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Set To Vroom

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On a cold December morning in Wolfsburg, Germany, headquarters of the $162 billion Volkswagen (VW) Group, CEO Martin Winterkorn, held a meeting with VW's top officials in BRIC countries, smack in the middle of the holiday season. Why was the head of the world's second largest automobile company (after General Motors) with 8.2 million units sold in 2011 so desperate to corner the BRIC market? The answer is obvious: the road to the number 1 spot passes through them.

India, the ‘I' in BRIC, figures in a big way in the VW CEO's plan to upstage General Motors and prevent Toyota from staging a comeback, especially with the group — comprising VW, Audi and Skoda brands — growing by 76.44 per cent in the first three quarters of 2011-12 in India. The success of group brands VW and Audi, along with resurgent sales of Skoda, led Winterkorn to send Ulrich Hackenberg, a member of the board with additional responsibility for the group's research and development, to learn about Indian conditions first-hand. Hackenberg travelled 4,000 km from Mumbai to Kolkata and then to Delhi to understand the Indian psyche. One hopes he took back the message that India is a price-conscious market and VW can become a significant player only if it has a range of options in the sub-Rs 10 lakh bracket.

"WE ARE SECOND ONLY TO TOYOTA AS A GROUP IN INDIA. IF WE PLAY THE GAME PROPERLY WE'LL DO WELL HERE." JOHN CHACKO President and managing director, Volkswagen India (BW pic by Bivash Banerjee)

"Today we are second only to Toyota as a group in India. If we play the game properly we will do very well here," says John Chacko, VW Group's chief representative and MD in India. He adds that the last three years have been great for VW, though he concedes 2012 will be a slow year for the industry. "It is a year where we need to consolidate this great growth that we have had. It allows us to sync processes with dealers, suppliers and the group itself," adds Chacko.

On The Fast Track
VW, which has existed as a separate brand in India for just 4 years, achieved what no other foreign car maker has been able to in the same time frame. Till February 2011, the brand sold 69,955 cars and as a group it has sold 1,02,737 units. Audi, Skoda and Volkswagen together have over 216 dealerships in the country, with Audi accounting for 15, Skoda 100 and VW 101. While Maruti Suzuki has 820 dealerships, Hyundai 340 and Tata Motors has 400, Chacko is confident that in a decade they will be in a position to upstage Hyundai and Maruti.

When VW began its journey in India in 2000 with Skoda, it was a different story. It was perceived as a premium brand because of its top-down strategy. Back then the market saw only 6,50,000 cars being sold annually. It was not until 2007-08, with the entry of VW that things changed. At first VW too adopted a top-down strategy, launching the Jetta and the Passat as premium CBU sedans. But in under a year, in 2008-09, the group invested Rs 3,600 crore to roll out mass production cars from its Chakan plant in Pune, with a capacity for 1,30,000 cars. Recently, VW has committed to investing a further Rs 2,000 crore over a couple of years. Brands like Audi and premium models of VW and Skoda are assembled at the Aurangabad plant. The Skoda Fabia and the VW Polo hatchbacks, sedans VW Vento and Skoda Rapid come out of Chakan and share common parts. These synergies between the three subsidiaries have kept production costs down. Chacko believes India also holds great potential to make powertrains and export cars.

But the real growth has come from the dealerships; with 33 per cent of the dealers not from the automobile industry. "VW began with three dealerships four years ago and the great leap to 100 has been possible because of the perception of the brand in this country," says Neeraj Garg, director of VW passenger cars. He adds that research shows that the company is perceived as an aspirational brand associated with great value, one known for its innovativeness.

Consolidation Strategy
While as a rule no automaker speaks about future launches, sources who track the industry say that the VW up! will make its way to India by the end of 2013 with feasibility studies already on. Priced cheaper than the Polo, the up! is expected to sport the same 1.2-litre diesel engine as the Polo. It could come with a 1-litre engine as well to address the chink in VW's armour. The up! will compete in a segment dominated by GM's Chevrolet Beat, the Ford Figo and Hyundai's i10. Audi too has plans; it will bring the Q3 SUV by the end of the year, entering the sub-Rs 30 lakh segment. "This year the VW group will also focus on adding new variants to the existing line-up. It will build the brand with the new versions of the Beetle and the Touareg SUV," says Shrawan Raja, managing editor of Industry sources say that VW and Skoda are working on a mini SUV.

VW's strategy is to drive volumes with the Fabia, Polo, Vento and Rapid. They will be priced independently; for example, a Skoda Fabia will be priced less than a Polo although it will have all the features of a Polo. The same holds for the Rapid and the Vento. By doing so, the group will have a good mix of options to increase sales; you pay a premium for a Volkswagen while Skoda is made affordable. Besides, sharing of parts across brands drives costs down.

