Boston Consulting: Production In BRIC Countries Costs More

Bertel Schmitt
by Bertel Schmitt

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?

Bertel Schmitt
Bertel Schmitt

Bertel Schmitt comes back to journalism after taking a 35 year break in advertising and marketing. He ran and owned advertising agencies in Duesseldorf, Germany, and New York City. Volkswagen A.G. was Bertel's most important corporate account. Schmitt's advertising and marketing career touched many corners of the industry with a special focus on automotive products and services. Since 2004, he lives in Japan and China with his wife <a href="http://www.tomokoandbertel.com"> Tomoko </a>. Bertel Schmitt is a founding board member of the <a href="http://www.offshoresuperseries.com"> Offshore Super Series </a>, an American offshore powerboat racing organization. He is co-owner of the racing team Typhoon.

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  • Jmo Jmo on Jan 22, 2010

    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.

  • Twonius Twonius on Jan 22, 2010

    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.

    • Brian P Brian P on Jan 22, 2010

      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.

  • Stevelovescars Stevelovescars on Jan 22, 2010

    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?

  • Bertel Schmitt Bertel Schmitt on Jan 22, 2010

    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.

    • Gimmeamanual Gimmeamanual on Jan 22, 2010

      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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