"Volkswagen To Make A Grand Comeback! Will it Work?"

That's the title of an article from MotorOctane recently (July 6, by Venkatesh Koushik). Now, everybody and her in-laws have an opinion about everything these days, automobiles included, so my post may just be one such. Still, the question is worth pondering. I am no auto expert and this post is simply an outsider's perspective.

The fact is, Western automobile companies have generally failed miserably in the Indian market. Ford Motor, in fact, arrived here on our shores a little ahead of Hyundai (October 1995 and May 1996, respectively) and the contrasting performance is for all to see. The latter is now India's second (or third, based on the latest numbers that include Tata Motors) largest manufacturer and seller of vehicles in the domestic market. Ford, meanwhile, exited the country, selling its Gujarat-based production facility to Tata Motors and mulled disposing its Chennai facility as well but held on; now, reports indicate it is seeking to return in some - as yet - unclear avatar.

GM, likewise, left the country and is yet to return while Chrysler - oh, Chrysler - has had so many incarnations that even the Americans are possibly confused.

Fiat (of the pre-Chrysler days) left in 2019, despite having a major share of a tiny duopoly market through several decades since Independence and eventually succumbing to the onslaught from Maruti-Suzuki. Their folly? The Fiat 1100D, introduced in the 1950s, was their only game well into the 90s when Suzuki was already on the rise. They brought in one hatchback model in the late 90s and one other in the late 2000s. Their sedan and estate models were half-hearted and did not quite line up to market expectations: on price, quality, features, and service.

Only the Germans survived but in a niche, very tiny, high-end market for cars peddled by Mercedes, BMW, and Audi. The French have struggled, going through almost the same convolutions and acrobatics of partnering "local" companies as did the others - Fiat with Walchand, GM with Hindustan Motors, Ford with Mahindra, and Peugeot (PSA Group now part of Stellantis of the erstwhile Fiat fame) with C.K. Birla... You get the drift - Western small-to-mid range car manufacturers have generally preferred to come to India on partnerships. And everyone of them has floundered and, later, the partnerships dropped for an independent existence or exited the country altogether. The high-end brands were exceptions but then again, why would they need a partner?

The Asian manufacturers from Japan and South Korea - Suzuki, Toyota, Nissan, Hyundai, Kia - provide a distinct example of an alternative mindset and strategy. They came on their own steam (with the one exception of Toyota but with a passive local partner), set up their own Indian operations, had a full time expat as head, and left the Indian team to make decisions based on their intrinsic understanding of the market.

Now comes the news that Volkswagen - like its peers, Renault and Citreon a peddler of mid-price vehicles in their home markets - wishes to change its dormant dynamics and forge a partnership with an Indian partner. The same report says the Indian automotive giant, Mahindra, is a potential partner to help with their EV initiatives. VW has been in the country for a long time: in 2001 they came in with the Skoda brand, and later the Passat, Jetta, Touareg, Beetle, Phaeton - all of them as CKDs. Eventually, VW set up their own manufacturing plant and began manufacturing the Polo, Taigun, and Virtus. But it's been a difficult journey for them with barely 2% of the Indian market to show despite a 20+% growth rate in FY22 for the overall market.

So, the question: what ails Western automotive brands in their inability to make a dent in the Indian market? The question is important as this is no more a small market that it was 20 years ago but the 4th biggest, in volumes, in the world today - bigger than the German market and growing much faster and destined to exceed Japan's market in size very shortly. It also cannot be - any longer - attributed to a "predator" characteristic of the Indian market, an observation made by by Klaus Zellmer, Global CEO of Skoda Auto. He was implying very low price points, high expectations, intense competition, etc. Why, then, are the Asians flourishing and expanding market share year after year? I believe this inability comes from various fronts, 10 to be precise:

