To Adapt or Design: An Emerging Market Dilemma for Automakers

Abstract

Multinational automakers tend to be biased toward adapting products designed for their primary markets to emerging or secondary markets. The preference for such adapted product design (APD) approach arises from reduced costs associated with product design and development. However, the growing importance of emerging markets combined with the recognition of their idiosyncratic needs have led automakers to consider an alternative product development approach that simultaneously incorporates the needs of both the markets and exploits scope economies. We term this approach as the customized simultaneous design (CSD) approach. Motivated by case studies of Ford and Hyundai, we abstract key elements to set up an analytical model for the APD and CSD approaches. We derive the optimal prices and extent of commonality between products for both the markets and compare the attractiveness of the two product development approaches. The relative profitability of the two approaches is driven by the trade‐off between the consumer‐side disutilities and the cost‐side scale and scope economies, and is moderated by demand uncertainty in the secondary market. Interestingly, we find that scale and scope economies reinforce each other in making CSD a more profitable approach under certain conditions. When the automaker is located in the secondary market, other factors such as market size, uncertainty and dissimilarity between the markets determine the most profitable approach. In addition, we demonstrate that higher profitability of one approach over the other is not necessarily achieved by providing higher commonality.