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DA IMLER AG S SMART CAR IsitsoSmartintheEmergingMarketsofIndonesiaandNigeria?

Master of International Business Case Study

Fa13-EIB-B238-01-International Business Strategy

Professor Bhaskar Chakravorti

Submitted by Team 7

August 21, 2013

2013 TEAM 7

htt : fletcher.tufts.edu


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DaimlerAGsSmartcar:IsitsosmartintheEmergingMarketsofIndonesia

andNigeria?

TheEmergenceoftheMicrocarIn2008,whentherewasaglobalfinancialdownturnandthebiggestcarmakeroftheworldGeneral

Motorswentbankrupt,thedemandforcarsincreasedacrosstheemergingmarkets.

Themajorcarmakersoftheworldbeganfocusingonmakingsmallcars.Therewasatimewhenthere

wereonlytwotochoosefrominlargestemergingeconomies:ChinaandIndia.However,whenMaruti

800 was launched, things changed. Suddenly, consumers wanted to go for this car because of its

featuresandpricerange.Now,therearemanydifferentmodelsofmicrocarsavailable.

Withtheincreaseofthenewfleetofmodelsinthemarket,customershaveabigrangetochoose

from.Whyallofasuddenpeoplearegoingformicrocars?Itisbecauseofthecongestedroadtraffic,

parkingproblems,risingfuelpricesandnewemissionsnorms,increasedcostofinputs,pricerangeand

the car loan facilities available. While China and India were early adopters of microcars, other

emergingmarketssuchasIndonesiaandNigeriabegantoseeanincreaseddemand.WouldDaimler

AGssmartcarbeabletotakeadvantageofthisexpandingmarket?

smartCAR

Smart is an automotive brand of Daimler AG that specializes in manufacturing microcars. Smart is

headquarteredinBblingen,GermanyandhasitsmainfactoryinHambach,France.

The design conceptfor smartcarsbegan inthe late 1980s, associatedatthetimewiththe Swatch

brandof watches. Aftera period ofbackingby Volkswagon,thefirstmodel was finally launchedby

Daimler-BenzinOctober1998.Severalvariantsontheoriginaldesignhavebeenintroduced,butthe

originaldesign,nowcalledtheFortwo,isthemostenduring.Itisnowinitssecondgeneration,andan

electricversionisalsoavailable.

SmartismarketedwidelyincludinginAsia,NorthandSouthAmerica,Australia,andEurope.Theyhave

been the subject of many conversions and design improvements by third parties, including electric

conversions, performance upgrades, anddesign enrichments. Sales from2011 to 2012increased by

6%,asshownintheExhibit11.


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IndonesiaandtheEconomicsofTransportation

IndonesianEconomy

Indonesiatodayisthe16 thlargesteconomyintheworld,has45millionmembersoftheconsuming

class,has53%ofthepopulationincitiesproducing74%ofGDP,andcontains55millionskilledworkersintheIndonesianeconomy2.Intheyear2030,Indonesiaissettobethe7 thlargesteconomyinthe

world,willhave135millionmembersoftheconsumingclass,willhave71%ofthepopulationincities

producing 86% ofGDP,and will need 113 million skilled workers3.Exhibit24 below represents how

Indonesias GDP has performed in relation to other to both non-emerging markets and emerging

markets in 2011. According to Exhibit 35, the current expected trajectory of growth for Indonesia

showsanadditional90millionIndonesianscouldjointheglobalconsumingclassby2030,poweredby

thecontinuedriseofurbanIndonesia.

PopulationDensity

Population density is a key indicator for the assessment of future needs for public transport

infrastructuredevelopment.Theworldspopulationiscontinuingtoexpandandisexpectedtogrowby

1.4billionby20306.AccordingtotheUnitedNations,in2015,emergingmarketswillalreadyaccount

fornearlythreequartersoftheworldsurbanpopulation.Indonesiastandsoutasacountry,which

will needextensive infrastructure enhancements, giventhat its already-high population density will

increasebyfurther32%by2030 7.EstimatessuggestthatIndonesiawillbehometosome322people

persquarekilometer8.

