Auto Makers Shift Gaze to ‘Emerging’ Emerging Markets

Auto Makers Shift Gaze to ‘Emerging’ Emerging Markets

Car Companies Look Past the BRICs

NEAL E. BOUDETTE

Oct. 22, 2013 1:27 p.m. ET

TROY, Mich.—The auto industry has been buzzing for the last couple of years about growth in the so-called BRIC markets –Brazil, Russia, India and China. Now the conversation is shifting to the Future 15—the next group of emerging markets beyond the BRICs that are expected to drive the industry forward. They include populous Asian nations of Indonesia, Thailand and Malaysia; Turkey, Saudi Arabia and Iran in the Middle East; South America’s Andean nations such as Chile and Argentina; and Morocco, Egypt and others in North Africa.Together this group, sometimes also called the Rising 15, already account for sales of about 10 million cars a year, and that is expected to rise to 14.5 million a year by 2020, according to a new study by The Boston Consulting Group.

“This is the last frontier for the auto industry to grow,” said Nikolaus Lang, a consultant with BCG in Munich.

A separate study by Ricardo RCDO.LN +2.57% PLC, an engineering and consulting firm, found that these 15 markets have a combined population of 1.2 billion people and very few cars per capita compared with developed nations, but are seeing strong economic growth and the emergence of a middle class that is eager to spend its increasing wealth on motor vehicles.

“In the BRIC markets, there is a lot of competition,” said Christoph Heuser, a Ricardo consultant, also based in Munich. “In 10 years, the BRICs will be developed and it will be the Rising 15 that will be the industry’s growth markets.”

That is not to say auto makers won’t face tough challenges. These “emerging” emerging markets are fragmented. Even the largest, Indonesia, is only expected to reach annual sales of 1.74 million cars a year by 2020. That is a little more than the number of light vehicles sold in the U.S. or China in one month. So it will be hard to for auto makers to achieve economies of scale in individual countries.

Some auto makers already have strongholds in certain regions. Toyota already has 34% of the Asean market. GM’s Chevrolet brand has 18% in the Andean countries and France’s Renault has 23% share in North Africa.

Many of the companies that have become already established in rising-15 countries are leveraging long historical ties. French influence in North Africa is strong. The leading seller of cars in Turkey is a German auto maker, Volkswagen. Japan has long had ties with Asean nations.

China’s domestic auto makers are also likely to emerge as competitors, said Ricardo’s Mr. Heuser. “I don’t think you’ll see many Chinese cars sold in the U.S. or Europe any time soon,” he said. “The Chinese OEMs are likely to enter the untapped markets before they come to the mature markets.”

For American car makers, global politics are a complicating matter. Iran is one of the most promising markets, but is subject to sanctions. About a million cars a year are sold there now; BCG forecasts it will grow to 1.5 million by 2020. Many others—Indonesia, Egypt, Saudi Arabia, Algeria, Colombia—are countries that have had tense relations with the U.S.

Both BCG and Ricardo found that these markets have their own special demands, too. In Iran, cars powered by natural gas are popular. Indonesians look for boxy cars with room for kids and grandparents. They also want high ground clearance for navigating streets that often flood. Malaysians prefer sedans. SUVs are popular in Saudi Arabia, but small and inexpensive cars prevail in North Africa.

Growth in the Future 15 is also likely to be uneven. Many have uneven economic growth and unstable governments. One other factor that could affect growth: a lack of infrastructure such as good roads.

Beyond BRIC Nations Are Auto ‘Last Frontier,’ BCG Says

Emerging markets beyond Brazil, India, Russia and China offer the “last frontier” for vehicle-sales growth through 2020, Boston Consulting Group said in a report.

“Brazil, Russia, India and China have generated substantial growth opportunities in the last decade and will certainly be vitally important over the coming decade,” according to the report released today in Troy, Michigan. “But we believe that concentrating on BRIC markets alone will be insufficient to ensure longer-term success.”

Sales in these so-called Beyond BRIC emerging markets will make up one-fifth of the world’s sales through 2020 and will rise faster than deliveries in the U.S., Canada, Europe, Japan, Australia and New Zealand, according to the study.

Toyota Motor Corp. (7203), General Motors Co. (GM) and Volkswagen AG (VOW) are competing to be the world’s largest automaker by vehicle sales. GM and VW receive a major part of their deliveries from China. Ford Motor Co. (F) is playing catch-up in China and seeks to capture 5 percent of the market during the fourth quarter, up from 2.5 percent in the first quarter of 2012.

Parts of Southeast Asia, Latin America, the Middle East and northern Africa offer “growth opportunity in a world in which established markets are largely characterized by stagnation or low growth and the key stakes have already been distributed in the BRIC markets,” Boston Consulting said in a separate statement.

‘Growth List’

The southeast Asia countries, including Indonesia, Malaysia and Thailand, are forecast to have new vehicle sales of 4.6 million by 2020, larger than Russia, the report said.

Middle Eastern countries, including Iran, Saudi Arabia and Turkey, may have 5.8 million sales in 2020, larger than 5.2 million forecast for Brazil, according to Boston Consulting. Latin American countries, including Argentina, Chile and Colombia, may be 2.9 million, compared with the 3.6-million German market.

“These regional clusters should be on the growth list of every OEM and supplier with ambitions to be a truly global player,” Thomas Dauner, a senior partner of the consulting firm and co-author of the report, said in the statement.

To contact the reporter on this story: Tim Higgins in Troy, Michigan at thiggins21@bloomberg.net

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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