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Applying global trends: A look at China’s auto industry

Filipe Barbosa, Damian Hattingh, and Michael Kloss

Strategists can challenge conventional wisdom and better prepare for


uncertainty by analyzing the complex and not-so-obvious ways global trends
interact in their industries.

Predicting the future is arguably Eastern players captured, to the tune


the most important and hardest task of more than $100 billion,2 by
facing strategists. One way of load- developing low-cost business models.
ing the dice in their favor: scrutinizing
the demographic, technological, How can company strategists spot the
environmental, macroeconomic, and next big opportunity or looming
other long-term forces constantly threat in their industries before it’s
shaping the global economy. The most apparent to everyone? In this arti-
eye-opening implications typically cle, we’ll describe a four-step meth-
lurk at the intersections where multiple odology for making global trends
trends (and dozens or more sub- part of a scenario-based strategic-
trends) interact with one another, often planning process. By bringing
in complex and not-so-obvious together trends and their interac-
ways. Moreover, to analyze trends tions, industry-specific insights,
successfully, executives must and problem-solving techniques, this
develop a fine-grained understanding approach helps create quantita-
of the potential impact for specific tive, actionable, and unbiased scenar-
geographies and industries.1 ios for what might happen in the
next five to ten years. Better scenarios,
Only a dozen years ago, for example, in turn, can help companies chal-
authoritative predictions for the lenge conventional wisdom, pressure-
coming decade envisioned no more test existing business models,
than a few million mobile-phone identify market opportunities, and
users throughout Africa. Local income, develop more innovative prod-
consumption, technology, infra- ucts and services.
1  structure, and regulatory conditions
See Mehrdad
Baghai, Sven seemed to hold little promise for To illustrate our thinking, we’ll look
Smit, and S. significant growth. Less than ten years at an intriguing example—how
Patrick Viguerie,
“The granularity later, though, Nigeria alone had Chinese automakers could defy con-
of growth,” 42 million mobile subscribers— ventional wisdom and steal a
mckinseyquarterly
80 times more than initial forecasts march on competitors in developed
.com, May 2007.
2 
From 1999 to predicted—as growth skyrock- markets by succeeding there
2009, the market eted, largely as a result of the inter- much more quickly than expected in
capitalization of
the top five Middle
action between just two trends: a future characterized by natural-
Eastern and African improved income levels and cheaper resource constraints, unceasing inno-
telecom operators handsets. This was a massive vation, a growing role for govern-
increased tenfold,
to more than growth opportunity that global telcos ments, and a shift of economic growth
$100 billion. missed but African and Middle and power to emerging markets.
2 July 2010

1. Establish the reference frame

The right frame of reference—a forecast that China’s share of these


specific problem statement and a clear markets would double, from
sense of the industry context for 0.1 percent today to a still-marginal
long-term shifts—is a critical starting 0.2 percent by 2020. Chinese
point. For example: “What share cars also suffer from poor consumer
of the car market in developed coun- perceptions of their quality and
tries is Chinese auto manufactur- safety. Evaluations by the China
ers likely to capture by 2020, and what New Car Assessment Program
impact could they have on global (C-NCAP, a government-supported
profit pools?” This might be a timely agency) give the country’s auto-
question for the planning team at makers a quality index score of around
a European or US automaker. After 30, versus 45 for automakers in
all, Chinese automakers enjoy a developed markets.
35 percent cost advantage over those
in developed markets, and Chinese Hyundai provides a memorable and
OEMs have supersized ambitions. recent example of an Asian auto-
BusinessWeek reported in July 2008, maker that entered the US market (in
for instance, that Geely Automobile the late 1980s) with quality prob-
“intends to sell 2 million cars [in the US lems and with volumes comparable
market] by 2015, and [the CEO is] to those of some smaller Chinese
confident he can thrive against global OEMs now. Though quite successful
competition.”3 The company’s today, it took the company nearly
March 2010 acquisition of Sweden’s two decades to establish a mean
Volvo Cars suggests that these ingful presence in developed mar-
ambitions aren’t just cheap talk. kets by competing on price and slowly
building out its sales network while
3  Still, China’s light-vehicle improving its quality and brand image.
Dexter Roberts,
“China’s Geely manufacturers haven’t entered Interestingly, the low market share
has global auto European or US markets at any numbers some forecasters expect for
ambitions,”
BusinessWeek,
scale, nor are they expected to do so China’s automakers seem to imply
July 17, 2008. soon. IHS Global Insight recently a trajectory similar to Hyundai’s in the
late 1980s.