AutomobileIndustry

Many factors, like easilyobtainablecredit and low interestrates, coupled with a strong increase in

consumer lending by banks and an abundance of new, low-priced models assembled locally, have

fueled a car boom in Indonesia. Slow improvements to Indonesian infrastructure, policy, and tax

incentiveshavecontributedtoincreasingforeigninvestmentinthesector,andhasbecomeakeypillar

of the economy with investments raising more than $7 billion and generating employment of over

600,0009.Theeconomyexpandedby14.1%in201110,mainlyspurredbyconsumption,andisexpected

tocontinueontrack,spurringhopesofcontinueddemandforcars.

The current Indonesian automobile volume is estimated at approximately 11.25 million. The major

concerninIndonesiarelatingtovehiclepopulationgrowthispredominatelyfocusedoninfrastructure.

Theroadsinmanyregionsarewellbelowacceptableinternationalstandards,andtrafficincitieslikeJakartaisalreadyatchokinglevels.Thecompactcaristhelargestandfastestgrowingsegmentofthe

Indonesianmarket.Compactcarsaremostlytwo-wheeldrive,howeverfour-wheeldrivevariantsare

available.Compactcarsarefavoredbecauseofitslowprice,fuelefficiency,andsmallersizetoavoid

trafficjams.AsshowninExhibit427,thetoptenmanufacturersof vehiclespurchasedbyIndonesians

arepredominantlyfromJapan.Currently,dutyonimportedpartsrangesfrom0%to40%duty.The

Government has committed to working towards a 0% tariff on all auto parts imports by 2020. In

addition,thereisaVATof10%.Importationisquiteeasy,althoughalocalpartnerispreferred.Inorder


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tominimizeduties,itisquitecommonforpartstobetransshippedthroughSingapore.Dutiesbetween

SingaporeandIndonesiaarecurrentlyzero.Thereisawell-establishedinfrastructurethatcanfacilitate

thesemovements.

ComponentproducersinIndonesiacontinuetoproducelesssophisticateditemsthatlackvalueadded

processesandarethereforefacingincreasedcompetition.UndertheASEANfreetradeareaandtheASEAN China free trade agreement, import tariffs onauto components are set atzero. Japanese

producers have maintained their own production of high technology components due to the weak

enforcementofintellectualpropertylawinproductionbasessuchasIndonesiatoprotecttheircore

business.Thehighrateofinvestmentneededtoestablishfacilitiescapableofproducingsophisticated

components has also held back manufacturers from making the decisive shift tocentralize all their

production processes. Local component producers are therefore keen to establish financial and

technologypartnershipsinordertoaddvaluetotheproductionprocessandboostfutureexports11

.

Onthemanufacturingandexportside,Indonesiahasnotyetreachedtheproductivitylevelstomeet

itspotentialasamanufacturinghub.Incarexports,numbersregisteredbelow100,000unitsayear,

andlessthan30,000formotorcycles,for20092010.AccordingtoGaikindo12,importsofcarsstoodat 72,646 units in 2008 then dropping to 32,628 in 2009 but sharply increasing to 76,520 in 2010.

Issuesofredtape,lackofqualifiedhumanresources,highlogisticalcostsfrompoorinfrastructureand

unreliableelectricitysupplyhaveheldcarproducersbackinthepast.Tofillthegapbetweenthelack

ofsupplywiththehighdemand,companiessuchasHyundaiandToyotamakinglarge-scaleinvestment

toincreasecapacityinthecountry,inlightofthepoliticalturmoilinThailandandthedamagecaused

bytheJapaneseearthquake.Audiannouncedatthebeginningof2011thatitwouldbesettingupacar

assembly plant in Indonesia toproduce 2,700cars by2015 for the Indonesian market. Suzuki also

statedintentionstoinvest$800millioninanewautoengineplanttodoublecapacityatitsexisting

facility.The domesticmarket has beenthe main attraction for car producers aswellasthe modest

incentivessuchasthe2008regulationthatprovidesa6yearincometaxbreakonupto5%ofthetotalinvestmentandexemptionofimportdutiesforcertainrawmaterials.Morewillfollowsuit,suchas

Europeancarmakers,ifthegovernmentgoesaheadwithincentivesthatwillputIndonesiaonparwith

thoseofferedinThailandaswellasimprovinginfrastructure.