The largest segment of car sales in India is in the Rs 5-8 lakh segment; in 2010, this segment sold 6,01,672 cars and in 2011, it sold 5,90,721 units, representing a fall of 10 per cent. It is in this segment where VW will bring in a small vehicle. In the year ahead, VW will also focus on strengthening its existing dealerships.

Towards this end, Volkswagen Financial Services AG has started an Indian subsidary with an investment of Rs 120 crore as a non-banking financial arm to support customer financing and insurance. The group has also launched Das Weld Auto, its global pre-owned cars business, which will be rolled out across its dealerships to further build its brand, thereby competing with M&M's First Choice, Maruti's True Value, Toyota's Trust and Hyundai's Advantage.
Tweaking The Message
According to TAM Media Research, the automobile industry was one of biggest spenders on advertising in 2011. There was a 40 per cent rise in TV spends, a 39 per cent rise in print ads and a whopping 63 per cent rise in radio spends over the previous year. Tata Motors remained the top spender among automobile companies with a 20 per cent share, while VW had a mere 2 per cent share in advertising. It is surprising that VW's market share increased without it resorting to frequent advertising. "What worked was the IPL sponsorship. I had to convince the board in Germany that cricket is emotional to Indians, like football is to Germans," says Lutz Kothe, head of marketing, Volkswagen India. In Europe, VW is closely associated with football, sponsoring 3 German clubs and a junior football academy. "We had to take a call on where we position ourselves in the media, but cricket worked for us," says Kothe. He adds that a lot of analysis went behind selecting the right medium to communicate and keep costs low.

VW has been positioning itself as a brand that offers value to people and tells them how its technology can change their lives. As a group, its market share in India has gone up to 3 per cent from almost nothing 2 years ago. Says Saurav Patnaik, vice president marketing at Kenscio, a digital marketing firm, "Look at the Jetta ad, it shows that although you have wings to fly, you are not yourself till you drive a VW."

For Audi, the stress is on youth. It sold 3,515 cars in 2011-12, second only to BMW with 5,895 cars. "We have done well because the young Indian has seen old men drive other luxury cars. The Audi is all about progressiveness and this is what the brand's DNA is globally, sporty and sophisticated," says Michael Perschke, head of Audi India.

Skoda, which has a 1 per cent market share in the country, is seeing a global resurgence, selling 8,75,000 cars in 2011, a 15 per cent growth over 2010. "We are a volume manufacturing group, our success in the future will be because of compact cars tailormade for each market," says Jurgen Stackmann, member of the board of management for Skoda. He says that VW built its Indian synergies from Skoda's learning and, as a group, it will bring products that fit the market at various price points.

Diesel Decider
Brand perception apart, what really worked for the VW group in India was the price differential between diesel and petrol, resulting in 80 per cent of the market making a beeline towards diesel cars. Volkswagen, with its strong diesel tradition, and the fact that it imports engines into India from Germany, was able to quickly offer diesel options to consumers. This hurt Honda, a market leader in the 1.6-litre sedan segment in 2010; the sales of the City fell from 43,858 to 31,986 in 2011-12 for the 11-month period ending February 29, a 27 per cent fall in sales. Meanwhile, VW's 1.6-litre Vento sold 30,159 cars in 2011 when compared to 14,407 cars in 2010, a 109 per cent rise in sales in the same period. Maruti's 1.3-litre Dzire and SX4 dominate this segment with 69,976 cars in the same period, followed by Hyundai's 1.6-litre Verna with 45,425 cars.

 The Polo hatchback too gave stiff competition to the bestselling Maruti Suzuki Swift and Hyundai's i10 and i20. The Polo's economical 1.2-litre diesel engine and its strong German pedigree helped it sell 35,525 cars, a 41.97 per cent rise over 2010. The Vento and Polo's combined sales have grown by 99 per cent in 2011-12.

Skoda too has grown by 46.61 per cent to 29,267 cars. Not surprisingly, 55 per cent of its growth has come from its hatchback Fabia, which sold 14,166 cars. Skoda's mid-sized sub-Rs 10 lakh Rapid sold 5,970 cars since September 2011. Audi, on the other hand, has seen a 85.78 per cent rise in sales, with 3,515 cars sold in 2011-12.

Chacko feels VW needs to ramp up to at least 2,50,000 cars in India, but that can only happen if it has a large portfolio of hatchbacks and sub-Rs 10 lakh sedans. Till that happens, the Suzukis and Hyundais will rule India's lanes and bylanes. The up! could make a difference; one will have to wait and watch.


(This story was published in Businessworld Issue Dated 09-04-2012)