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How automotive companies can mitigate risk in emerging markets

A conversation with Chris Johnsen, national leader of the Automotive practice

In search of low-cost production and untapped opportunities for revenue growth, automotive companies are increasingly expanding to emerging markets. However, as Deloitte’s  Global Manufacturing Industry group concludes in its “Innovation in emerging markets: 2007 annual study,” effective expansion requires significant advance planning.  Chris Johnsen , national  Automotive practice leader, discusses how automotive companies can lay the groundwork for emerging market success.

How is the rapid growth of emerging markets affecting automotive companies?
In recent years, emerging markets have increased exports at exponential rates. Today, they are consumers of half the world’s energy and are experiencing GDP growth at three times the rate of developed countries. This explosive growth has resulted in rising demand for talent in emerging markets — and is driving up the cost of labour.

For automotive companies, these trends represent a huge wake-up call. Companies can no longer simply adapt their North American or European operating structures to emerging markets and expect the model to work. Instead, they must put a human resource strategy in place to attract and retain the right talent. They also need to understand that money might not be the biggest motivator to attract skill in emerging markets. Employees may be more interested in receiving advanced training or being fed three meals a day. In developing an appropriate HR strategy, automotive companies require an understanding of what drives people in the markets where they are operating.

“Automotive companies must make efforts to put an appropriate growth strategy in place that takes local culture into account. By understanding the shifting political environment and prevailing labour expectations, they can craft solutions that can help them succeed over time.”
— Chris Johnsen

What other issues should automotive companies consider as they expand to emerging markets?
Although automotive manufacturers once looked to emerging markets primarily as locations for cost reduction, today they are also in search of opportunities for revenue growth. The demographics certainly make sense. Countries like India and China have huge populations transitioning to a middle-class lifestyle. By transferring complex production and research and development activities to emerging markets, automotive companies can begin to develop compact, fuel-efficient vehicles that appeal to both emerging market consumers and entry-level consumers in North America.

However, to succeed in this strategy, automotive companies must realize that they need more than an effective operating strategy. For instance, they may need to alter their product features to withstand local environments and usages. They have to determine the functionality of local supply chain networks and warehousing facilities to ensure they can meet local distribution requirements. Similarly, they must calculate the costs of shipping if they plan to export their vehicles back to their home base. They must ensure their intellectual property is well protected. They must determine the management structure for their emerging market facilities. And they have to consider both shifting local regulations and tax rules to ensure they can operate in different locales in a cost-effective manner, while still repatriating earnings.

As automotive companies pursue emerging market expansion, how can they mitigate these risks?
Automotive companies that were early to expand in emerging markets quickly learned that a level of homework was needed up front. Companies should be leery of just diving in. The political landscape in many emerging countries continues to evolve. Governments may not be as stable as companies expect, and protection for intellectual property rights may be weak. To avoid common pitfalls, automotive companies must gain an understanding of local regulations and customs so they can identify key risks and put appropriate plans in place well in advance.

How can companies already operating in emerging markets continue to enhance their growth potential?
I think this comes back to employee retention issues. Companies that expanded to emerging markets early have spent considerable time and resources training key people. As competition in these regions heats up, however, demand for that talent is bound to increase. Automotive companies that want to succeed in the long term must make efforts to put an appropriate growth strategy in place that takes local culture into account. By understanding both the shifting political environment and prevailing labour expectations, they can craft solutions that can help them continue to succeed over time.