MovingForward

InMay2013,theIndonesianGovernmentannouncedandimmediatelyimplementedanewregulation,

theLowCostGreenCar(LCGC)project,encouragingtheproductionoflowcost,cheaper,fuelefficient

cars.Theregulationwouldseetheluxurytax(10%-75%)currentlyleviedoncarsreducedbybetween

25% and 100% for the LCGC cars specifically. Gaikindo, the Association of Indonesian Automotive

Industries have appeared to welcome the regulation and encouraged their members, includingMercedes Benz (Smart), to produce LCGC as quickly as possible

13. All brands within Gaikindo are

foreign,andsotheassumedabilitytoreceiveincreasedforeigndirectinvestment(FDI)throughthe

establishedchannelsisclear,providingtherightframeworkforthisFDIisinplace.Itcouldbeargued

that,ifaninterventionistpolicywereatplay,IndonesiasbilateraltradeagreementswithChina,South

KoreaandJapan,couldfavorbiasforparticularbrandswithintheautomotivemarket.


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Inaddition,accordingtothePoliticalandEconomicRiskConsultancyLtdsMarch20,2013reportand

rankings, Asia Intelligence, No 871, Indonesia is perceived tobe the most corrupt nation in Asia,

behindIndia.Withrelationtothemanufacturingindustry,however,thereisanemphasisonletting

themarketmechanismsdictateitsgrowthandexpansion,withlittleinterferencefromgovernmentor

otherpublicinstitutions.JongkieSugiarto,ChairmanofGaikindo,isofthefirmbeliefthatpriceandbuyerpowerwillbethetwothingsthatdeterminewhetheracarisbought-ifacaristooexpensive,it

willnotsell14.Inaddition,evenwithlargescalerisesof44%tominimumpayinIndonesia,thelabor

costsstillremainlowat$226permonth15.LCGCmarketpricesmustandcan,therefore,remainlowin

orderforsufficientrevenuetobegeneratedinacompetitivemarket.

NigeriaandtheEconomicsofTransportation

NigerianEconomy

Located in West Africas rain forest belt, 20% of Lagos' 3,600 sq km geographical area is mostly

waterways; however,90% ofcommutertravel inthe state isroad based. City authorities predict a

350% growth in the number of vehicles in the state over the next 25 years, with the population

doublingto40millionby2030.

PopulationDensity&Infrastructure

Lagosisarguablyoneofthefastestgrowingcitiesintheworld,andisWestAfricasleadingcommercial

hubwiththeregionslargestairandseaports.Lagosgenerates25%ofnationalgrossdomesticproduct

and its 20 million citizens account for 12% of Nigerias population. Lagos will continue to be a

significantpatchofAfricaseconomicsuccessstory,"saidTaiwoOtiti,IBMsCountryGeneralManager

forWestAfrica16

.Nigeriastruggleswithunreliablepublictransportation.Forexample,busesareof

poorqualityandrunmostlybyindividualbusoperators,whoareavitalpartofLagostransportation

network.Withclosetosixteenmillionbustripsmadedailyinthecity,thestreetsareteemingwith

over75,000minibuses.Thelackofplanningandmanagementcapacitycontributedtothepoorlevelof

urban transport services. Improving the capacity of the public transport system to cope with the

populationgrowthisclearlyofcriticalimportanceforLagos17.

NigeriainaContextualSpotlight

As a WestAfricanpowerhouse, Nigeria hashadlittle trade disagreement andis encouraging FDIbyproviding investment incentives to boost economic growth. Similarly to Indonesia, the Nigerian

government(bothFederalandStateGovernments)hasinvestedindevelopinginfrastructurethrough

partnershipswiththeprivatesector18.Withgrowingconsumerism,alargepopulationandarapidly

growingmiddleclass,therulingelitecanafford[...]top-endcarsthat,acrossWestAfrica,haveledto

thesobriquetWabenzi,orpeopleoftheMercedes-Benz19

.


