Go where the growth is.
That was the message delivered by Dee Kapur, president of Navistar International Corporation's Truck Group, in his presentation, “The Global Commercial Vehicle Industry: An OEM's Perspective.”
He said progressive companies are the ones that are exploring opportunities beyond America's borders.
“Times are changing,” he said. “There's only so much growth in America now. There's a lot more growth elsewhere. Many of you know it and are operationalizing it in different markets — in emerging markets particularly. Globalization is also good because it brings synergies and scales. And there is a growing convergence of companies, regulations, and technologies.
“It's essential to move that way. You look at the truck sales trend in the last 25 years, and there is a steady upward climb, albeit with different adjustments from time to time. But the trend is pretty clear.”
He said the global sales of trucks over six tons GVW have increased steadily each year, with 2.19 million in 2007 and 2.23 million expected this year.
The GDP growth rate over the next 45 years is expected to be highest in the emerging markets of India (8.7%), China (7.4%), Brazil (6.1%), and Russia (5.3%) — compared to just 2.5% in the US.
The countries with the most significant mineral resources will be Russia, Australia, South Africa, sub-Saharan Africa, the previous Soviet states, and South America.
“Natural resources — be it crude oil, copper, zinc, or steel — are going up and being consumed in voracious fashion by the emerging economies,” he said. “Look at the parts of world that are wealthy in these. Couple that resourced wealth with one driving factor — large, underserved populations are now just beginning to get benefits and the support of governments to bring them out of the dark ages, most notably China and India. There's demand for commodities and resources, people being lifted out of poverty and joining the middle classes, and research development. That development requires infrastructure, infrastructure requires transportation, and that leads to growth of commercial vehicles.”
In 2005, North America, Western Europe, and Japan accounted for 59% of all major-truck production. But the shift is so dramatic that by 2012, those mature markets will account for just 52%, while the emerging markets of China, India, Russia, and Brazil account for 48%. America's share of that will decline from 27% in 2005 to an estimated 21% in 2012.
Kapur said an OEM's considerations are the economy, competitive landscape, government, supply base, infrastructure, brand/distribution, language, skills base, and workforce.
The focus is on three countries:
Kapur said there is 10% GDP growth, an expanding middle class, consumer-based economy, and an environment where road transportation is critical to growth.
“From emissions standards to rules on vehicle weight and the rules of the road, India has a solid base of safety rules and regulations aimed at protecting the public and the country's investment in the infrastructure,” he said. “India recognizes the challenges and is actively developing its road infrastructure, rules, and regulations. The country recognizes that road transportation is critical to its ongoing economic growth. Most prominent is the development of the ‘golden quadrangle’ — major national highways that draw a box (quadrangle) around the country and two more main arteries from north to south and east to west to improve transportation between and among the major economic hubs.
“Indicators that forecast growth: as the roads improve, trucks are able to travel farther and at greater speeds; as the economy grows, industry needs to be able to transport goods of higher value, requiring safer, more reliable and secure vehicles; Wal-Mart has entered the market and brings its expertise in logistics, so the whole industry can move from a focus on transportation to a more efficient view of logistics.”
He said global partnerships create win-win scenarios, combine complementary capabilities and resources, and accelerate growth for both parties.
He said that Navistar International decided India was a prime opportunity because of the economic growth and the government's commitment to be a major player in the automotive and commercial vehicle industry. Navistar International chose to go in with a local partner, Mahindra and Mahindra, a leading maker of cars and light trucks.
“Mahindra gives us local connections, local manufacturing, an established distribution channel, engineering resources, and local supply relationships,” he said. “International gives Mahindra North American technology, expertise in larger vehicles, strong brand reputation, volume, and scale.”
The Mahindra International joint venture consists of three components: the design, manufacturing, and marketing of vehicles for India and export; engineering services for other product programs; and purchasing resources to identify suppliers for our products and assembly worldwide.
“Also, a key to this or any business relationship is the cultural alignment,” he said. “In this case, we have been able to build upon goodwill and reputation from when our two companies worked together in the 1970s. We've entered this JV partnership with common goals and compatible corporate cultures.”
“There is huge growth and a large population,” he said. “It's a large country driven by a different set of behaviors and a different set of standards, but nonetheless there is huge growth. They have more miles of paved road than the US does now. They're going to tighten emissions standards. Leading up to this summer and the Beijing Olympic Games, there has been a frenetic pace of construction to showcase the country for the world, followed by the Shanghai World Fair in 2010. In 2007, in the six-ton-and-up space, China surpassed the US as the largest market. So you can't ignore it.”
Kapur said the heavy-truck sector has been growing at an average rate of eight vehicles per kilometer since the beginning of the decade.
“There is a commercial-vehicle frenzy involving all the major players,” he said. “The most profitable business GM had in 2007 was in China. We're seduced by the size of the market.
“The laws require 50/50 ownership. You have to go in with somebody. Their growing self-confidence and demands and the provincial pressures make it a dicey thing. You have to feel it out. Is this an organization, a person, you can trust? Some of the things I talked about in India don't exist in the classical sense — the same court system, laws, communications, etc. We approach it with some circumspection.”
“Over the next few years, we expect to see a total increase in truck sales in Russia,” he said. “Within that, the largest increases will be for imported new trucks. Today, used-truck imports are mostly from European manufacturers, with a pocket coming from the US, often older cabover trucks from JB Hunt and other large fleets. But Russia's used-truck imports are becoming younger and younger-from 7 years old to 5 years old recently — and as the age gap shrinks, we expect to see a rise in imports of new trucks.
“When we look at where the new trucks are being imported from, we see it's almost entirely European makes. So as an American OEM, we see this is an opportunity to sell new trucks into Russia. Since a true export does not make financial sense, we are opening a local assembly operation, where our partner, Goodwill Holding, will assemble kits and distribute through a broad dealer network.”
He said the reasons for optimism include: the North American driveline earns respect in the Russian market for durability, simplicity, reliability, and longevity; the continued weakening of the US dollar starts to strongly favor US-supplied trucks; and today's Russian domestic products are outdated and will have a tough time competing with US and European technology.
“There is growing appeal for North American product,” he said. “Why? Distances are huge. The comfort aspects of North American sleepers have appreciated. There's probably a kind of stealth factor here. A lot of drivers in North America are from Russia. I'm sure word gets back that these are great trucks.
“We think ultimately local assembly will be required if we want to get into high volume, because shipping things to Russia from here is not a long-term strategy. The question is, do we get a partner? If so, who do we get?”
Kapur said the process of going global will be eased even further by the convergence of standards.
“When the Europeans get their standards accepted in other parts of the world, the European manufacturers have a natural competitive advantage going into those markets,” he said. “I submit that the United States, backed by everyone here, needs to more actively promote the acceptance of US standards throughout the developing nations. And here's a case in point: Length restrictions are the key reason many countries use cabover vehicles.
“We have to work with our government, diplomatic missions and other government agencies, and other manufacturers and industry associations to get a consolidated position accepted in other parts of the world. It is very important for our industry and our country to be on this level playing field.”