Emerging markets the key to sustainable growth

Auto industry consultantcy forecasts improved return on investment selling cars in advancing economies

Premium cars in mature markets are no longer where the action is, according to a report by Ipsos Business Consulting: Eco Cars and Key Developments within the Global Auto Industry. Companies battling to make ends meet should consider exporting lower-cost cars to markets where demand currently outstrips supply.

The report reveals that the GFC was the tipping point for many car companies, with sales in developed markets dropping from 42 million in 2006 to 32 million in 2009. Since then vehicle sales in developed markets have recovered to 36 million in 2013 (and are projected to reach 37 million by the end of this year). Sales in emerging markets over the same period rose from 26 million to 49 million at the end of last year.

For many car companies selling around the world, the sales volume in the emerging markets would have offset in varying degrees the downturn in profit from lower sales in developed markets during that seven-year period. The overall trend for global sales (with emerging and developed markets combined) is four per cent since 2010 – and that growth is almost entirely due to demand for new cars from the emerging markets... especially the 'BRIC' nations: Brazil, Russia, India and China.

It's no surprise in light of those figures that the Ipsos report recommends car companies leave the hotly contested premium sector in mature markets and focus instead on affordable solutions in emerging markets. But there's still a lot of life left in prestige, if the Australian market is any indication.

Australia – a mature market and a developed economy – bought record numbers of cars last year, according to VFACTS. Of the volume-selling passenger-car brands however, fewer than half of FCAI members (11 of 26) sold more cars in 2013 than in 2012. And one of those that did sell more cars was Opel, which had folded by the end of the year anyway.

In contrast, every prestige brand selling cars in Australia during 2013 sold more units than in 2012. That no doubt explains why so many volume-selling brands are attempting the move upmarket in this country. As Andreas Sigl, Infiniti's Global Director of Formula One, recently told motoring.com.au, prestige vehicle sales are just 11 per cent of the global market, yet they yield 50 per cent of the profit. But perhaps the struggle to be perceived as a prestige brand is simply too hard (as in the case of brands like Infiniti itself, Jaguar Land Rover, Lexus and Volvo) in the face of the established German juggernaut – Audi, BMW, Mercedes-Benz and Porsche.

It may be that the take-out from the Ipsos report is this: car companies should aim for the low-hanging fruit.

Another point of interest in the Ipsos report is the projected rise of alternative-energy vehicles. This trend is driven by subsidy and legislation from some emerging nations.

"Pollution is a global concern and automobile manufacturers are racing to develop more environmentally-friendly and economical vehicles in order to better compete in emerging markets and satisfy increasingly stringent emissions standards," says Shoko Furukawa, co-author of the report and Head of the Automotive Sector at Ipsos.

"In addition to making existing vehicles more fuel efficient, manufacturers are developing technologies such as clean diesel engines, hybrid vehicles, electric vehicles and fuel cell vehicles to spearhead the next generation of eco cars," she was quoted saying in a press release.

"It will not be long before most new cars entering the market will be environmentally-friendly vehicles."

The report indicates that 1.5 million hybrids were sold around the world in 2012, with sales of plug-in hybrids and electric vehicles accounting for just 53,000 and 51,000 sales, respectively. From next year, the report's authors postulate, sales of alternative-energy vehicles will grow to two million. Hybrids will continue to account for the lion's share, but conventional internal-combustion-powered vehicles will remain the majority choice while nations grapple with cultural change and setting up infrastructure to support, for instance, hydrogen fuel cell vehicles.

From 2025 however, hybrid sales should total seven million, with electric vehicles (EVs) adding a further 1.4 million, fuel cell vehicles (FCVs) contributing 1.1 million, and plug-ins delivering 900,000 extra sales. Five years after that (2030), Ipsos predicts that global sales of EVs and FCVs will almost triple, but plug-in sales will only grow by around 30 per cent. The report suggests that plug-in hybrids may not be the milestone some in the industry expect, due to the added complexity and weight of two drivetrains, with nowhere readily available for fast charging. Those concerns respectively apply to conventional hybrids and EVs too, but the authors of the report seemingly expect the plug-in hybrids to lose ground to rapidly advancing FCV technology before plug-in technology can properly establish itself in the market against conventional hybrids and EVs.

The global outlook in the report is somewhat at odds with the situation in Australia, where our high incidence of electrified off-street parking would support the uptake of both plug-ins and EVs (contrary to what Ipsos predicts for the rest of the world), but we're congenitally averse to unconventional powertrains and EVs are unlikely to be popular here within the next decade, short of a major breakthrough in battery technology. That is due to the 'wide, brown land' perception of our country – a place that needs cars capable of long-range touring, despite 90 per cent of us living huddled in cities and suburbs on the coastal fringes.

While some of the Ipsos report's predictions are open to discussion and interpretation – and a global forecast may not be applicable in Australia – it makes for interesting reading.

Emerging markets the key to sustainable growth

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