1. Product line: simply importing a car model to Indian shores and expecting they would be embraced is high on the list. The Europeans have already missed the early stages of EV growth in India and when they do come up with models to fit in, it is likely the slowdown in EV sales would have shifted the ground again - this time, perhaps, to hybrids. When a brand is 3 or 5 years late and without a product that fits the market, they've already conceded market share.
2. Model upgrades: this is a no-brainer. American and European auto manufacturers have been extremely slow in bringing changes to their existing models, even "facelifts". Indian buyers are now savvy about what is out there.
3. Pricing: pricing is important, as in any market, but to lay all the blame on it exposes a high degree of arrogance. The fact is, the right product at the right price always sells. Today, almost 60% of the Indian market comprises SUVs - one divided into micro or mini sub-4 meter so-called "SUVs", mid-class SUVs, and large SUVs. They range, on average, in price from Rs.10 Lakh (USD 12,000) to over Rs.40 Lakh, with the median falling somewhere around Rs.15 to Rs.18 Lakh. That's 60% of the market, mind you. The mid-class SUV in the US costs upwards of USD 25,000 and the price differential between the two markets is slight, about USD 5,000 to USD 8,000 less in India for the same class of vehicles. The pricing argument is increasingly untenable as a full manufacture in the country also reduces the cost base compared to the US by some 40%, making the lower pricing possible. This is why many of them export in large numbers.
4. Dealerships, Customer Service, Experience: Suzuki in India sells mostly small but increasingly mid-level cars. It has a humongous dealership network - over 1,000. Most importantly, it is service quality that brings it customers - even if the car is 10 years old, you can expect the same attention, quality, and customer experience. Domestic Indian manufacturers have recognized this and are coming on strong while the aggressive South Koreans are already here. Kia was an unknown brand in India just 5 years ago; they had no pedigree to peddle as does VW, Fiat, Ford, or Renault. Yet, it has raced to the top in its sales of SUVs (it has over double VW's market share), thanks to an expanding dealership (339 versus 175 for Skoda and 140 for VW) and finetuning its product range for Indian sensibilities. Even newbie MG has 245.
5. Local manufacture: part of the reason for the premium pricing of Western brands is, well, its perceived European or American pedigree and partly due to imports. Most of these brands have been slow to set up comprehensive, integrated, manufacturing facilities and these matter.
6. Cost of Ownership: certain facts are indeed incontestable - some brands have very low cost of ownership, with spares and parts easily available at good prices. But when a brand's models cannot offer these competitively to their own equivalents from other brands...that sucks and the customer takes note and chooses to buy accordingly. The notion that some brands have premium pricing owing to their superior engineering is all bosh: supply chains are all global and the same Tier-1 and 2 vendors supply to most manufacturers. Body, chassis, and engine matter and these are increasingly quite uniform and standardized for a variety of reasons. Indifferent quality shows up on these dimensions in the NCAP ratings or mileage.
7. Superiority approach to market: India is considered low price, hence it was appropriate for Western manufacturers to peddle old models (the Logan from Renault comes to mind) or bring a second-tier brand from Europe and pitch it against global brands like Toyota and Hyundai in India. VW did this, often pricing their Skodas higher than the others. The Skoda Yeti, for instance was a good product with outrageous pricing. No surprise that it left no trace. The others - Ford, Renault, Stellantis - dithered. The buyer is no fool.
8. Feature set & Accessories: differences in the features are no longer tolerated in this globalized world and the Indian buyer fully understands what is offered elsewhere. European car models are loath to provide a feature set that compares to other competitive offerings. Just compare VW or Skoda to domestic manufacturers and one instantly notices not just the price difference for a similar size of cars/SUVs, but the inadequacy of their models - in terms of seating capacity, number of rows and other doodads that go into a car these days - safety, sensors, cameras, infotainment, smartphone support, trunk space, climate control and placement, bottle and cup holders everywhere, arm rests, heads-up display, keyless entry, etc etc.
9. Copycat: copycats abound in the automotive space, whether in the hatchback, sedan, or SUV segments. There is increasingly little to distinguish the various brands and models on offer. How does someone from the bottom get to muscle in? Copycats work if the model has pricing, features, safety, or any other dimension right. If these are not possible, time to look at a "non-copycat" strategy where the brand has a lock, a storied history, or gives some psychological edge to a customer's decision - while also offering what all other brands do in terms of what, increasingly, are table stakes.
10. Leadership & Commitment to a Geography: It is not a matter of expat versus indigenous leaderships. The real question is the brand's commitment to the country that is demonstrated by the longevity of its local leadership. Both American and European brands have consistently shown a revolving door of top leadership - usually seconded by their parent HO. Asian manufacturers, by contrast, demonstrate commitment, persistence, and longevity.

Will VW achieve what it is aiming for with its Version 2.0 project? First, from the above, it is clear that chasing the new growth segment - SUVs - means they are already on the backfoot in terms of product range and models that target different segments. Second, the expected changeover to another engine modality, from EVs to something else that may be on the horizon, means they have had little time to capitalize on EV's high growth so far without a product in the market, all the while failing in the ICE marketplace - that would be a double whammy. Third, even if they are focused, efficient, and get their products right, they would be entering a crowded market and confront the need to keep pace with facelifts, features, accessories, and model upgrades just to stay still. Tall order.

If I were in a position to advise, I would venture to suggest that VW should take an altogether new, and radical, tack. Stay away from the me-too rat race and carve a different identity. Not one of premium pricing for the same old same old but one based on the product itself. Premium pricing is for the creamy layer. Time to get real.

For example, VW is lucky to have in its stables one of the world's most iconic small cars that has now been canned: the Beetle. Since the Mexican plant has been allegedly shuttered, why not bring this brand here, re-designed and developed, for the new era that matches India's expectations - ie, a longer wheelbase, higher ground clearance, four doors, trunk space, and a hybrid motor that has all the features of a contemporary vehicle? To some extent, this has already been done, in parts, by BMW with its Mini but without much energy or strategy - as CKDs. The model has not changed for several years and priced out of the world. At the right price, say, at the level of the high end of mini SUVs it may fly off the shelves. As Chrysler's PT Cruiser demonstrated in the US in the 1990s, retros work remarkably well...when executed well.

Or: why not ideate on an "Indian market version" of the incredibly buzzy ID.Buzz Microbus? Sure, it's expensive in its European incarnation for India, but this could be the base to build a truly iconic MPV for the Indian market - right when this segment is taking off, on the wings of Toyota's famed Innova that begat the smaller Suzuki Ertiga, or Kia's Carens? More are in the offing. One designed in size and attitude that is directed more to the nuclear family than a commercial van. In other words, about the size of the Ertiga, while retaining the VW design and features to match?

Indians are hitting the roads in record numbers that hark back to the US in the 1960s, with spanking new autobahns coming up all across the nation. They are now getting used to a new mode of long distance travel that increasingly has few of the earlier aches and pains and a lot of convenience and comfort in exploring a vast, beautiful, land. That is where the new designs in SUVs, spacious hatchbacks, and MPVs come in.

Auto companies don't really need to go back to the drawing board every time to come up with a winner. Therein lies copycat-ism and boredom. They could learn from pharma companies by repurposing old products.

VW needs to think different if it wishes to make a success of ver 2.0. Else, it is possibly looking to exit the market in five years' time. Just as the Americans did.

#Volkswagen #automotive #India #klaus-zellmer

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