Mercedes-Benz Reimagine The Way It Operates In India

The year 2012 was a particularly bad one for Mercedes-Benz in India. Its performance hit its nadir, and the company dropped to third, in terms of sales, in the luxury-car market, behind compatriots BMW and Audi. The Stuttgart carmaker, which had reentered India in 1994 and dominated the market for a decade and a half, posted a rare loss as well.

Its problems began with the entry of BMW and Audi into the Indian market in 2007. The duo, being late entrants, unleashed a product offensive with attractive prices. Like Daimler subsidiary Mercedes-Benz, their vehicles had the famed German-engineering DNA. But what caught the fancy of customers was their modern design and styling. Mercedes-Benz, on the other hand, had a more dated design. Plus it lacked a strong SUV portfolio. Its traditional communication strategy and approach did not suit the changing customer profile, and soon the brand was perceived as one suited to older people. BMW, Audi and other nameplates such as Jaguar Land Rover and Volvo gained in reputation and customer attention. In 2009, BMW overtook Mercedes-Benz, and Audi followed suit in 2012. The fact that Mercedes-Benz had lost the crown globally to BMW in 2005 did not help, either. With the parent itself facing strong headwinds, the ability of the Indian operations to react strongly to the altering market environment was impaired.

"We got complacent. We were the only player in the market, and in a monopoly situation you do not satisfy customers as you should. The year 2009 was a wake-up call," Roland S. Folger tells Forbes India in an interview in Pune. Folger, who took over as managing director and CEO of Mercedes-Benz India in October 2015, recalls how the poor performance sent the Mercedes-Benz India management team into introspection mode to understand what had hit them and what needed to be done to regain market leadership. The company labeled 2013 "The Year of the Offensive."

Results followed in a couple of years. By 2015, Mercedes-Benz had regained market leadership in India. As per its filings with the Registrar of Companies, Mercedes-Benz's profits in India in 2014-15 stood at about $50 million. In 2016, it consolidated its lead despite being badly hit by the ban on the sale of big diesel cars in the National Capital Region (NCR) as well as by demonetization; in the first quarter of 2017, it posted its highest-ever sales numbers, 3,650 units, with those of SUVs growing by 13%. The perception that it is not a brand for younger people was changing as well--the average age of its customers dropped from 45 to 37. Globally, too, Mercedes-Benz regained its leadership in 2016 after over a decade of playing catch-up.

Mercedes-Benz's recovery in India began with the launch of the A-Class in 2013. The car, with its modern design, ran up 400 orders in just ten days. More launches followed, including in the SUV segment. In 2015, some 15 models debuted, followed by another 13 in 2016. This year has already witnessed three launches: the new E-Class with a long wheelbase, Night Editions in the A-Class and B-Class models, and the S-Class Connoisseur's Edition. "The new launches helped us cover all the white spots in our product range," says Folger, a 57-year-old Mercedes-Benz lifer who headed the Malaysia business before coming to India. "Our new launches this year will be more or less the same as last year."

The product blitzkrieg has helped the company erase its "slow mover" image, while offering customers multiple options across segments--be it a compact car, sedan or SUV, dream cars like Cabriolet or performance vehicles such as AMG.

Even as the company launched new models, it realized that the new class of customers it was wooing was different from its traditional buyers in many respects. For instance, entrepreneurs--in the startup space and elsewhere--and professionals who had tasted success early in their careers wanted to own a Mercedes-Benz but found them unaffordable. The company adopted a multipronged strategy to tackle that challenge.

First, it put to better use its manufacturing facility at Chakan, near Pune, with a capacity to assemble up to 20,000 cars, by assembling more vehicles in India. "Today we locally assemble nine models that account for 80% of our volumes," Folger says. The company also focused heavily on localization. For most of the nine models the local content is about 60%. "These measures enabled us to reduce our prices by 20% to 30%. This helped our volumes and improved our profitability," he says.

Today any model that sells over 500 units a year presents a business case for the company to assemble locally. This applies to top-end cars as well. India is the first and the only market outside Germany where a righthand-drive, long-wheelbase E-Class is assembled locally. The same is the true of the Mercedes-Maybach S500 and S600, priced at $260,000 and $400,000 respectively. "It is testimony to the fact that we can produce cars of the same quality as Germany with no discernible difference at all," Folger says. "Such is the quality of the people at our plant that when Mercedes-Benz started a plant in Brazil, workers from here were sent to train people there."