But how relevant is this example for

Chinese automakers today’s Chinese automakers?


The vast difference in scale between

enjoy a 35 percent China’s domestic auto markets


and South Korea’s is obvious. But

cost advantage Chinese market penetration


might be similarly measured if certain
conditions held sway—such as
over those in developed the absence of major technological
breakthroughs in engine technol-
markets. ogy, continued quality problems for
Chinese automakers, and a need
for the slow, steady development of
a sales network.
Applying global trends: A look at China’s auto industry 3

2. Expand the solution space

Having carefully defined the problem When companies overcome these and
and the industry context surrounding other strategic and organizational
it, the challenge for strategists is to barriers, they can begin developing a
broaden the potential solution space rigorous and more nuanced picture
by challenging conventional wisdom of how trends and subtrends might
through the lens of global trends. Most influence their industries. In the
companies have a broad range of auto industry, for instance, could the
experts who can help, yet these peo- developing world’s rising economic
ple are often tucked away in orga- influence, the increasing scarcity of
nizational silos that make it difficult resources, and the spread of “green”
for them to connect the dots. Auto- technologies combine to affect the
makers in the developed world are market, with unexpected results?
very good at gathering rich trend
data and perspectives on topics such While events could play out in many
as regulation, macroeconomics, ways, Chinese carmakers could
and demand. But regulatory analysts well leapfrog current engine technol-
4 
BYD Auto, an in car companies may spend more ogy and develop a significant com-
upstart automaker time developing strategies for govern- petitive advantage in electric vehicles
that began as a
supplier of batteries
ment relations and lobbying than or other clean technologies; the
and electronic they do working with internal econo- Chinese player BYD Auto appears to
components to mists forecasting future demand. be moving in this direction already.4
mobile-phone
makers, recently Those economists, in turn, rarely inter- For one thing, global resource con-
announced that it act with engineers who focus on straints are prompting China to reduce
will have an electric
car for the US
future game-changing technological its dependence on foreign oil, as
market in 2011. possibilities. well as pollution and greenhouse gas

A man charges
a BYD Auto
electric vehicle
at the com-
pany’s campus
in Shenzhen,
China.

© Bloomberg/Getty Images
4 July 2010

emissions. With large funds avail- Likewise, Chinese cars could rap-
able through an economic-stimulus idly exceed minimum quality and
package, the Chinese government safety standards if the government’s
is already investing significantly in R&D appetite for technology and man-
for alternative technologies. agement know-how drove it to support
the acquisition of a major automaker
In parallel, China’s massive buildup of in a developed market (say, one of the
new infrastructure might spark an top five). This move would speed
entirely novel green automotive infra- the transfer of best practices to local
structure, without the massive Chinese companies, thus helping
replacement costs developed nations them to move rapidly up the learning
would incur. This infrastructure curve, to improve their brand image,
could include service networks and and to develop a more sophisticated
promote incentives for clean-tech understanding of consumer needs.
cars (say, special traffic lanes and pref- Alternately, the Chinese government
erential parking). Such moves might raise safety, emission, and
might inspire a large-scale consumer quality standards in response to con-
preference for alternative-technol- sumer demands while simultaneously
ogy vehicles, allowing Chinese auto- subsidizing local players so that
makers to achieve the required they could meet the more stringent
scale to begin mass production; China, requirements.
remember, is a homogenous auto-
motive market—as well as the world’s Finally, natural-resource constraints
largest and fastest-growing one. and environmental concerns might per-
This, in turn, would give China’s car- suade consumers in developed mar-
makers a cost and knowledge advan- kets to adopt cost-effective clean-tech
tage that might help them pass over vehicles more quickly than expected,
competitors in the developed world. creating a large market that Chinese
auto players would be poised to supply.

