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Volkswagen's India plan


Volkswagen recently announced the launch of its high-end luxury car, the Phaeton, in India. Named after the son of Phoebus, the Greek Sun God, it was unveiled at the Geneva Motor Show in 2002, and it hit the market in 2003. But the sales fell short of expectations. It was positioned against top-end brands like Mercedes, BMW, Lexus and Volkswagen’s own Audi. But it lacked the appeal of the rival brands — hence the lacklustre performance. But so keen is Volkswagen to make the Phaeton work in India that it has taken the car back to the drawing board. The result: LED daytime running lights, 18-inch wheels, a new dashboard, 18-way adjustable seats, better upholstery and even new air-conditioning to suit the Indian climate.


Earlier in the month, Volkswagen, headquartered in Lower Saxony in Germany, had announced that it will launch an all-new sedan, the Vento, in autumn. It will be manufactured at Volkswagen’s factory at Chakan in Pune, and has been completely designed to the needs and expectations of the Indian consumer. Also in the works is a small car. At present, there are six cars in Volkswagen’s stables: The Beetle, Polo, Passat, Jetta, Phaeton and Touareg. It could expand to eight. It fits petrol as well as diesel engines into its cars. Volkswagen thus straddles the entire spectrum of the Indian market. Its factory at Chakan, put up at a cost of Rs 3,200 crore, can make 110,000 cars in a year. Those who have seen the factory say this capacity can easily be doubled because of the modular nature of the plant.

Along with its other brands, Skoda and Audi, Volkswagen has a share of less than 1 per cent in the 1.3-million per annum Indian car market. From here, Volkswagen wants to raise it to 10 per cent in five years. India is vital for Volkswagen’s plan to become the world’s largest car maker by 2018. In 2009, it sold 6.29 million cars. This had placed it on the third spot after Toyota (7.23 million) and General Motors (6.50 million). Volkswagen is the largest player in China, Europe and South America. In China, it sold 1.4 million cars in 2009 — more than the entire Indian market — and its share of the market was an impressive 18 per cent. India, which is expected to grow to 3 million cars in five years, is the final frontier. By itself it may not catapult Volkswagen ahead of Toyota and General Motors, but it is one of the few markets left with large sale volumes up for grabs.

Automobile analysts expect Volkswagen to use its learnings in China here. These could be aggressive price tags and high-decibel advertisements. But China and India are different markets. Large cars rule the roost in China. Small cars form more than two-thirds of the Indian market. On the positive side, Volkswagen’s strength lies in the mass market. Its name, after all, means people’s car in German. Its presence in India can no longer be dismissed, admit some rivals. But quite a few insist that it will be a tough challenge for Volkswagen to get 10 per cent of the market in five years flat. They point to the example of General Motors which had in mind a similar market share by the end of this year but is now unsure if it will be able to meet the target.   Building the brand
When Volkswagen started out last year, research suggested that many people did not know what the brand stood for, while several others had not even heard of it. That’s when the company’s brand managers and marketers sat down with its creative agency, DDB Mudra, and thrashed out a plan. “Low brand awareness was one of our key concerns,” says Mudra Group Chief Creative Officer Bobby Pawar. With that in mind, the brief given to Mudra was to raise brand awareness and get consumers engaged with the cars. “We wanted people to sit up and take notice,” adds Pawar.


Thus, last November, Volkswagen came out with 13 advertisements in a leading

English newspaper. It told readers all they ever wanted to know about Volkswagen — how the name came about, its product line and so on. The mandatory TV commercial followed. By the time the campaign ended, Volkswagen had used 18,000 television spots, 144 insertions in broadsheet dailies, 50 insertions in magazines, 280 out-of-home sites and 23 digital portals.

This was the biggest inaugural campaign launched by a car maker in India.

To improve brand recall, the next campaign showed all Volkswagen cars: The Beetle, Passat, Jetta and Touareg. “This denoted that we had integrated all our brands with our products,” Marketing Manager Lutz Kothe explains. “Besides that we had to keep the global style and tone of warmth that Volkswagen campaigns have while highlighting its positioning.” A boy is given a round of the Volkswagen showroom in the advertisement. The salesman slots the various cars into different stages of the consumer’s life: The Beetle for the young, the high-performance Jetta for the mid-level executive, the comfortable Passat for the chief executive and the Touareg for the lifestyle-conscious buyer. Has it paid off?

DDB Mudra claims that the brand recall is now in double digits. There is still a long way to go.

Some analysts feel Volkswagen has made the right moves. “The feedback around Volkswagen is that it’s a much awaited brand. It is truly the people’s car. Along with Hyundai, Volkswagen is top of the mind for people,” says Synovate India Director and Head of qualitative research Shravani Sen. “The fact that people are only looking for fuel efficiency is a myth; performance has become increasingly important and that’s really what’s helping Volkswagen.”

