Truck sales are stagnating in the Triad markets (Japan, North America, and Western Europe), with little or no growth expected beyond the current recovery. By contrast, developing markets such as Brazil, Russia, India, and China (BRIC) have experienced tremendous growth over recent years and still offer huge growth potential. The BRIC markets, which accounted for one-third of global truck sales in 2000, are likely to contribute two-thirds by 2020.
In addition to volume growth, the truck industry in the BRIC markets will see continuous professionalization. Changes in customer and legal requirements mean that most of today’s low-cost trucks are likely to be replaced by upgraded vehicles offering greater sophistication—at prices 20 to 50 percent higher.
Such upgrading should create considerably more revenue and profit potential in the BRIC markets. Global OEMs from mature economies and local OEMs from developing economies are competing for this highly attractive, newly emerging segment.
In this report, the third in the series Winning the Localization Game in the Automotive Industry, The Boston Consulting Group presents the challenges truck manufacturers will face over the coming decade. On the basis of interviews with more than 75 senior executives from the world’s leading truck manufacturers and suppliers, the report analyzes optimal strategies for excelling in BRIC commercial-vehicle markets. It also compares current strategies and business models and analyzes their potential to be the winning models of the future.
In many industry sectors, the BRIC nations—Brazil, Russia, India, and China—are perceived as the markets of the future. In the truck industry, this expectation has already become a reality. The BRIC nations experienced tremendous growth over the past decade, and will continue on this path over the next ten years. In 2010, they accounted for 74 percent of global truck sales. (See “The Truck Market: Our Definition,” below.)
Our analysis focuses on commercial vehicles whose gross weight is at least 3.5 tons and that are built for transporting freight. Buses and off-road applications such as excavators are excluded.
Within this vehicle market, we distinguish three gross-weight segments:
Heavy-duty trucks that exceed 15 tons
Medium-duty trucks that range from 6 to 15 tons
Light-duty trucks that range from 3.5 to 6 tons
Although our analysis focuses only on these segments, many concepts and strategies outlined in this report are applicable to other segments.
The dominance of the BRIC nations reflects a global volume shift from 2000 through 2010. At the turn of the millennium, the Triad nations—Japan and the countries of North America and Western Europe—were still responsible for 56 percent of world sales and an even higher proportion of revenues and profits. In the aftermath of the recent economic crisis, however, the Triad countries’ share of sales shrank to 17 percent in 2010 and is expected to remain low, reaching only 22 percent in 2020.
This shift comprised two stages. The mature Triad economies grew slowly after 2000, while the BRIC economies expanded rapidly. China, for instance, generated annual volume growth of 16 percent during the decade through 2010.
This divergence grew during the economic crisis. Sales collapsed in the Triad countries, falling in 2009 to barely half of 2000 levels. The pattern was different in the BRIC countries. Only Russia was hit hard, with sales falling below 2000 levels. India’s sales suffered a minor decrease, Brazil continued to progress, and China maintained its rapid growth.
Looking Forward: The Triad Markets. Our projections suggest that the Triad markets will rebound in the short term, but starting in 2013, they will likely resume their previous pattern of slow growth, with stagnation in Japan and Western Europe. In 2020, overall sales in the Triad markets are expected to be slightly below the 2000 level. Over the same two decades, BRIC sales will likely grow by a factor of four to five. (See Exhibits 1 and 2.)
This does not make Triad markets irrelevant. Truck sales in those markets are dominated by high-performance products such as the Mercedes-Benz Actros, Scania R-series, Freightliner Coronado, and Fuso Super Great.
Because of this, the Triad countries’ projected 22 percent share of world sales in 2020 is still expected to account for relatively higher shares of revenues (33 percent of the global total) and profits (37 percent), but these shares will be considerably lower than 2000 levels.
Looking beyond the Triad and BRIC markets, we project that other countries will make up 15 percent of global sales volumes in 2020. They range from very advanced economies such as Australia to those still in an early stage of development such as some African states. Although they are not the main focus of this report, these countries should be explored opportunistically.
Looking Forward: The BRIC Markets. The implication is clear. New market opportunities are likely to be concentrated in the BRIC countries. What will change, however, is the scale of growth in these markets.
Future growth is unlikely to match the spectacular volume growth—more than 10 percent per year—achieved by truck markets in Brazil, India, and China from 2000 through 2010. Massive investments in fleets meant that truck sales in India and China grew more rapidly than GDP, but the next ten years should see sales trailing behind GDP growth. The reasons for this deceleration differ by country:
Brazil is hampered by infrastructure weaknesses. In particular, its roads are less developed than those of Russia and China, and no significant improvement is expected. Sales are projected to grow by 2 percent annually to 2020, compared with 10 percent from 2000 through 2010.
Russia’s economy is still recovering from the recent economic crisis. Truck sales are projected to return to precrisis levels in 2013 and then grow at 4 percent annually for the rest of the decade.
India’s growth potential to 2020, projected at 6 percent annually, should exceed that of the other BRIC countries. Road conditions are still very poor, but improvements to infrastructure will drive increasing efficiency in a fast-growing transportation sector.
China’s market is currently overheated and expected to cool down. Further growth will be concentrated in light-duty trucks (LDTs) and medium-duty trucks (MDTs), with the heavy-duty truck (HDT) sector stagnating. This trend is reflected in the words of Huang Gang, managing director of Dongfeng Commercial Vehicle, who told The Boston Consulting Group researchers, “We don’t expect big growth in the Chinese HDT market based on 2010 sales. The 2010 sales level was abnormal due to the government stimulus package and won’t be reached again.”
