BRICs and clicks

Twenty years ago, Jim O’Neill, then an economist with Goldman Sachs, came up with the term ‘BRIC’ to represent four major economies that appeared to offer exceptional growth opportunities in the years ahead – Brazil, Russia, India and China.  It was a convenient way to group four quite different markets which shared a potential for high growth and it attracted justified attention from many investors, including in automotive.  Huge sums flowed into opening up local assembly and building dealer networks, and senior executives were assigned to make sure that nobody missed out on this apparent gold rush.  The expectation was that these markets would outpace the economic development of the established global economies and become dominant by 2050.

The reality has been somewhat different, and Goldman Sachs themselves collapsed their BRICS focused investment fund into a broader emerging markets fund in 2015.  The combined Gross Domestic Product (GDP) of the four BRIC markets in 2001 was US$2.7 trillion, and grew eightfold to 2020, reaching $20.4 trillion.  However, within this total, the economic engine has not been firing on all four cylinders.  Whilst China saw GDP growth of over 1000% over the period, this was twice the level of India and Russia, and four times that of Brazil.  This has created very different outcomes for the automotive sector investors.

China has developed into the world’s largest car market and producer over the intervening period, with a particular focus on developing battery electric vehicles, and now on the cusp of becoming established in mature markets in Western Europe, and despite political tensions probably the US.  Twenty years ago, it was the non-Chinese joint venture partners – notably VW, GM, Hyundai and the German premium brands – who were driving industry development at all levels.  Most development work was done by the foreign brands, production processes were designed and managed by them, and the distribution model was a ‘cut and paste’ from Europe and the US.  The latter was literally true in some cases – the dealer standards and processes for SAIC-GM were edited versions of those operated in the US.  This arguably meant that ‘clean slate’ opportunities were missed to address some of the inherent flaws in the traditional distribution model, but it was not a constraint in a booming market, and China became a huge profit generator for a number of the foreign brands.

Looking to the other members of the BRIC, Brazil has seen a roller-coaster economic development over the years, but twenty years ago the outlook was positive.  Total local automotive production had hovered around 1.5 million units annually for the previous decade, but hyper-inflation was now under control, and there was a rush of automotive investment, growing from under US$0.7 billion in 2003 to around US$5 billion in each of 2011 and 2012.  Local production and the market as a whole more than doubled over the same period.  This not only attracted interest from the manufacturers, but also from other players.  The US dealer group, Group 1 Automotive, acquired a Brazilian dealer group – UAB Motors – with sales at the time of around US$650 million, and a number of European and US service providers set up shop to support the development of the industry.

The story in Russia and India was similar.  Driven by a recovery in the Russian economy and warming political relationships, there was a wave of inward investment, starting with Ford in 2002, and production of foreign brand cars rose from 11,000 in 2002 to almost half a million five years later.  However, Russia was badly hit by the Global Financial Crisis, and introduced protectionist measures.  GM and Ford both closed their operations subsequently, though Renault has made a creditable success of its acquisition of Avtovaz, and ironically Chinese manufacturers have established a firm footing, with their dealer expansion balancing out the decline of other foreign brands.  As the Indian market opened up from the mid-90’s there was a wave of enthusiasm and inward investment with a number of plants opened over the following decade, all with 100,000+ annual capacity.  In 2014, the total of the anticipated sales of the manufacturers was almost three times the actual market size.  Fiat achieved just 10% of their 2014 sales target, and finally withdrew from the market in 2018.

The implications today are clear to see.  Whereas there was the possibility 10-15 years ago of seeing Indian and Russian brands such as Tata and GAZ having a broader role in the global market, this is now limited mainly to Tata’s ownership of Jaguar Land Rover.  Brazil, rather than being a supplier to the whole South American market, and potentially more broadly for some products (Land Rover Defender was at one point considered for global production in Brazil and VW used to source the Fox in Brazil for Europe), has become more inwardly-focused.  This is also likely to delay convergence in products and standards for emissions and safety, as there is less scale benefit in converging with standards applicable elsewhere.  In the meanwhile, China – alone from the original BRIC grouping – marches on, developing its own brands and technology of which we are certainly going to see more in the next decade.

However, none of the BRIC markets have simply followed along the traditional path in the distribution area.  All the markets have developed in terms of the general uptake of e-commerce and digital technology.  When we had our China research programme a few years ago, it was clear that the customer buying journey was more digitally focused and enabled than it was in Europe or the US, even if lack of product familiarity still led buyers to a traditional dealership.  That is now changing with some of the new brands being much more biased towards their online channel.  In Brazil, there have been innovations in the e-commerce space that at least equal what we see elsewhere in the world, including the use of AI to support lead management and customer interactions.  The Russian market has a wide range of e-commerce platforms covering new and used car sales, leasing and aftersales.  India has a similar range of e-commerce offers as you would expect from a global tech-hub, but also a range of subscription offers from both manufacturers and independent start-ups, as well as being the second southern hemisphere market that Mercedes chose to launch agency earlier this year.  Whilst we might therefore be disappointed as industry-watchers that some of the initial promise from 2001 has not been delivered, we should not ignore any of those markets when looking for innovation in distribution.  Clicks are playing an important role in the continuing development of the BRICs.