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However, the pervading issue of corruption still remains pertinent in Nigeria. Transparency

International,a bodymonitoringinternationalfinancialcorruption,rankedNigeria172nd worstinits

listof215countriessurveyed.Inaddition,lackofimportregulation,lowgovernmentpatronagefor

locallyproducedautomobiles;andadutyregimethatfavorsimportedcompetitors,areallperceived

tobemajorcontributorstothestalledautomobileindustryinNigeria20

.Thereisgrowingrecognition

thatgovernmentandkeystakeholdersneedtodomoretobolsterthedomesticassemblyindustry,but

thatdespitetheexistenceofgovernmentmandatesanddirectivestoregulateimportsandboostlocal

productivity,thegovernmentitself,withthelargestpurchasingpower,willcontinuetofavorimported

cars21

.ThefederalgovernmenthassinceissuedagreementswithautomobilemanufacturersinEurope

to importing new cars (both European and Asian brands). A reliance on imported cars, and the

resultingconsumerpreferencesforthem,couldbeseentonegateanywilltoproduce.

Withrelativelylowlaborcosts,aneducatedpopulation22,andanestimated300,000jobspotentially

created in a fully functioning automobile industry, the revival of the industry could be seen as

attractive forboththe Nigeriangovernment andfor foreign investors, providingthat theregulatory

frameworkwasmoreconducivetostablegrowth.Veryrecentevents,however,couldpotentiallybethe turning point for the automobile industry. Through an informal agreement with South Africa,

NigeriaislookingforSouthAfricasexpertisetobuildupitsmotorindustry,onthebasisthatNigeria

wouldhavetosignificantlyincreaseitsimporttariffs,seealargeincreaseindemandforvehicles,and

tackleitspreferenceforimportedcars(locallyproducedcarsareperceivedaslowerquality).Though

therelianceon importedcarscouldbeseenasproblematic,fromabrandperspective,foreignbrand

names havealready established manufacturing plants in South Africa, includingMercedesBenzand

Toyota,meaningthattheWabenziwouldstillbeabletodrivetheircarsandboosteconomicgrowth

andtraderelations.

The agreement between the two nations to produce the Zagerian car would undermine the grey

marketandsupportlocalproductivityandtrade,aswellasboostingappetiteforandentryintothemarket.

Inaddition,theexistenceofthegreymarket(importedbasic,taxfreeversionsofcarsacrossborders)

hasunderminedeffortstoregulate,suchasnewlyintroducedimportpoliciesandtheestablishmentof

theNationalAutomobileCouncil23

.Accordingtoarecentarticle(March2013)inthePremiumTimes

ofNigeria,revenueof$550millionhasbeenlosttothegreymarket,intheautomobileindustry,over

the lastfour years. Grey market carshaveprimarily beensourcedfromDubai andelsewhere inthe

Middle East.The Financial DerivativesCompany, referenced inthe article, states that Greymarket

productscanoriginatefromtheft,unreportedsaleofgoods,theleakingofexcessinventoryintothe

market,illegalsalesacrossborders(playingthepricearbitragegame),andmultiplesalesof thesame

productwherethemanufacturerreceivesrevenueonlyforthesalefirstreported.24

NigeriaSmartornot?

The sale of Smart cars is targeted towards urban populations, where the need for swift modes of

transportiscontendingwithincreasingtrafficandpopulationdensitygrowth.ThecurrentsaleofSmart


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carswithin emergingmarkets, asin Indonesia, isalsoin line withagrowingmiddle classwherethe

demandforsuchcarsisalsoincreasing.TherationaleforchoosingNigeria,asaprospectivemarket,is

asfollows:

Firstly,asinferred,AfricaistheonlycontinentinwhichSmarthasnotmadeanentry.Secondly,there

isproductionofMercedesBenzcarsalreadywithinSouthAfrica,butnotintheotherpowerhouseofAfrica, Nigeria. Thirdly, we consider statistics on population density, an incremental population of

middle-classconsumersandtheirgrowingpotentialtopurchasedurablegoodssuchasasmartcar.

22.8%oftheNigerianpopulationisconsideredmiddle-class,ofwhich45%donotcurrentlyownacar.

Inadditiontoincreaseddemandsforcars(seeExhibit925),Nigeriaistheoreticallyattractive26.Upon

furtherresearch,andfromapurelymacroeconomicperspective,itappearsthatthecontextaround

the industry within specific markets is massively impactful upon whether we choose to enter the

Nigerianmarket.