The company also adapted cars that came as CBUs (completely built-up units) for the Indian market in a bid to make them more affordable. For instance, AMGs were launched globally with 4-liter V8 engines, but the company felt they were too powerful for Indian conditions and cost too much. The company opted for a 3-liter, V6 engine, which offered a relatively lower horsepower and torque but worked well for local conditions and came with a lower price tag.

The affordability factor was also tackled through some innovative financing products. Daimler Financial Services India (DFSI), the captive financing company, came in handy here. "The challenge before us was to make a Mercedes-Benz car more accessible to customers who wanted to own it but were unsure of servicing a large equated monthly installment," says Fred Wick, managing director and CEO of DFSI.

Launched in 2013, STAR Agility, a finance solution created by Mercedes-Benz India with Mercedes-Benz Financial, gave buyers the option of making a balloon payment at the end of the contract and either take ownership of the car or exchange it for a new model at the end of the contract period. STAR Agility reduced the equated monthly installment by 40%, making the cars affordable for a wider pool of customers.

"Mercedes-Benz learned from its past mistakes and understood the need to make its products attractive and affordable to the new breed of customers. By doing so, it has come back strongly," says Amit Jain, a partner at BMR Associates. "It also built a strong management team to go deeper into the country." With 89 sales and service outlets across 41 cities, Mercedes-Benz has the densest network among all luxury-car players in the country and 35% more than its nearest competitor.

"Our go to customer' strategy, a qualitative network expansion, has been the key to our growth story. We have tried to unleash the potential not only in the key metros but also in emerging T2 and T3 markets," says Michael Jopp, vice president of sales and marketing at Mercedes-Benz India.

This widespread network was useful when the company rolled out its next biggest differentiator: My Mercedes-My Service. Until a few years ago, the total cost of ownership--a metric that looks at the cost a buyer incurs while using a car--was never a factor in the luxury-car space. But for the new crop of buyers who wanted to own a luxury car for the first time, a high maintenance cost--as well as service--was a big deterrent to buying a Mercedes. To address this issue, the company extended the warranty period to three years (two years is the norm in the industry) for all cars.

It did not stop there. Mercedes began offering attractive service packages in various forms. Each car has 45 different packages that enable customers to choose a plan based on their usage pattern--three years or 30,000 km, three years or 60,000 km and even ten years or 200,000 km. About 30% of all new car buyers have opted for the My Mercedes-My Service scheme since it launched in July 2016. "My father always said you learn how to save money from rich people," Folger says.

Mercedes-Benz is back on a firm footing. It has attracted younger customers, and what pleases Folger even more is that many of the traditional customers who left the brand in 2009-10 are returning. "They tried out other brands and realized that the grass is not always greener on the other side," he says. If anything worries him today, it is the larger issue of growth in the Indian luxury-car market. For many years now, the volumes have remained almost flat. Between 2013 and 2016, the segment added just 4,000 units, and in 2016, growth declined by 5% to 34,176 units. The high duty structure seems to be an impeding factor. "The exorbitant duty structure makes luxury cars quite prohibitive in pricing in this market. Any reduction in excise duty would have grown the volume, and the fear of revenue loss would have been more than aptly balanced," Jopp says. Folger adds, "India is still a bit socialist in its thinking."

But that is changing from a customer's perspective. "Buying a luxury car is not a taboo any longer, and customers now perceive a luxury car as an extension of their lifestyle and also as an achievement," Jopp says. BMR's Jain agrees. "The Indian market is upping the ante. People want to own a luxury car." The numbers surely show the potential headroom for growth. In India, the share of luxury cars among total new cars registered, at 1.2%, is among the lowest in the world. In Indonesia it is 2.5%, Malaysia 5.4%, China 8% and Germany 24%. "I am confident the market will grow," says Folger. He adds that Mercedes-Benz has never been better prepared to take advantage of any sharp increase in demand for luxury cars in the country.

Adapted from Forbes India, a licensee of Forbes Media.