Emerging markets for Dummies: How to identify a high growth market for cars

India - picture courtesy Bertel Schmitt

Let’s say you are the CEO of a large multinational OEM, and you want to know which of the world’s regions to target next for expansion.  What you want are large untapped markets that will soak up millions of your cars. How do you find them? We will tell you how.

To identify a growth market, you need only three essential data points:

  • Total population
  • Number of cars on the road
  • Gross National Product

Yes, it is that easy, even if your consultants say it’s not.

Total population defines your market size.  Mongolia might be a sixth of the size of China. But its population is only 2.9 million. Mongolia won’t be a large auto market anytime soon. To sell a lot of cars, you need a lot of people to buy them.

The number of cars on the road divided by total population gives you the cars per thousand number. You want a low number here when you are looking for untapped markets. The lower the number, the more people are potential first car buyers.  In the U.S., there are approximately 800 automobiles per thousand people – the number of cars exceeds the number of people with a drivers license. In China, there are only around 60 cars per thousand people – whatever they say, that market has a long way to grow.  If China would ever reach a car density of U.S. proportions, this would result in a billion cars in China – a frightening or wonderful thought, depending on which side you are on. In Brazil, there are around 200 cars per thousand. In Russia, where two decades ago only apparatchiks had a car, there are now 280 cars per thousand. Portugal 450. Germany 650. In the industry, the assumption is that a market reaches saturation at around 500 cars per thousand. In a saturated market, you can’t grow with the market, you need to take your growth from your competition, and the competition will try to do the same to you. To grow with a market, you want one that has decades until saturation.

However, you say, people need to be able to afford the car. Right you are.  This is where the Gross National Product, or GNP comes in. Divide the GNP by the total population in your market, and you get a per capita GNP . On the average, the population in your target market does not need to be filthy rich to sustain a growing car market. In the industry, the rule of the thumb is that a region’s auto market starts to get going at around $1,000 GNP per head, and that the market goes into rapid expansion  at around $3,000 per capita GNP.  Why? Because it does.  China crossed into $3,000 per capita GNP in 2008, and two years later, its auto sales had doubled from 9 million to 18 million.

Of course, these numbers are only rough indicators.  Being in dollars, they are subject to currency fluctuations. When a currency is undervalued, the stops are triggered a bit earlier. Also, be careful about the quality of numbers. Emerging markets often have lousy statistics.

Be wary of what you are given as a “motor vehicle.” According to the definitions of OICA, the world umbrella organization of all automakers, a “motor vehicle” is anything with an engine and four wheels or more that does not fly. or run on rails. In many markets, they bunch motorcycles or three-wheelers into that number. You hear “motor vehicle” sales of 18 million out of India. They include two-wheelers. The actual number of “motor vehicles” with four or more wheels sold in India was less than 3 million in the 2012-13 fiscal.

Also, as the CEO of that global automaker, make sure you are given all motor vehicles, not just “passenger vehicles,” or “cars.” About half of the motor vehicles in the U.S. are classified as “trucks.” Other markets have different classifications.  Especially in emerging markets, a small van or pickup truck is used as the family car. Therefore, when you look at global markets, always take the total of all “motor vehicles” with four wheels or more – the few heavy trucks and buses don’t change the equation much.

Next in Emerging markets for Dummies:  Why the India car market is only a fraction of the Chinese (armed with the three essential data points, you already know the answer …)