By on January 22, 2010

A report about the automotive industry in the BRIC countries, released by the Boston Consulting Group, throws cold water on the low cost production story:

“In manufacturing, companies are generally paying a premium of 5 to 15 percent to manufacture in the BRIC countries, mainly because of diseconomies of scale and higher quality-assurance costs than they incur in the more developed markets; only in Brazil do they actually save money on manufacturing.”

Ooops.

Apart from this astounding revelation, the rest of the report is full of platitudes and comes 20 years too late:

“For at least the next decade, the future of the automotive industry lies in the BRIC countries. Together, Brazil, Russia, India, and China will account for more than 30 percent of the world’s auto sales in 2014.”

“Auto companies cannot succeed in these markets by offering one-size-fits-all products, processes, or approaches. To realize the full value of localization, the key is knowing which functions are best suited to which BRIC countries.”

“Whereas auto sales in the Unites States, Europe, and Japan will grow only moderately from early 2009 through 2014, at an average rate of some 2 percent per year, sales in the BRIC countries will grow by more than 6 percent per year.”

“In sales, the diversity in national tastes and requirements drives the need for specific car offerings for each country. For example, Brazilian consumers favor sporty hatchbacks, Russians prefer Western sedans and sport-utility vehicles without visible local adaptations, Indians seek ultra-low-cost minicars, and the Chinese enjoy affordable luxury-style sedans with flair.”

Does anybody pay money for such timely and comprehensive advice?

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10 Comments on “Boston Consulting: Production In BRIC Countries Costs More...”


  • avatar
    Disaster

    Does this report mean it costs 5-10% more to manufacture cars or car parts in the BRICs (Brazil, Russia, India, China) or at least the RIC (Russia, India and China?) If that is true, is it implying the U.S. and Japanese are exporting jobs to China and yet it is costing them money…not a cost saver? That seems highly unlikely since labor is so cheap and so many companies have put plants in China. What is unique about the auto industry that makes it less cost effective to build plants there than say, Motherboards?

    • 0 avatar
      HerrKaLeun

      maybe 5%-10% in addition to what they thoght. Say it costs 50% to produce a car in china compared to the US. but you have to add 10-15% (which would be 5% – 7.5%) for additional cost such as quality control and smaller numbers.

      this might change over time. Once the ramp up production, economies of scale will be bigger and workers will be trained better. On the other hand they will have rising wages there too.

      Same phenomena with the Eastern European countries, they were cheap labor, and quality often was shady. but over time quality got better and labor rates went up.

    • 0 avatar

      Does this report mean it costs 5-10% more to manufacture cars or car parts in the BRICs (Brazil, Russia, India, China) or at least the RIC (Russia, India and China?)

      It doesn’t necessarily mean it, but that’s what the report says. I went to the actual report (a press release could have gotten it wrong, and here it says again: “In manufacturing, companies are generally paying a premium of 5 to 15 percent to manufacture in the BRIC countries, mainly because of diseconomies of scale and higher quality-assurance costs than they incur in the more developed markets; only in Brazil do they actually save money on manufacturing.” Yes, they are saying, except for Brazil, it’s cheaper to manufacture at home.

      I wouldn’t pay a dime for that advice.

    • 0 avatar
      stuki

      Compared to cheapest non-BRIC alternative, perhaps? Wouldn’t surprise me, as developing a presence in these markets is worth overpaying a bit for.

  • avatar
    jmo

    HerrKaLeun,

    You’ll remember when oil prices spiked and they raised trans-pacific shipping rates companies started to move production back to the US. The cost savings from the low labor costs were less than the fuel surcharge.

    So, it’s certainly possible it’s not that much cheaper to make something in China than the US. You need to keep in mind depending on the product labor isn’t that big a component of the final cost.

  • avatar
    twonius

    Yeah this makes a lot of sense based on my experience. (perhaps a-typical, I have no way of knowing)

    I worked on getting a chinese supplier up and running on a product once. LOTS of time spent esentially teaching them what to do. Then months of testing and quality control to make sure they keep doing it. Plus you had a lot of staff turnover in China, so it was hard to keep a project like that on track.

    Then factor in that 95% of the cost of the part was materials and even if you’re paying nothing for labor you were still losing money by the time the project was completed.

    Of course it probably had more to do with getting into the chinese market than making a cheaper part for the world, so maybe it will pay off eventually.

    • 0 avatar
      Brian P

      Your experience is not atypical. My own close-hand observation of two projects (not mine, but same company) that went into developing countries was that although the people there only got paid one-tenth as much, they also only did one-tenth as much, so at the end of the day, the project cost the same but took ten times longer. Numbers rounded-off, perhaps, but you get the idea.

  • avatar
    stevelovescars

    Does the report also include the costs associated with handing over one’s designs and technologies to potential competitors in a country that doesn’t enforce intellectual property rights?

  • avatar

    twonius: If materials is 95% of the part, then it’s downright silly to have it made in China. I try to impress this on all my customers. They beg me for cheap batteries. My answer is “No.” Batteries are a lot of lead, acid, and little work. On labor intensive products, the equation changes dramatically.

    • 0 avatar
      gimmeamanual

      If material is 95% and you want to export, then yes, silly. But if you’re making them for the domestic market, then better in China. That’s what we’ve found; we save nothing on labor as our parts don’t have a lot, and taxes/shipping mean we do very little import or export. For China we produce in China, for Europe we produce in Europe, and for NA we produce in NA, etc etc.

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