Emerging Markets Lure Stalled Auto Makers With Promise of Double-Digit Growth

No wonder global auto makers are paying more attention to emerging markets. PriceWaterhouseCoopers reports the regions accounted for 47% of global automotive production in 2009 and forecasts that figure will rise to 56% by 2016.

“Emerging automotive markets are the most important markets on Earth,” says Christopher Richter, a senior analyst with CLSA Asia-Pacific Markets in Tokyo.

There is no agreement on exactly what countries qualify, but the best-known and most important are the so-called BRIC nations – Brazil, Russia, India and China. Additional members on many lists include Mexico, Thailand, Indonesia and South Africa.

“The center of the automotive universe is shifting quite rapidly away from the established markets of North America and Europe,” says John Humphrey, senior vice president-global operations at J.D. Power and Associates. “It’s the Asia/Pacific market that is turning into the global powerhouse.”

Koji Endo, managing director-Advanced Research Japan, says global auto makers’ profitability in the three major mature markets of Japan, the U.S. and Europe, is declining. “The share of small cars in almost every market is rising very fast, so (car companies’) market mix is suffering and they must look elsewhere to make money.”

Atop every global auto maker’s list of most promising markets is China, which surged past the U.S. this year to become the largest vehicle market in the world. Sales there have soared from a relatively modest 2.3 million units in 2001 to estimates as high as 17 million in 2010, with a J.D. Power’s forecast calling for 34 million in 2020.

“In the next half decade, China will account for half the growth in global automotive demand, while the U.S. will get maybe 12%,” says Richter.

“And the next biggest emerging markets are Brazil, which will probably pass Germany this year and become the world’s fourth-largest auto market with sales well over 3 million vehicles, and India, now the world’s fastest-growing auto market.”

Toyota Etios developed for India may be sold in other emerging markets

Endo agrees. “The main automotive battleground today is definitely China,” he says. “And next are India, Brazil and maybe Thailand.”

General Motors Co. and Volkswagen AG currently lead the pack of foreign auto makers in China, while Hyundai Motor Co. Ltd. is in third place.

Says Richter: “In China, Japanese auto makers are significant, but more on the margin. Toyota (Motor Corp.), Nissan (Motor Co. Ltd.) and Honda (Motor Co. Ltd.) each have a market share (of) around 6%. And the recall mess didn’t help Toyota at all.

“(However), standing behind all these foreign makers is a Chinese partner with ambitions for its own brands,” he warns. “It is harder to be nimble when all major decisions have to be negotiated with a partner who may have different objectives.”

Richter also emphasizes that “Chinese national auto makers are making serious inroads, as well.” In Brazil, Anfavea, the association of vehicle manufacturers, predicts record sales this year of 3.4 million new vehicles, 8.2% ahead of 2009, while J.D. Power forecasts light-vehicle sales to reach 5.4 million by 2020.

The Brazilian market long has been dominated by Volkswagen, Fiat Automobiles SpA, GM and Ford Motor Co., says Endo. “Toyota, Nissan and Honda are trying hard to increase their minor share, but it is difficult for Japanese makers to establish a bigger footprint there. The market leaders are far ahead of them with popular small cars running on biofuels.”

Nissan March/Micra made in Thailand also to be built in India, Mexico and China.

India’s total light-vehicle sales through October reached nearly 2.3 million units, according to Ward’s data, up 33.2% from year-ago, and an array of auto makers are scrambling for a share.

Suzuki Motor Corp. is dominant in India, with a 54% ownership share of Maruti Suzuki India Ltd., which accounts for about 40% of passenger-car sales. Through October, the auto maker sold 745,472 units.

Hyundai Group (Kia) held second place with deliveries of 298,934 cars, and Tata Motors Ltd. was third with 220,716. These were followed by GM (76,953), Ford (69,186), Honda Siel Cars India Ltd. (53,028), Volkswagen (21,872) and Toyota Kirloskar Motor Ltd. (9,163).

Utility-vehicle maker Mahindra & Mahindra Ltd. sold only 6,391 cars in the period, but with light trucks included its total soars to 223,485, good for third place in light-vehicle sales among India’s Big Four.

The Russian market, roughly half held by domestic auto makers, is on a comeback this year after plunging 50% in 2009. The market share of foreign makers is fragmented, with Chevrolet the top-seller with a 6.1% share through October, and Kia not far behind with 5.3%, Ward’s data shows.

However, the Renault (SA)-Nissan Alliance plans to take a 50% controlling stake in national car maker OAO AvtoVAZ and with the Kremlin’s blessing, may change the market parameters. CEO Carlos Ghosn foresees vehicle sales in Russia reaching 4 million units in four years and is seeking a 40% share for the Renault-Nissan-AvtoVAZ partnership.

Southeast Asia is the private happy hunting ground of Japanese makers, which have accounted for about 90% of vehicle sales in the region for many years. Yet, nothing is certain these days for global auto makers but uncertainty.

Kota Yuzawa, a senior analyst with Goldman Sachs Japan, estimates Japanese auto makers’ share of total global vehicle sales will be 28.2% this fiscal year, ending next March 31, and 27.4% in the next fiscal year.

“The global auto market is much more competitive than it was in the 1990s and early 2000s when Japanese producers were becoming kings of the hill,” says Richter. “Ford and GM are looking a lot stronger. Volkswagen is taking advantage of a weaker euro.

“All Japanese auto executives want to talk about today are the very potent Korean makers. They are alarmed.”

Says Endo: “Some auto makers are adapting better than others. When you compare Japanese auto makers with the U.S. Big Three, Korean and European competitors, there are huge differences.

“For example, China is General Motors’ biggest market today, not the U.S., with about 30% of the company’s sales there compared to 25% in the U.S. India provides about one-third of Suzuki’s sales and around half their global profits.”

Adds Richter: “Toyota is already the leading maker in South Africa, with over 20% of the market, and Nissan is the sales leader in Mexico, having passed GM last year.”

Although the new GM is on the road to recovery and Volkswagen has ambitions to become the world’s biggest vehicle producer, Japanese auto makers still are a major force globally, moving both defensively and offensively to cope with the fast-changing times.

Nearly 60% of their global production has been shifted overseas. Major producers already have assembly plants in the main emerging markets and are beefing up their offshore production:

That isn’t all Japanese auto makers are doing to stay healthy and wealthy in a world of evolving markets.

“To make money selling small cars with sticker prices between $8,000 and $15,000, producers must have local content of at least 80% or even 90%,” Endo says. “This means relying more on local suppliers and, in many cases, can be very difficult because of tradeoffs between lower quality and lower costs and future risks of higher recalls.”

Says Richter: “The majors are sourcing more components from low-cost countries. And it’s interesting that Nissan’s March is not made in Japan anymore but imported from Thailand. If things continue like this, can plant closures in Japan be far behind?”

The analysts point out that Japanese auto makers are relieved their push into emerging markets is not burdened by the strong yen, now hovering between ¥80-¥85:$1, up 26% or more since 2007.

“The strong yen will hurt Japanese vehicle sales in the U.S. and Europe, but not much in emerging markets,” says Endo, “because most Japanese cars and trucks sold there are made there to escape the extremely high import duties of 200% and 300%.”

What’s most striking about any examination of emerging automotive markets is the overwhelming presence of China. “China is bigger than all the other emerging markets, combined, and then some,” Richter says.

This raises a question not easily answered: At what point in size and influence does an emerging market become a full-fledged industrial nation?