Michael W. Rüger, Fredrik Vernersson, Colin Brash
November 6, 2014
The global recovery from the economic crisis has major implications for the commercial vehicle and tractor-trailer manufacturing industry. There are, essentially, two worldwide markets for trucks in the near future. The first, in Europe, North America, Japan, and other industrialized East Asian nations, is characterized by a high level of environmental regulation and sophisticated demand for technological improvements and other features, including emerging “connected car”–style innovation. However, this is a slow-growth market, bound by limited demand for the foreseeable future.
Faster growth will be found in the BRIC countries (Brazil, Russia, India, and China), and the threshold countries of other emerging markets in Asia, Africa, and Latin America. Mexico is a prominent example. The markets for trucks in these countries are highly costconscious, and they are less interested in features. Truck makers in China and India, in particular, are producing the sorts of vehicles that succeed in these markets — vehicles that are “good enough.” They are high in basic reliability and safety, but short on amenities and features, and they are often well suited to the imperfect infrastructure of emerging markets.
The original equipment manufacturers (OEMs) in the industrialized world face a significant challenge. On the one hand, they must innovate effectively enough to compete in mature economies with low environmental impact and well-designed digital features. On the other hand, they must find a way to enter high-growth, low-cost markets, which will often mean adjusting their operating models and product concepts. Truck makers in India and China are already there.
The situation in China is particularly daunting for competitors. Local OEMs there have built overcapacity for a rapidly growing Chinese market — which has now slowed. They have every incentive to move internationally and to compete on price. It will be very difficult for international OEMs to counter this, since they cannot compete effectively on given product costs. In the long run, this will establish 4 Strategy& some Chinese truck makers as significant global players, able to compete not just in the low-cost tiers, but in higher-end markets as well.
Global truck makers thus have a few imperatives to keep in mind. Avoid India and China as markets. Innovate and revamp production. Expand your presence in countries you already know, and find better ways to compete there. Develop low-budget trucks, which will require a shift in operating models and other parameters; no incumbent company from an industrialized nation has yet done this successfully. But for those that can make the transition, an enormous global opportunity is available.
During the economic crisis of 2007–10, the global truck market contracted. Around 2013, it appears to have stabilized, and there is reason to expect further growth averaging 3.7 percent or more annually between 2014 and 2020.
Transportation is greatly affected by large-scale political, social, environmental, and economic changes — the major global trends that shape the business environment. Although these trends are similar across the globe, they affect different regions in different ways. Therefore, the road ahead for large commercial vehicles looks different from one country to the next.
In that context, each industry player will have its own potential road to success. To help craft an effective strategy for your own starting point and chosen destination, you should consider five major factors:
As we have shown, the coming changes in the global truck market will be driven in particular by a large number of emerging sales markets in the threshold countries and by the considerable overcapacity in Chinese truck production. Truck OEMs globally will need to critically reevaluate their strategies.
Four regions are important for future growth: the NAFTA countries, Europe, India, and Africa. Sales in China will be flat, but that country will continue to be the biggest market, dominated by local players. New markets, such as Africa or Southeast Asia, are currently small but will grow strongly in the future, assuming a stable political climate.
OEMs’ products will change in the future. In the new growth markets such as Africa, Southeast Asia, and Central America, low-budget trucks will become the preferred product. Value trucks will benefit from growth in India, increasing demand from fleet operators in China, and new customer requirements in Brazil. Tougher emissions regulations in Western countries and in the threshold countries will increase the demand for low-emission technologies. And to address the demands from major urban centers to reduce heavy truck movements, entirely new products and transport solutions will have to be developed.
Truck production capacity in Europe and the NAFTA region is in line with demand. In China, there is massive overcapacity in production, and consequently it makes little sense for Triad manufacturers to build up additional capacity there. If a Western manufacturer develops a vehicle concept that is suitable for China, then the better approach is to use the existing capacity of a joint-venture partner. Even with this option, serious questions still need to be asked about the advisability of further engagement in China for Triad manufacturers.
To open up the new markets in Africa, “completely knocked down” concepts are suitable initially, but investment in production, sales, and after-sales structures will be necessary to be successful over the long term.
By pushing strongly into the global market, particularly in the emerging nations, Chinese and Indian OEMs will be taking a major step toward becoming globalized manufacturers. OEMs from both countries have solid positions in their domestic markets and will be able to exploit market growth in the Middle East, Africa, selected Asian countries, and Latin America. The particular focus for this expansion is on budget and “good enough” trucks.
Becoming established in these markets, however, will not be easy. While seeking success in the new markets, Chinese and Indian OEMs will need to keep hold of their own domestic markets. Particularly in India, further investment in infrastructure will be needed. Meanwhile, global success can be achieved only if appropriate local models are in place and legally certified and sales/service/after-sales networks, vehicle financing, and a local supply chain have been established. This creates barriers to market entry for Chinese and Indian truck manufacturers, which do not yet have much experience outside their home countries. To be establish themselves as truck manufacturers on the global stage, they must first prove themselves in important country markets. That is why they are adapting their efficient domestic cost structures for low-budget trucks to local production abroad — to keep their cost advantage. But they also need to develop some entirely new skills of international management, including the ability to deal with other cultures and social structures.
For the Triad manufacturers, China is not the success story they once hoped it would be. Many Western manufacturers have entered into joint ventures with Chinese partners since 2000, but this has not given them a noteworthy role in the Chinese market. In addition, for the foreseeable future, no significant growth in sales is anticipated in the premium segment, which is the most attractive for Triad manufacturers.
The future of the Triad OEMs is limited in India and almost nonexistent in China. This is the time to recognize real opportunities and act decisively. Their opportunities lie in their strong domestic markets and their established export geographies — the countries where they already have powerful brands and a strong international presence. These strengths should be the foundation of successful entry to the next-generation growth markets. The Triad OEMs have the opportunity to exploit growth in a restabilized Brazil and to offer more attractive and price-competitive products to the markets they already know.
A key product for the Triad OEMs is the low-budget truck. They need to expand their core competence — the production of premium and mid-class trucks — to offer low-budget trucks as well. Market success in the emerging threshold countries rises or falls with the availability of such trucks. The demand for low-budget trucks will increase, and it will be vital to fulfill the demand for more price-competitive and robust trucks while keeping production costs in line. There have already been numerous attempts by Triad OEMs to develop low-budget trucks, but to date no truly successful concept has emerged. Meanwhile, Indian and Chinese OEMs will make a big impact on the distribution of market share only if they succeed in developing the right international business structures.
In short, global truck makers have a few imperatives to keep in mind. Avoid India and China as markets. Innovate and revamp production. Expand your presence in countries you already know, and find better ways to compete there. Develop low-budget trucks, which will require a shift in operating models and other parameters; no incumbent company from an industrialized nation has yet done this successfully. But for those who can make the transition, an enormous global opportunity is available.