Overall volume growth in BRIC markets is likely to be significantly below past levels, but the shift to upgraded, higher-priced vehicles means that a volume increase projected at 21 percent over the next decade should generate a revenue increase of more than 50 percent. (See Exhibit 3.)
Volume change is important, but the real BRIC truck-market story will concern changing truck specifications rather than pure sales volumes. Today, the global truck market is dominated by two broad segments: low cost and premium. The low-cost segment is concentrated in emerging markets, the premium segment in mature markets. But a newly emerging midmarket is likely to become the dominant sector over the next decade.
OEMs are already responding to BRIC customer demand for enhanced comfort, safety, and efficiency by launching trucks that are more sophisticated than current low-cost vehicles. However, these upgraded trucks are still clearly positioned below premium trucks. (See Exhibit 4.)
The Growing Midmarket. If the BRIC markets are set to experience the fastest growth, that growth will be mostly in the midmarket, which is expected to dominate in all four markets and is projected to account for 70 percent of their total sales. The BRIC midmarket will generate nearly half—44 percent—of global truck sales by 2020. (See Exhibit 5.)
The once-dominant low-cost sector will lose significance, accounting for less than one in five BRIC truck sales. Upgrading should also increase growth in the premium segment, but this segment will be significant only in Brazil, because of its maturity, and in Russia, because of its proximity to Europe.
The Upgrading. The shift to the midmarket will be driven by an upgrading of demand in the BRIC markets as a result of government action (with governments acting as both the regulators and the suppliers of infrastructure), the increasing demands of customers, and the professionalization of the transportation industry. Across all BRIC markets, we anticipate that governments will take the following actions:
They will demand compliance with more stringent emissions standards. All four BRIC markets are likely to introduce Euro V standards from 2012 through 2015, and Euro VI over the long term.
They will tighten safety regulations. Brazil, for example, is requiring all new commercial vehicles to have an antilock brake system (ABS) starting in 2014.
They will invest in road infrastructure. New and improved high-speed roadways make the purchase of faster, more sophisticated vehicles worthwhile.
For their part, BRIC customers will want more sophisticated vehicles, but their demands will still fall short of the specifications required in Triad markets. The big sales increases will be in the midmarket rather than in the premium segment. Truck buyers will apply a more sophisticated understanding of costs. Fleet management has become more professional in the BRIC markets, and purchasing choices once decided on the basis of the initial sales price are increasingly guided by total cost of ownership (TCO), which will favor midmarket vehicles.
Truck manufacturers that wish to remain global players have to focus on the midmarket now. Not participating will mean missing out on the biggest revenue and profit growth and highest sales volumes globally. But companies seeking serious sales growth should be prepared to make significant investments.
The midmarket dynamic will drive the world’s leading OEMs into the BRIC market battleground. Today, there are two broad categories of manufacturers. For the most part, global OEMs such as MAN, Volvo, Scania, and Isuzu sell premium trucks in the Triad markets. Local OEMs such as Tata Motors, Kamaz, and Dongfeng Motor produce low-cost vehicles for BRIC markets.
Local OEMs have vastly outpaced global OEMs over the past decade, and that trend is expected to continue. Most local OEMs from India and China have achieved growth rates of 5 percent and higher, while many global OEMs and local OEMs from Russia have seen sales decline. Stimulated by domestic growth, BRIC OEMs already account for six of the ten largest producers worldwide. The next ten years will see global and local OEMs converge and compete. Global Triad companies will become more localized, local BRIC manufacturers more global.
Global OEMs. With Triad markets remaining stagnant, global players need new markets. Even though BRIC buyers are seeking more sophisticated trucks, vehicles designed and priced for Triad markets still cost too much. They meet emissions standards and come with special features that BRIC buyers do not demand. To compete with local BRIC players, global OEMs must downgrade specifications and reduce costs. We calculate that to do this, they will need to localize more than 90 percent of their activities. A European OEM told us, “We could achieve a competitive level in Brazil only after localizing all of our activities.”
Local OEMs. BRIC OEMs also seek fresh markets. So far, they have profited from rapid growth in home economies. In terms of sales units, annual growth rates exceeding 10 percent—achieved from 2000 through 2008 by companies such as Tata in India and Dongfeng in China—were in line with overall growth in domestic commercial-vehicle markets. But new entrants and upgraded vehicles have intensified competition, so these companies can no longer rely on domestic growth to power expansion. To maintain momentum, local OEMs must operate two key levers: tapping into upgrades in their domestic market and capturing growth in other rapidly developing economies.
To tap the potential of upgraded vehicles, BRIC OEMs need access to advanced technology. Many local OEMs have, therefore, entered into partnerships with global suppliers or OEMs. Tata, for example, built an upgraded truck using advanced components from global suppliers such as Cummins, ArvinMeritor, and ZF Friedrichshafen. Prakash Telang, the managing director of Tata Motors, reported, “We are not confining ourselves to the domestic market but are now building a world truck to be sold in overseas markets.”
To encourage further growth, local OEMs need to improve their positions in other developing economies. Most local OEMs we spoke with are aiming for an export rate of 15 to 20 percent over the next five years compared with less than 5 percent today. The most frequently named markets are Southeast Asia, Latin America, Africa, the Middle East, and other BRIC countries.
The authors wish to thank all participating senior executives of major truck OEMs and suppliers for their great support and openness. The authors also extend their appreciation to their BCG colleagues Pascal Bruckner, Kevin Chen, Rafael Cicco, Roman Hilgers, Robert Koschig, Stefan Mauerer, Alexa Schlamp, Tobias Weidner, and the Knowledge Team. Thanks also go to Katherine Andrews, Gary Callahan, Elyse Friedman, Kim Friedman, Huw Richards, and Sara Strassenreiter for their contributions to the writing, editing, and production of this report.
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