beyondbrics

What can emerging markets offer carmakers? The easy answer is low-cost production: Mexico and Hungary are celebrating new investments from Volkswagen and General Motors respectively.

But the factories aren’t the main story. They will mainly export to neighbouring rich countries, while four-fifths of new demand for cars will come from emerging markets. So the real challenge for carmakers is to attract consumers in the Brics and beyond – by adapting products and technology.

Take Honda, Japan’s second biggest automobile producer. Like Apple phones and Acer laptops, Honda cars are basically the same wherever in the world you buy them. The parts must be suitable for all markets – the highest common denominator wins.

On Monday the company’s head of purchasing, Masaya Yamashita, said that has to change. A Honda to be sold in India need not meet US requirements – and the company should start using cheaper parts where possible. That could mean more sourcing from suppliers in emerging markets. Costs for Honda’s Fit (Jazz) – a hatchback car available since 2001 – could come down by between 20 and 30 per cent, Yamashita said, adding:

The stereotype used to be that the cheap prices came from lower quality, but that’s no longer the case. We need to operate with a brand new standard for components.

Yamashita spoke enviously of the speed with which Honda’s rival Hyundai has adapted to new markets. And, as if to emphasise the point, this week Hyundai took a further step towards localisation, launching its first Russian car factory along with the Solaris, a car specifically for Russia.

The Solaris’s heaters, mirrors and wipers are designed for the “long and bitterly cold Russian winter” (raising the question why the model is named after the sun). It hopes to compete with similarly-cheap models from Lada and Renault.

But another carmaker, Nissan, has gone further. It announced on Wednesday that it is sharing its battery technology – crucial for the future of electric cars – with a Chinese partner. Some analysts fear that such moves jeopardise traditional carmakers’ big advantage: their intellectual property.

However, Nikolaus Lang of Boston Consulting Group says that weak international property rights should not deter carmakers from localising their research and development (R&D) activities. “The relevance of IP [intellectual property] protection has been overestimated in recent years,” he says. “Over the last decade, the Chinese government has understood that either they get IP under control or they have a big problem.”

A BCG report published earlier this year called for companies to take advantage of different countries’ research strengths:

For instance, a company might focus R&D in India on software and IT, in China on electronics, and in Brazil on metal parts and low-cost components.

(Russia is deliberately not mentioned: its R&D potential is limited by rising wages for engineers, who in any case don’t have much auto experience.)

BCG says carmakers should aspire to make breakthroughs in one emerging market and then spread them to others.

That’s an exciting suggestion of how emerging markets might, ahem, drive the global economy.

Related reading:
Nissan adopts an alias to lure Chinese consumers, beyondbrics