Take a mobile phone and make it bigger. Make it still bigger. Now you have got a screen size that makes it a viable competitor to the TV for your entertainment needs. Make it big enough to put enough processing power for your information needs. Make it voice activated. But it is too unwieldy to carry around with you. No problem; if you can’t carry your communication-entertainment-information unit, let it carry you. Make it even bigger and add some wheels to it. Soon, a GPS enabled car, with all its in-cabin communication/information/entertainment implications will be a regular feature on the roads of Japan and Korea. And what begins in any of these places will naturally find expression of scale in China.
Let's look at some numbers. The US consumes about 10 million cars annually. China consumes, currently, about 3 million annually. Given the low level of current penetration, the rapidly increasing infrastructure of global quality, the large population and the increasing wealth of the Chinese consumers, this number is going to increase constantly (the "emerging markets" flattener). How much will it increase to?
If we take a 50 year view, and assume a conservative CAGR of about 4% over that period for the Chinese auto market, it'll reach a level of 20 million cars annually in 2056. Cumulatively, between now and then, China will consume about 450 million cars. What about the US? Given the high level of penetration, the relatively static population, and lower economic growth rates, let us assume a static consumption of 10 million cars annually over the next 50 years. That's a cumulative consumption of 500 million cars; roughly speaking, the same as China. The US market is fragmented and mature; the Chinese market is the new frontier, with no clear long-term leaders established yet.
What does this mean for the global auto majors? How will it impact the balance of power?
The Japanese and the Koreans are strong in the latest generation communication technology. Will it give their automobiles an unbeatable edge?
Energy efficiency, either through hybrids or through alternative fuels, will be a key driver. Whichever energy source emerges as the winner, the end of the big-big car and the rise of the small/medium car looks likely. This trend will be further enhanced in China as millions of people who buy a car for the first time will go for a smaller car that's more affordable. Will this be Hyundai's window of opportunity? Does GM"s acquisition of Daewoo give it an entry here? Will the Japanese, the past masters of the small, fuel efficient car, further increase their dominance?
Will there be a Chinese company that will combine the potent force of local knowledge, made - in - China pride and fierce ambition to emerge as a dark horse?
And what would be the strategy of the US car majors? Can they fight on two fronts? Given that there is more money to be made per car in China, should they resign themselves to a gradual erosion of their market share in their domestic market, swallow their pride and focus on the China market?
If the center of gravity of the supply chain of all auto majors shifts to China completely, how will it impact the market in the US? And will the US players be able to crack the communication code in China, or will they struggle long enough for the Asian players to establish a lead?
We haven't even discussed the impact of the Indian market and the European auto industry, but it'll be interesting to watch the flat world phenomena play out on the roads in China.