For years the secret to success in the automotive business was to penetrate the U.S. market. Automakers such as Toyota (TM), Honda (HMC), BMW (BMW:GR), and Mercedes-Benz (DAI) enjoyed plush revenues as their network of dealerships expanded across North America. So great was the market that automakers were willing to jump through U.S. regulatory hoops. They installed such devices as catalytic converters and introduced new models and engines—in some cases adapting right-hand-drive vehicles to offer left-hand drive. They kept production costs down and spent millions of marketing dollars to entice credit-happy American consumers.
That may no longer be the case. In the past, the main reason certain auto brands or models couldn't be found in the U.S. was that they failed to satisfy consumers, the government, or both. Now it's increasingly because there are more attractive—and accessible—markets.
In 2009, China surpassed the U.S.as the world's No.1 automotive market, according to Beijing-based China Association of Automobile Manufacturers, as millions of Chinese flexed their new-found economic muscles to buy cars. Domestic demand has been exploding and the major Chinese automakers such as Geely, Chery, and BYD are working hard to meet it. China is expected to consume about 15 million vehicles this year and as many as 20 million by 2015, according to Rebecca Lindland, an analyst at Lexington (Mass.)-based IHS Global Insight. Automakers around the world are hungrily eyeing ways to tap into hundreds of millions of potential customers in a single market.
In April, Martin Winterkorn, chief executive officer of Europe's largest automaker, Volkswagen (VOW:GR), reportedly told shareholders that he expected the Chinese car market to grow by 75 percent—and India's market to more than double—by 2018.
Do China's automakers yearn to enter the U.S. market? "Right now, obviously, the U.S. has no Chinese vehicles," says IHS's Lindland. "Because of the collapse of our economy, we aren't really the cash cow that we used to be. China has so much unmet demand and potential demand that it may be tough to make a business argument to sell cars here."
Fickle Concern for Fuel Efficiency
In addition to growing demand at home, Chinese automakers may also be wary of committing capital to selling in the U.S. They would need to meet U.S. environmental and safety standards just to face the risk that American consumers might reject their models as too small, underpowered, or simply cheap.
At the height of the most recent gas crisis, when a gallon of regular fuel hovered around $4, many U.S. consumers were desperate to trade in gas-guzzlers for more fuel-efficient coupes and sedans. European and Asia automakers rushed such models as the Honda Fit and Toyota Yaris to market while U.S. rivals were stuck with showrooms jammed with SUVs and pickups.
Now that gas prices have come down, small car sales have tailed off and sales of big cars and trucks have resumed. Daimler's microscopic Smart car, introduced in 2008, has seen sales drop 62 percent. Even sales of the popular Mini Cooper are down. At the same time, Ford Motor (F), which just posted a $1.69 billion third-quarter profit, saw sales of light trucks climb 23 percent in the first nine months of the year, compared to the same period last year, according to Autodata.
That isn't to say that U.S., Asian, and European automakers already established in the U.S. needn't worry about competition from China and India.
Tata's Priority: Serving India?
Instead of flooding the U.S. market with an onslaught of cheap, small cars, Chinese and Indian companies are already entering it quietly, on a much higher level. Ford sold Volvo to Geely in a $1.5 billion deal that was completed in August. Tata Motors (TTM), one of India's top three automakers, bought Jaguar Land Rover for $2.3 billion last year.
"Tata actually has a very healthy presence in the States already," Lindland says. "The potential demand in India all by itself is huge. Why come to the States and fight that battle in a mature market when you have a well-known brand in an emerging market?"
Despite the U.S. slump in small car sales this year, analysts expect the supermini market to return with a vengeance when gas prices go back up, as they periodically do. Moreover, fuel economy standards coming in 2016 will mandate that gas mileage for all cars must rise from 27.5 mpg to 37.8 mpg, heightening U.S. demand for smaller cars.
Within 5 or 10 years, analysts say, so-called global cars—small vehicles that are best-sellers everywhere else—should register greater inroads in the U.S. market. In January 2011, Fiat (F:IM) will be returning to the U.S. market for the first time since 1995 with the launch of its popular 500, which will sell through the company's network of Chrysler dealerships. (Fiat acquired Chrysler in 2009.) For now, though, small car dealers may need to stock patience on the sales front.
"The small car market is really probably one of the riskiest parts of the market right now," says Lindland. "Consumers aren't necessarily saying, 'Get me these teeny, tiny cars.'"
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