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In this paper, the author has discussed how today's industry is reacting to global opportunities and how the future industry is likely to react.
Emerging Markets
By 2000, the combined urban populations of eight countries-China, South Korea, Indonesia, Turkey, Mexico, Argentina, India and Brazil-will exceed one billion people and grow GDP at rates well above average through 2005 and beyond. The various emerging countries can all be placed somewhere on the continuum of automotive industry development stages. Vietnam, which is just now opening to complete knock-down (CKD) assembly investments is leaving stage one and moving to stage two. In the early stages, there is demand for a high percentage of trucks. Then as the domestic industry moves beyond import substitution policies requiring high local content to export promotion and lower tariff barriers; demand for small cars kicks in from the emerging middle class. With huge populations striving to become middle class and continued trade liberalization and productivity improvement in the domestic assembly industry-growth is sustainable.
Different criteria for manufacturers and component makers
The criteria used when considering an investment in an emerging market country is ranked by importance. The criteria reveal substantial differences between passenger car/light truck manufacturers and component makers. Component makers consider the export market potential to be very important, indeed more important than the domestic market.
Japanese companies, in particular, seem very adept at exploiting such small market opportunities.
What Do Small Markets Have to Offer?
Small markets have a low-investment, high-reward potential for vehicle manufacturers. This explains why the opening of Vietnam has attracted so much interest.
By contrast, parts builders have to be more strategic and not as opportunistic in selecting a country for investment. Southeast Asia is a good example. Generally, few countries today have a big enough market to justify the investment in a world-class plant. As component suppliers look at the volume necessary to get a return on investment, they must look at exporting immediately. Thus, in southeast Asia, for example, the component supplier is more likely to invest if inter-regional trade barriers drop.
When asked where in NAFTA they would invest, the U.S. is first and Mexico is second. Outside North America, China looks to be the most attractive investment opportunity to North American auto executives over the long-term (i.e., 2005). Brazil is the only other non-mature market country that even makes the list.
Criteria For Supplier Selection
Suppliers will be selecting customers strategically, not opportunistically. What will they look for in a vehicle manufacturer now that supply relationships are becoming long-term partnerships? A quality player, with global presence, and a good business partner (one that requires limited investment in managing the relationship).
In this new environment, A.T.Kearney's research indicates that winning suppliers have followed strategies or have superior capabilities in specific areas of the business. Recently a number of suppliers have achieved growth by consolidating their product/market segments via acquisitions to become one of the big remaining players.
For detailed reading on this report, refer to AT Kearney’s report.