3. Define scenarios

In broadening the solution space by Intelligence Agency developed in


highlighting the way trends may recent years, allows planners to gene-
interact to challenge conventional rate extreme but plausible scen-
wisdom, we’ve emphasized two arios quickly by reversing their under-
variables that seem quite uncertain lying assumptions to arrive at a
and will probably have a major number of very different potential
impact on the industry’s evolution: states of the world. This approach
first, whether Chinese manufac- can help business strategists com-
turers can achieve a scale advantage bine uncertainties to provide a
in clean technology and, second, basis for robust, quantitative, and
whether they will acquire a large, therefore actionable scenarios,
leading Western auto brand. We can such as the following for our Chinese
use these two variables to gene- automotive example:
rate a handful of scenarios, each with
a compelling but distinct narrative. •A
 perfect storm. China’s govern-
A methodology called “quadrant ment aggressively promotes
crunching,” which the US Central its carmakers by creating the con-
Applying global trends: A look at China’s auto industry 5

ditions for a domestic clean-tech larger than Volvo) in a developed


market to flourish and by helping a market combines established
Chinese company buy a major brands and quality perceptions with
automotive business in a developed access to a large sales network,
market in order to facilitate rapid as well as a homegrown cost advan-
market entry. tage in traditional vehicles pow-
ered by combustion engines.
• The clean-tech advantage.
China’s market for clean-tech vehi- • Follow in Hyundai’s footsteps.
cles flourishes, allowing domes- Chinese auto players use their
tic automakers to develop competi- existing brands or create new ones,
Q3 2010
tive advantages to compete head- leveraging their factor cost advan-
Global forces—China autos
on in developed markets, but with- tage to produce inexpensive tradi-
Exhibit 1 of 2
out acquiring a brand in any of them. tional cars that compete head-
Glance: Two uncertain variables for China’s automakers could haveon a major impact
with the carsonofthe
incumbents in
evolution of the auto industry and can be used to define
• A helping hand. A Chinese acqui- potential scenarios.
developed markets.
Exhibit title: Scale, acquisition, or both?
sition of a top auto player (one much

Two uncertainties could have a major impact on the


evolution of China’s auto industry and can be used to define
potential scenarios.

Four 2020 scenarios, estimated Chinese auto OEMs’ market share and capture of profit pool1
in developed markets

The clean-tech A perfect


advantage storm

Market share: Market share:


Yes 3–6% 7–15% 2 methods to estimate
the probability of
Profit pool: Profit pool: each scenario and market
Variable 1: $1 billion−$3 billion $4 billion−$8 billion share impact
Chinese OEMs • Quantitative analysis where
develop significant trends are well-established and
scale advantages
Following A helping predictable
in clean tech in Hyundai’s hand • Delphi technique2 where
footsteps outcomes are binary (either/or),
difficult to predict, or both
No
Market share: Market share:
0–3% 3–6%
Profit pool: Profit pool:
0−$1 billion $1 billion−$3 billion

No Yes

Variable 2:
Chinese OEMs acquire 1 or more major
developed-market OEMs

The clean-tech Following in A helping hand A perfect storm


advantage Hyundai’s footsteps Chinese OEMs buy top China aggressively
Chinese OEMs leapfrog Chinese OEMs auto player, combining promotes OEMs by
technologies to compete head-on in established brand/quality heavily subsidizing
develop first compelling developed markets with cost advantage clean tech and buying
electric car established brands

1 Assumes Chinese OEMs achieve profitability similar to that of current compact segment average.
2 Systematic forecasting method developed in the 1940s to minimize groupthink. It draws on knowledge of panel of experts with diverse,
incomplete information.
6 July 2010

