The global commercial vehicle market is starting to motor. But rather than the fuel-injected, western-dominated growth that characterised the industry in the past, this time the engine is being fuelled by the emerging markets.
Last year, Dongfeng – a Chinese manufacturer – became the world’s highest selling OEM for heavy commercial vehicles. And whereas just five years ago, the ‘Triad markets’ (Western Europe, North America and Japan) dominated the leader board with seven of the top ten companies based on sales, by 2010 the opposite was true: seven of the top ten companies hailed from either China or India. What is more, the US and Japan had dropped off the list entirely.
So while North America saw its share of worldwide commercial vehicle registrations fall from 50 percent in 2006 to around 32 percent in 2010, China sharply increased its global market share to 28 percent by the end of 2009 and to more than 30 percent by 2010.
Demand shifts to emerging markets
However, these statistics must be viewed in the context of rapidly growing demand in the emerging markets which is most likely to be satisfied, at least for the near future, by local manufacturers. Asia is now (by far) the largest region for commercial vehicle sales, accounting for nearly one in two commercial vehicles sold worldwide. But any incremental growth in, for example, Chinese demand for trucks will likely be served by one of the existing Chinese manufacturers (Dongfeng, FAW, CNHTC, Torch or Beijing Automotive).
Nevertheless, the emerging markets are also – overall – starting to open up to foreign ownership and participation (with the obvious exception of China where market entry for foreign commercial vehicle manufacturers remains substantially more difficult). In India, for example, most protectionist measures have now been dismantled, and import regulations and customs duties no longer create a barrier to foreign participation. Even despite the fact that the Chinese vehicle market is heavily regulated, foreign OEMs are not willing to surrender right away and are trying to get a foot in the door to the world’s largest commercial vehicle market via joint ventures and production agreements. In particular in China, foreign OEMs will find a largely fragmented industry structure: Currently 24 companies produce Light Commercial Vehicles (less than 6 tons), 18 service the Heavy Commercial Vehicle market (over 6 tons), and around 16 full-line companies currently cover both market segments. The Triad markets, on the contrary, have largely exhausted opportunities for consolidation, leaving the market dominated by a handful of global full-line, multi-brand manufacturers with the scale and reach to properly serve a variety of markets.
Purchase price vs. TCO – regional adaptability is the key to success
Of course, Triad manufacturers will quickly find that strategies that were ‘tried-and-true’ in western markets will not necessarily return the same results in the emerging markets.
Emerging market customers tend to focus on different ‘selling points’ depending on their market. For example, there is a tendency for operators in the emerging markets to drastically overload their commercial vehicles, meaning that manufacturers must address the fact that vehicles will bear a higher payload than intended. In other words, it’s not RPMs, but torque, that counts in order to get overloaded trucks into motion in the stop-and-go traffic of the emerging markets. Vehicle design must also take into account the condition of the local road networks, which are often of poor quality.
And whereas Total Cost of Ownership sits high on the purchasing agenda for buyers in the more evolved markets, customers in the emerging markets tend to focus strongly on initial cost and ease of DIY-style repair. As a result, the strategy of charging a premium for vehicles that – over time – deliver cost savings through innovation or enhanced safety is currently a difficult sell in China or India. Furthermore, wide-scale fleet management solutions are also not in high demand in places like India, where only 10 percent of truck operators own a fleet of up to 25 trucks, and less than 2 percent own between 200 and 1,000 vehicles.
World Truck or modular systems: Strategies for a successful future
And while it seems clear that most Triad manufacturers are likely to focus on the emerging markets going forward, this does not spell the dawn of the ‘World Truck’. Rather vehicle concepts will need to be geared towards the demands of local customers, which will also often mean reducing product complexity and using local resources and suppliers. In response, many global players are now focused on developing modular systems that use the same aggregates and components in a variety of different models and brands.
Above all, multi-brand manufacturers will need to develop different business models to meet the unique needs of mature and developing commercial vehicle markets. The business model for commercial vehicle manufacturers in Triad markets is based on a product-service bundle with technically high-quality, high-value vehicles, as well as complementary services (such as spare parts logistics, financial services and fleet management). In contrast, a successful business model for emerging markets must place the low-cost truck at the forefront and focus on developing vehicles that are easy to repair.
The value of greening
Environmental regulation also creates a disparity between the markets. Manufacturers in the Triad countries continue to face tightening environmental restrictions with expectations that they will only increase in the future. In response, manufacturers have substantially cut particle and nitrogen oxide emissions, and increased fuel efficiency.
These environmental regulations may pose a significant barrier to emerging market manufacturers seeking to enter the more developed markets. But while emission limits in the emerging markets are currently less restrictive than those in the Triad markets, it is widely anticipated that environmental demands will rise in due course.
A number of Triad manufacturers are currently testing and selling so-called ‘micro-hybrids’ across many vehicle classes, and – less frequently – mild/full hybrid engines. But in the commercial vehicle segment in particular, buyers seem less willing to pay a premium for eco-innovation. As a result, commercial vehicle manufacturers will need to find ways to substantially reduce the cost of hybrid systems.
Achieving knowledge transfer between cars and trucks
Particularly in the more developed markets, there is an increasing opportunity for valuable lessons to be shared between manufacturers of cars and trucks. For one, the emergence of mobility solutions in the passenger car segment (for example, Daimler AG’s ‘Car2Go’ program) could be enhanced by leveraging the mature practices of commercial fleet management and logistics approaches common in the developed world. Passenger cars used for mobility services will also necessitate more frequent maintenance and service, likely closely resembling the truck industry’s automated service management approaches. Of course, truck manufacturers can learn a few lessons from the passenger market as well. For example, in the developing markets, where customers are very often owner/drivers, truck manufacturers may want to study the customer segmentation and targeting approaches of the passenger vehicle market to learn key insights into selling vehicles to individuals rather than fleet managers.
Russian specifics is widely covered in the report. Lydia Petrashova, Partner, Head of Automotive, KPMG in Russia and CIS comments: “Russia’s commercial vehicle market is heavily influenced by Europe – but still largely defined by low technical standards. Purchase price is the number one criteria for Russian market but replacing commercial vehicle inventories will strengthen the position of foreign manufacturers with more sophisticated products. Local commercial vehicle manufacturers dominate the Russian market, despite many established market participants from countries as Triada (Canada, Mexico, USA, EU, industrial countries of Asian region). For international players succeeding in the Russian market is difficult without local partners. Due to low technical standards Russian players look for long term cooperation with international players in the area technology and innovation.”
© 2017 KPMG Audit LLC, the Mongolian member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.