Emerging economies take larger share of global car production volumes

Recent data released by one of the country’s most authoritative automotive bodies - SIAM suggests that the Indian passenger car market grew only at 2.2% in 2012-13 as car sales shrank for the first time in 10 years. Record incentives being offered by automakers and dealers haven’t really helped to fix the disappointing car sales either.

While this may indicate only a temporary slump in the demand for automobiles as a whole, the fact that there has been a revolution in the worldwide production of cars over the past decade cannot be dismissed. The reasons are manifold, and it appears as though the more prosperous nations are taking a serious hit.

The weights of the countries in this regard have shifted away from the classic car-nations such as the USA, France and Italy, to emerging countries such as China, Brazil and Mexico. The Asian and Latin American climbers of the last decade finished 2012 with an impressive 32 million new cars produced. This represents an already 38.1 percent of the worldwide automotive production. 

This fundamental change is hardly noticed because the players are still on the same international stage. So far, no Chinese or Indian manufacturer was able to penetrate the ranks of the major car manufacturers. Large international manufacturers are quite intent on keeping it this way and one way of doing this is encouraging the global relocation of production in a massive way. But at what cost exactly?

Cheaper and more abundant availability of labour means that a car can be produced cheaper in China or in Mexico as compared to Europe. For instance, the hourly wage of a worker in the auto industry in China is almost seven Euros and around six in Mexico, but a whopping 55 Euros are paid in Germany.

The German Federal Republic is among the few in Europe that has not been drastically affected by this change. On the contrary, in the past decade the output of the domestic factories rose by 1,79, 960 vehicles. However, the total volume of German manufacturers grew to a much greater extent with domestic corporations also setting up new facilities mostly abroad.

Understanding that a larger demand for its cars would only be possible through an impactful presence particularly in such growth markets,  international car manufacturers like Mercedes-Benz and Volkswagen have built colossal production plants around Pune’s Chakan area here in India to better deal with high import duties. On the contrary the Chinese government itself, which wants to build car in the People's Republic, will do so in a joint venture with a Chinese company.

In order to avoid currency fluctuations, Japanese car companies have now begun assembling their cars in Europe. For this very same reason many German premium manufacturers have also settled in the United States. After all building in the buyer’s country does have its cost saving advantages.

Budget automobile manufacturers like Hyundai and Kia also have their manufacturing setups in Eastern Europe and their common development centre has successfully led the way in Rüsselsheim. 

Over a period of decades it has been observed that foreign manufacturers that produce locally have often even been perceived by customers as domestic brands - such as Volkswagen and Ford in Brazil.

Among the winners of the last decade in this automotive production revolution is China. The mainland scaled up its car production by almost six times since 2002, and has jumped from 5th place ten years ago to turning into a leader in recent times. In the shadow of the red dragon India has achieved a very similar growth trajectory.

The emerging economy has increased its production by 363 percent and now builds more cars than France and the UK. Like Brazil and Mexico, India too has developed itself into an important automobile manufacturing hub, with foreign players like Volkswagen playing a big role in helping with building this global identity.

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But this expansion has been at the expense of once robust European auto nations like France and Italy, which have had to cope with a decline of 45.4 percent and 52.9 percent in recent years. This helps us to better understand why corporations like Peugeot-Citroen, Renault and Fiat are in a constant price competition with Asian rivals and are finding it increasingly hard to adapt to their local cost of production. 

Even a country like Spain, whose car production so far has been rising steadily, recently landed a decline of 30.7 percent. Germany is the only exception with its strong premium brands not feeling pressured to sell their car at a very low price. In fact, the high-wage country, has slightly increased production in recent years. 

Back in India the slowdown in sales despite this production boom as we see it has already resulted in several global automakers revisiting their future strategies. According to Rakesh Batra, National Leader, Automotive Sector, Ernst & Young, “The lack of stable policies e.g. diesel fuel pricing, adds to the uncertainty which impacts new investments. As we move into 2013-14, passenger vehicle sales are likely to decline over the next few months. However improved economic growth will result in vehicle sales picking up momentum resulting in a moderate forecast growth of around 1-3% for FY14.”

In the meantime, automakers and component suppliers are likely to be under pressure as they not only bear the burden of higher input costs, but are also offering heavy discounts, innovative financing and buy-back schemes to boost sales.