operations in the countries.

For example, the industry was right to assume it could take advantage of the growing talent pool in both countries by establishing local research and development centers, Lang says.

Last year, China graduated 1.8 million trained engineers and India conferred another 450,000. Boston Consulting expects those numbers to increase at compound annual rates in the double digits.

But many still require training, and the industry has tried to answer that dilemma. Toyota Motor Corp., for instance, established its Center of Industrial Development and Environmental Governance with Tsinghua University in 2005 and planned to invest $5.3 million there over three years. Its goal is advanced education and on-the-job training.

In India, General Motors Corp. continued to build its R&D strength in Bangalore last year by establishing a joint venture with the Indian Institute of Technology Kharagpur to carry out joint research in the areas of electronics, controls and software, as well as create a new educational curriculum leading to a post-graduate degree in those fields.

Other auto makers have launched similar efforts in the two countries.

But without identifying companies, Lang says manufacturers are failing to realize the full potential of their R&D centers because operations remain relatively small, command little autonomy and work on few global projects.

The Boston Consulting study found 55% of local R&D centers exercise low autonomy and are granted only low levels of global project responsibility. The firm considers only 10% of R&D operations “centers of competence,” where autonomy is high and project responsibility is worldwide.