4. Quantify industry impact

Such scenarios are important We used the Delphi method with a


because they provide strategic clarity, panel of McKinsey auto industry
and they become even more power- experts after briefing them extensively
ful when accompanied by probabili- on the scenarios. The outcome?
ties and financial estimates that The panelists saw only a 40 percent
help clarify their implications. One clas- likelihood that the scenario based
sic approach involves the Delphi on conventional wisdom would be
technique—a systematic forecasting realized. In this scenario, Chinese
method, developed in the 1940s, automotive companies would cap-
that draws on the knowledge of a ture, at most, $1 billion of the profit
panel of experts with diverse, incom- pool in developed markets by 2020.
plete information. By keeping indi-
vidual predictions anonymous and By contrast, the panel saw a 60 per-
using an iterative process to con- cent likelihood of an aggressive
verge on a limited set of outcomes, entry by China into developed markets,
this method minimizes “groupthink” with Chinese players capturing
and helps experts to get comfortable a 3 to 15 percent market share. One
with high levels of uncertainty. scenario gave Chinese players a

The Delphi technique


A systematic forecasting method developed in the 1940s, this method draws on the
knowledge of a panel of experts with diverse, incomplete information to generate
predictions on which future scenarios can be based.

Stages Design Quality control Run the poll Synthesize


Design the panel, Double-check the Poll, aggregate Aggregate the final
choose the ques- panel’s composition responses, repoll. estimates.
tions, and identify and scrutinize
the panelists. questions.

Imperatives Ask the panelists Be sure the panel is Group the justifica- Look for the story
for estimates, balanced. tions and aggregate between the
justification, and predictions. justifications and the
level of confidence in Do a dry run with estimates.
their estimate. team members or Repoll until the
colleagues to be estimates don’t Weigh the estimates
Choose panelists sure questions are change (2–3 times by self-assessed
with a general clear. should be enough). confidence levels.
background but with
knowledge spike.

Caveats Avoid ambiguous Avoid a preponder- Results will often Don’t report on the
questions, which ance of like-minded cluster around precision of the
confuse panelists panelists by including scenarios. Don’t forecast (eg, confi-
and result in external experts. allow the story dence intervals);
unusable answers. Homogeneity among to be effaced, but rather, include
panelists may lend a do average the average confidence
perception of rigor to results. of each group of
a biased estimate. panelists.
Applying global trends: A look at China’s auto industry 7

10 to 15 percent chance of enter- Uncertainty isn’t limited to the auto


ing the developed world with the bene- sector. A wider range of actionable
fits of both a clean-tech cost advan- scenarios based on a granular
tage and a major acquisition. Subse- understanding of global trends and
quently, we estimated that this their interactions can help strate-
scenario implies that Chinese auto- gists in any industry see opportuni-
makers would capture a whop- ties where others see only uncer-
ping $4 billion to $7 billion share of tainty. Armed with a more robust out-
the global profit pool. look, executives can define the
appropriate strategic postures, iden-
To be sure, much would have to hap- tify no-regrets moves and steps
pen for this most aggressive sce- to mitigate risk, and spot the potential
nario to play out, but it is plausible big bets—insights that together
enough—and the stakes are high underpin a long-term strategic plan.
enough—to demand more serious By reassessing scenarios over
attention from auto strategists in time, companies can prepare to seize
developed markets. Indeed, if this opportunities before their com-
scenario came to pass, the impli- petitors do.
cations would be significant:
developed-market players would likely
see a big profit erosion that could
put their viability in question, thus pro-
pelling a large-scale restructuring
of the industry.

To read more about harnessing global trends,


visit mckinsey.com/strategic_trends.

The authors would like to thank the following people who provided input to this article: Dago
Diedrich, Dieter Düsedau, Russell Hensley, Hanns Joachim Krösche, and Stefano Proverbio.

Filipe Barbosa is a principal in McKinsey’s Johannesburg office, where Damian Hattingh is a


consultant and Michael Kloss is a director. Copyright © 2010 McKinsey & Company.
All rights reserved.