Road ahead: A surge in auto exports from India, China
By Jaideep Mishra, TNN |
Highlights
Comparisons are odorous, penned the Bard in the age of carriages and kings. In these days of fast cars and heady growth, it seems imperative always to learn, compare, and collect the facts! Consider, for instance, the booming automobile industry in China and India.
In terms of sheer numbers the Chinese auto industry is over five times larger. But there has been rapid growth in the auto sector in India, and further acceleration is very much on the cards. Also, while auto exports have picked speed in both the countries, auto makers in India do seem to be more export-oriented. The growth and pace of vehicular production in India and China appear likely to change the global dynamics.
A word about the changing economics of the world auto industry. As per a recent A T Kearney report, the CFRIC (cash flow return on invested capital) has declined from 7.4% in 2004 to 7% in ���05, and is almost certain to have further dropped in ���06.
After accounting for the cost of capital and inflation, it implies negative returns. So the global auto industry���especially the US majors���may well be destroying capital, on the face of legacy costs like healthcare and pensions. Hence the pressing need to shift auto production to lower-cost centres.
The other trend in automobiles is of shrinking product lifecycles. The average number of vehicles produced per nameplate has dropped 25% of late. So much so that low volume differentiated vehicles (yearly output of 50K units or less) are likely to account for 40% of US nameplates in ���08.
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This implies reduced scale economies for the major auto producers. And a large window of opportunity for both India and China to step up auto exports. After all, global auto majors do need to reduce the capital cost per car by cutting the cost of development, manufacturing and assembling with alliances and partnerships.Estimates suggest that by 2015, global auto production is likely to be $1.9 trillion, with the output at low-cost hubs put at about $700 billion. Further, the projections are that auto exports from low-cost centres would increase to $375 billion, up from just about $65 billion last year.
As for auto production in India, total output is expected to reach the $40 b mark in under a decade, up from roughly $9 billion at present, and with exports in the range of $20-25 billion. It points at 20-fold growth in automobile exports from current levels.
Meanwhile, China has grown to become the third-largest automotive market and the fourth largest auto producing nation. The 2006 figures may well reveal that China has in fact surpassed Japan as the second largest market for new motor vehicles. The export target is that by ���15, Chinese auto firms account for 10% of the global market, or $120 billion. Notwithstanding the high growth rates though, China and India remain relatively smaller players in the global auto industry.
The ground reality is that auto exports from India and China are only a fraction from those emanating from mid-sized players like Korea or Mexico, and far behind global leaders like Japan, Germany, France and the US. Also, the scope for value-addition and technological sophistication of the auto industry in both the Asian giants remains rather limited, although things seem to be improving at a fast clip with the firming up of global tie-ups with Renault and Fiat for example.
World exports of automotive products in ���05 added up to $887 bn accounting for just under 10% of all global exports. At just about 0.8% of global automotive exports, China���s merchandise remained overwhelmingly dominated by sales of low-tech replacement items such as wheels, tires, batteries, and body parts for which the demands on quality offerings and design skills were generally low.
Over the next decade, both China and India seem likely to have considerable impact in certain markets and product segments such as small cars, vans and light trucks in the Asia-Pacific region, and in labour-intensive auto parts quite throughout the world. Besides, the outsourcing of information technology and engineering has been relatively tentative in autos compared to the practice in many other industries, where it increasingly includes quite small companies.
Already, GM, Ford and leading suppliers such as Delphi and Bosch have opened research and development centres here in India and in China, employing thousands of engineers and scientists, many of them with PhDs and years of the most sophisticated work and design experience.
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Most of their work supports development of the local market, but the investments, particularly in India, increasingly moving towards true arms-length outsourcing as well. A study by the McKinsey Global Institute says that in automotive engineering and R&D, 42% of total employment could possibly be offshored. The trend may well be that more knowledge work of the majors would shift to India and China.
A caveat is in order though. The exact magnitude of trade in auto materials, parts and components may be difficult to ascertain when double-counting can be rife, with tens of thousands of parts involved in assembly. Still, the road ahead does appear to be rapidly expanding auto exports from China and India.
The way to go is for a relatively modular approach at the lower end of the market, where demands for seamless integration, precise road feel and noise control are less exacting. It remains to be seen how quickly the newer assemblers compete head-on in middle to upper ranges of the global auto market.
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