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BW Businessworld

Battle For The Top Slot

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It is a new world order for the automotive industry. The business has gone through tremendous change during the past few years. Toyota has replaced General Motors as the world's largest auto maker. Ford, the long-time number two, has slipped to sixth place. Volkswagen (VW) is now competing with General Motors for second place. New powers such as Renault-Nissan and Hyundai-Kia are coming up fast.

Not only is the face of the competition changing, but so are the factors for success. 

The rise of the Bric: This is what I consider the game changer, given the magnitude of its impact and the fact that it is behind many of the developing trends in the global market. Currently, 34 per cent of global light vehicle production is based in the Bric nations (Brazil, Russia, India and China) and I expect that share to rise to over 40 per cent over the next five years. More importantly, the Bric are forecast to make up 65 per cent of the global growth during that period. China is the prominent force accounting for nearly 70 per cent of that total.

The shift towards small cars: The rise of the Bric and high oil prices are leading to a shift towards smaller cars. Small cars will be the fastest-growing segment over the next five years taking 35 per cent of the sales expansion. Their share will rise to 30 per cent of the total global sales.

The cost challenge: With more volume coming from less profitable small cars, cost competitiveness is set to become more critical than ever. Other costs of doing business will also increase, such as raw materials, particularly the rare earth materials.

The energy challenge: Our planet is going greener, and rightly so. But there are technology costs associated with meeting the stricter emission standards. Europe has the most stringent emission standards in the world, with CO2 emission caps at 140 grams per kilometre. This is set to go down to 95 g/km by 2020. Until now companies have been able to make incremental improvements on current powertrains to meet new regulations. However, meeting the 2020 requirements will require entirely new powertrains. Such a change will be costly, with some estimates suggesting it may exceed $100 billion.

Industry consolidation: I do not think major industry consolidations are imminent. Many tie-ups are likely to happen, but not acquisitions. The industry has a pretty bad record of mergers and acquisitions. There have been more failures than successes. The Renault-Nissan partnership could be considered one of the rare successes. It managed to create more value for consumers, rather than destroy it.

So taking these factors into account, how do the automakers measure up?
It is becoming increasingly apparent that Toyota is losing its edge. The company has been slow to enter the high growth Bric markets. Among the top five original equipment manufacturers (OEMs), Toyota has the smallest share of the Bric at just 5 per cent, well down when compared to VW's 11 per cent, GM's 8 per cent, Renault-Nissan's 7 per cent and Hyundai's 7 per cent.

Unlike many of its peers, Toyota's Bric strategy remains conservative, with its focus remaining on the mature markets of Japan, North America and Western Europe, thus inhibiting its growth opportunity. It will become increasingly hard for Toyota to hold on to its leadership position as the Bric continue to expand faster than the rest of the world.
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While Toyota has 22 small car models, dwarfing its closest rival Nissan, which has 13, its small car production is the lowest among the top five OEMs. Toyota's average volume per small model is 80,000 units this year, compared to 180,000 or more among the other top five OEMs. Its scale in producing small cars will continue to lag behind others as a result of its low Bric exposure.

Cost control has been hailed as a key Toyota strength. But the company seems to be slipping on that front, too. Toyota's total cost per vehicle is estimated to be $26,700 in 2010, much higher than Nissan's $22,000 and VW's $21,000. This has squeezed its operating margin over the past two years and, it is set to fall to 0.8 per cent this year.

The only area where Toyota is still clearly ahead of its peers is in green technologies. Since 1997 it has been producing the Prius hybrid, whose cumulative production reached 2 million units as of September 2010. Hybrid electric vehicles offer much more CO2 reduction potential compared to other technologies. Toyota is planning to add more hybrid models to its Prius family and to release full electric vehicles. This would take its total hybrid electric vehicle (HEV) and electric vehicle (EV) volume to 1.5 million annually over the next five years, 13 per cent of its global volumes.

Unlike Toyota, European auto makers have taken a different route to reduce CO2 emissions, by making improvements to current combustion technologies. However, this is now reaching its limit and it looks as though they will now need to make significant investment in new powertrains to be able to meet the more stringent regulations.

VW's robust emerging market strategy has paid off, propelling the group to the world's number two spot. It is the largest vehicle maker within the Bric, being No. 1 in China and Brazil and No. 3 in Russia. VW also has big plans for India, where it is entering the market with the Polo and other small models. It is fairly strong in East Europe and is expected to grow stronger. VW has also tied up with Suzuki through a 19.9 per cent stake to enhance its small car capability. All in all, VW looks to be in the strongest position amongst the top 3; well positioned for the challenging years to come.

Renault-Nissan is the world's largest small car maker and is on track to sell 2.35 million small cars this year. The company's strong emerging market coverage is expected to strengthen its lead in small cars with volume set to rise to 3.6 million over the next five years. It is catching up fast in the area of alternative energy vehicles, having just released the Leaf electric. The group is also planning to add electric cars under the Renault and Infiniti brand within the next 2-3 years.

GM, Ford and Chrysler have led the global auto industry as the Big Three for decades. However, the changes now taking place in the global markets will result in none of these automakers making it to the top 3 in terms of global vehicle sales in the coming years. Toyota, VW and Renault-Nissan look set to take the lead going forward. Their strong positions in the growth markets and new technologies will help them find success in the challenging times to come.

The author is director, J.D. Power Asia Pacific, Thailand Branch

(This story was published in Businessworld Issue Dated 17-01-2011)