Automakers: Forget America, Think China and India

There is no denying that America constitutes a massive market for vehicles. Of the 650 million or so cars and trucks registered around the world, over a third of them can be found in the garages of American households. The need to slowly replace that fleet, and the wealth of American buyers, make the North American market one of the juiciest in the world.

But it's also a fairly stagnant market. Vehicle registrations per capita aren't rising by as much as they used to and average vehicle ages are rising, and the combination of high oil prices and deep recession gutted automobile sales over the past two years. They're beginning to recover, but it's not clear that the market will ever be as it once was. Americans have long owned vehicles at rates well above those for other developed nations. Expensive petrol and a difficult economy may lead to some convergence of developed nation rates.

Luckily for carmakers there's China and India. Chinese automobile purchases have trended upward strongly during the last decade, barely pausing to slow down during the recent downturn. And these are often new sales, to owners who previously did not have a car. Auto ownership in China is growing by 10% per year. In India, it's rising at 6.6% per year.

The margins on sales in China and India may not be as substantial as in Europe and America, but smaller margins aren't that big a deal when you're looking at hundreds of millions of potential sales.

To succeed in automobile manufacturing seems like a simple thing these days; figure out what Chinese and Indian customers want or need and give it to them. If General Motors (GMGMQ.PK) and Chrysler can't find their way back into American market dominance, then they ought to turn their whole attention to the billion or so people who may be looking to buy their first car sometime in the next decade.

This article originally appeared on The Economist.com

Comments

[a. palmer jr.:]

I think the automakers should do as they've done in America...tell the consumer what he or she wants. That's how they got these little soccer moms to drive the kids to school in a truck. I guess the proper name is SUV. Before all the advertising most women wouldn't consider driving a four wheel drive truck to do shopping in.
If the automakers convince China and India what they really want is a gas guzzler, then their nations can enjoy the fruits of deficit spending and trade imbalances as the United States has.

Jul 30 09:45 AM

[Glenn Mercer:]

I think the author is 100% correct but glosses over the margin issue a bit too quickly. The vast majority of Indian and Chinese cars sold will be fairly low-priced models. Forecasters have shown that the OECD markets will be equal in REVENUE to the emerging markets for years to come, even as the latter pull way ahead in UNITS. Then, margins are wildly nonlinear in cars: Toyota was lucky to net $300 on an Echo, and easily bagged $15,000 on a Lexus LS. So the Indian market (which considers a Fiesta a "large" car) will probably not match an equivalent developed market in profit potential until it both enriches mix greatly and exceeds unit volume dramatically. Note that Tata itself has said the bottom line margin on Nano may be only $200... not sure I want to chase that market!

Jul 30 10:44 AM

[Speedzzter:]

" I think the automakers should do as they've done in America...tell the consumer what he or she wants. That's how they got these little soccer moms to drive the kids to school in a truck. I guess the proper name is SUV. Before all the advertising most women wouldn't consider driving a four wheel drive truck to do shopping in."

This is completely wrong.

Corporate Average Fuel Economy regulations killed the traditional RWD station wagon and reduced market choices for sedans large enough to carry American families.

While the minivan stood in the gap for a while, public perceptions of them became that they lacked style and adventurousness. Minivans became a cliche not by any fault of the OEMs (most of which were vigorously marketing minivans)

Truck based vehicles became popular because consumers could see for themselves that they were better values. Lower CAFE standards for trucks meant that RWD and V8s could be retained and that simpler, cheaper-to-repair, more durable mechanical systems could be used. Mechanically, these trucks were similar to the large cars that CAFE had reduced the supplies and artificially inflated the prices of. Trucks also became less utilitatarian as sales pressures over four decades forced option proliferation.

Once many drivers became reaccustomed to the higher 1950s "h-point" through minivans and pickups (the higher seating position that was never abandoned in trucks) and gasoline prices stabilized, SUVs became popular because of their style, value and practicality. Since Jeep and Land Rover built the first SUVs decades ago, they've always been associated with rugged individualism, adventure, and practicality.

The SUVs of the '90s merely built upon this heritage and provided customers with an interesting and exciting vehicle with the functionality of old, CAFE-killed station wagons at price points that were more attractive than cramped FWD sedans and boring minivans. As trucks and SUVs proliferated, many bought them merely to stay "competitive" with their neighbors and/or for enhanced visibility.

Advertising actually had little to do with it. Word-of-mouth, direct personal experience, and social imitation was much more important. Obviously, if Detroit advertising could work such miracles, Detroit could have pushed the Japanese back into the sea long ago. Consumers are smarter than that.

Jul 30 12:26 PM