ComparativelywithIndonesia,theNigeriangovernmentswilltoimprovetheregulatoryframework,

induceforeigninvestmentthroughpublic-privatepartnerships,andintroduceamorefavorableLCGC

schemeisstrong.However,theIndonesianmodelhaslessinterventionandposesfewerobstaclesto

entry.This,combinedwithpurchasingpowerinIndonesiaandalackofmarketdominancebyanyone

playerintheautomobilemarketallsetthetoneforsmarttosuccessfullyenterthemicrocarmarketon

alevelplayingfield.

Nigeriasautomobileindustryisfledglingandcontrolledentirelybygovernment.Attemptstoestablish

newmanufacturingplantsinNigeriawouldrequirealargecapitalinvestmentforanymarketentrant.

In addition,anyhistorical attemptsto regulate import tariffs andboost local production have been

undermined bythegreymarket, lackof enforcement, andbyestablished consumerpreferences for

foreign made cars. The regulatory framework in Nigeria is not yet stable enough topenetrate the

automobileindustrywithconfidence.Simultaneously,consumermindsetsarecurrentlyattunedtooildependentcarsduetothesubsidiesgrantedbythegovernment.

Theeconomicsofsuchsubsidieswouldnotnegateamovetowardsgreenerformsoftransportinthe

future. Ifa low cost modelsuchas that inIndonesia couldalsobe adopted,macroeconomictrends

supportthehypothesisthatLCGCcouldbecomeamoreviableoptioninthefutureforNigeria.If the

trade agreement with South Africa proves successful and the Nigerian government is able to meet

SouthAfricas demands,the regulatory framework for our entry into the Nigerianmarket becomes

moreattractive.Themodelwewouldadopt,however,wouldfollowtheproposedtradeagreement.

ThiswouldmeanthatwewouldproduceSmartLCGCsinDaimlersalready-establishedSouthAfrican

manufacturingplantsandexporttoNigeria.

Inconclusion,whilethesmartcarmayhavea long-termfutureinNigeria,wewouldnotrecommend

currentlyexpandingintotheNigerianmarket.


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EXHIBITS

Exhibit1:UnitSalesMercedes-BenzCars

Exhibit 2: Vehicles import statistics in Nigeria (Data source: Manufacturers, OMI India).


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Exhibit3:GNIPerCapita,PPP,(Worldbank)

Exhibit427:ToptenimportedvehicleconsumptioninIndonesia

Pos Model 2012 % /11 2011 % Pos

1 ToyotaAvanza 192,146 17.20% 18% 162,367 18.20% 1

2 DaihatsuXenia 73,418 6.60% 10% 66,835 7.50% 2

3 ToyotaInnova 71,685 6.40% 31% 54,763 6.10% 3

4 MitsubishiTruckColtDiesel 55,604 5.00% n/a n/a n/a n/a

5 SuzukiCarryPick-up 43,926 3.90% n/a n/a n/a n/a6 DaihatsuGranMaxPick-up 37,948 3.40% n/a n/a n/a n/a

7 NissanGrandLivina 34,129 3.10% 35% 25,324 2.80% 5

8 SuzukiErtiga 34,074 3.10% new - 0.00% -

9 ToyotaRush 34,033 3.00% 36% 25,012 2.80% 6

10 ToyotaYaris 27,809 2.50% 69% 16,448 1.80% 8

0

2,000

4,000

6,000

2008 2009 2010 2011 2012

GNIperCapita,PPP(currentinternaonal$)Nigeria

Indonesia


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Exhibit5:Population(Worldbank)

Exhibit6:PopulationinLargestCity(Worldbank)

0

50,000,000

100,000,000

150,000,000

200,000,000

250,000,000

300,000,000

2008 2009 2010 2011 2012

Populaon

Nigeria

Indonesia

0

5,000,000

10,000,000

15,000,000

2008 2009 2010 2011

PopulaoninLargestCityNigeria

Indonesia


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Exhibit7:GDPperCapita(US$)

Exhibit8:Indonesia Imports by Commodity in US Dollars - Motor cars and other motorvehicles principally designed for the transport of persons... Yearly

www.indexmundi.com

0

500

1,000

1,500

2,000

2008 2009 2010 2011 2012

GDPperCapita(US$)

Nigeria

Indonesia


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Exhibit9:Nigeria Imports by Commodity in US Dollars - Motor cars and other motor vehicles

principally designed for the transport of persons... Yearly

www.indexmundi.com


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Endnotes

1DaimlerAnnualReport2012 ,p.144.

2

RaoulOberman,RichardDobbs,AriefBudiman,FraserThompsonandMortenRoss,Thearchipelagoeconomy: Unleashing Indonesias potential, McKinsey Global Institute. September 2012,

http://www.mckinsey.com/insights/asia-pacific/the_archipelago_economy,accessedAugust20,2013.

3OrganizationforEconomicCo-OperationandDevelopment;Brazil,Russia,India,andChina,p.12.

4Manufacturers,OMIIndia.

5GNIPerCapita,PPP,(WorldBank).

6Transportation&Logistics2030,http://www.pwc.com/gx/en/transportation-

logistics/tl2030/index.jhtml.

7 OrganizationforEconomicCo-OperationandDevelopment;Brazil,Russia,India,andChina.

8Ibid.

9pwcfsviewpointReportMay2013,p.24.

10Indonesian Automotive Aftermarket Opportunities: Looking at potential Australian export

opportunitiesintheAutomotiveAftermarketinIndonesia,p.38.

11Global Business Guide, Automotive Industry: Driving Manufacturing., 2012,

http://www.gbgindonesia.com/en/manufacturing/article/2011/automotive_industry_driving_manufact

uring.php,accessedAugust20,2013

12GAIKINDODomesticAutoProductionbyCategoryJan-June2013.

13Jakarta Globe, Indonesia is Seen as Most Corrupt Nation in Asia-Pacific Region, March 9, 2010,

http://www.thejakartaglobe.com/archive/indonesia-is-seen-as-most-corrupt-nation-in-asia-pacific-

region/,accessedAugust20,2013.

14Ibid.

15ShamimAdam&SharonChen,AsiaSoaringWagesMeanRisingPricesWorldwide,Bloomberg,Apr2,

2013, http://www.bloomberg.com/news/2013-04-02/asia-soaring-wages-stoke-inflation-as-factory-

costs-rise.html,accessedAugust20,2013.

16IBM,IBMHelpsNigeria'sLagosStateDesignaTransportationSystemforFutureGrowth,14Jun2013,

http://www-03.ibm.com/press/us/en/pressrelease/41296.wss,accessedAugust20,2013.

17Ibid.


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18Mary Ekemezie (Bio), Kunle Durosinmi-Etti Folake Adebowale (Bio), The Guide to Worlds Leading

FinancialLaw Firms,http://www.iflr1000.com/LegislationGuide/838/Nigeria.html, accessedAugust 20,

2013

19MichelBurleigh,Acountrysocorruptitwouldbebettertoburnouraidmoney,MailOnline,8August

2013,http://www.dailymail.co.uk/debate/article-2387359/Nigeria-country-corrupt-better-burn-aid-money.html#ixzz2cYQMOxw0,accessedAugust20,2013.

20Taiwo Hassan, Leeway to revival of Nigerias auto industry, The Guardian Nigeria, 19 JULY 2013,

http://www.ngrguardiannews.com/auto-wheels/127415-leeway-to-revival-of-nigerias-auto-industry,

accessedAugust20,2013.

21Ibid.

22Mary Ekemezie (Bio), Kunle Durosinmi-Etti Folake Adebowale (Bio), The Guide to Worlds Leading

FinancialLaw Firms,http://www.iflr1000.com/LegislationGuide/838/Nigeria.html, accessedAugust 20,

2013

23Proshare,Nigerias Automobile Industry: A shadow of Itself, April 25, 2013,

http://www.proshareng.com/news/19796,accessedAugust20,2013.

24NigerialosesN90billiontoGreymarketautomobile.PremiumTimes.OluwaseyiBangudu.March16

2013.

25 NigeriaImportsbyCommodityinUSDollars-Motorcarsandothermotorvehiclesprincipallydesigned

forthetransportofpersons,www.indexmundi.com.

26Ibid.

27 http://bestsellingcarsblog.com/2013/01/15/indonesia-full-year-2012-toyota-avanza-kicks-goals-in-

record-market/

07 group 7_daimler ag_s smart car

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