German class
Are Indian car buyers willing to experiment with a new brand? The evidence on the ground is mixed. Maruti Suzuki still owns almost 55 per cent of the market. In spite of the rising competition, its market dominance continues. On the other hand, rivals have gained some traction from value additions and aggressive prices. Some have focused in areas like the eastern states where Maruti Suzuki does not have a stranglehold over the market. The key is to have a differentiator.

Volkswagen cars are positioned as products of German engineering. In the mind of the Indian consumer, Germany produces the best-engineered products in the world. Volkswagen has been quick to latch on to it. But the car that is made in India — the Polo — has up to 50 per cent local components. This number will improve further to 75-80 per cent in the days to come. This is essential if it wants to price its cars competitively. “Volkswagen’s dependence on imports has to reduce. That will take some time. It can’t happen overnight as it has to scout for quality local machines, alternate sources and so on,” says PricewaterhouseCoopers’ leader of the automobile practice, Abdul Majeed.   So, is it really German engineering? “The components are made to Volkswagen’s specifications and designs. In that sense, the cars are German-engineered,” says an industry observer. “German engineering stands for innovative technology, safety, stability and sturdiness. Sourcing local components which can finally achieve this are chosen under these high quality factors to achieve ‘German Engineering,” adds Volkswagen India Director (cars) Neeraj Garg.


That apart, Volkswagen visits Indian homes to understand how people live, use their car, what they needed from their car and so on. These insights have been used in the design of its cars for the country. “In the beginning we thought high quality is shown by dark interiors; but after talking to people we realised that they want bright interiors. And so we added that change within two months,” says Kothe. Volkswagen also discovered that suspensions need to be conditioned according to the roads in India, while air-conditioners, horns and headlights ought to be more powerful.

But how has it done so far? From January to April 2010, Volkswagen sold 3,280 cars, compared to the 3,039 cars it sold all of 2009. That may not be even a blip, but there are indications that buyers have begun to warm up to the brand. The Beetle, for instance, has sold 284 since January, the steep price of Rs 20.45 lakh (ex-showroom, New Delhi) notwithstanding. Throw in a little more and you could buy an entry-level Mercedes! The Beetle is imported from the Volkswagen facility in Mexico and buyers have to wait up to three months for delivery.

The small-car war
The big one, of course, has been the Polo hatchback. Since its launch in February, Volkswagen has sold 1,599 Polos so far. The queue of buyers runs into thousands, the company claims, and delivery can take up to three months. The car is priced at Rs 4.46 lakh. Though more expensive than the Maruti Suzuki Swift (Rs 4.2 lakh), the Fiat Grande Punto (Rs 4.33 lakh) and the Ford Figo (Rs 3.54 lakh), it is priced below the Hyundai i20 (Rs 4.46 lakh). The price tag, some analysts believe, could work against Volkswagen because buyers are not willing to pay a premium for a small car. The going could get tougher when Toyota launches the Etios. The car was shown at the New Delhi Auto Expo earlier this year. Critics felt it was a little under-designed, like the Mahindra Logan, but Toyota can count on its tremendous brand equity.

Volkswagen also knows that two versions of the same car — hatchback and sedan — can work well in India. Maruti Suzuki has reaped a rich harvest with the Swift hatchback and Dzire sedan. The Vento, thus, builds on the Polo platform. It will compete against bestsellers like the Honda City, Ford Fiesta and Maruti Suzuki SX4. But the game-changer could be the small car. It is not clear what shape it could take. But Volkswagen has such cars in its global portfolio — the Fox in Brazil and Ebisa in Spain. But India could be different. Also, the market place is crowded. To complicate matters further, Hyundai and Honda are working on brand new small cars. Honda, in the Japanese style of perfection, has even shipped some saris to its development centre in Japan to make sure that Indian women can get in and out of its new small car with ease.

Where Volkswagen might trip, say rivals as well as analysts, is distribution. India is a large country and hundreds of dealers are required to cover its length and breadth. With about 300 dealers, industry norms suggest, a car maker can cover up to 80 per cent of the market. How does Volkswagen measure against this benchmark? At the moment, Volkswagen has 43 dealers in 32 cities — woefully short of rivals like Maruti Suzuki, Hyundai, Tata Motors and Mahindra & Mahindra. But the network could expand in the days to come. “We will be spread all over, and are keen on increasing our penetration in line with volumes. Hence we will open one dealership every three weeks,” says Garg. “People’s concern with Volkswagen is its dealership and after-sale service. The company needs to build that up fast. The consumer is not going to wait,” says Sen.

But Volkswagen could have an ace up its sleeve. Last year, it had bought 19.6 per cent in Suzuki Motor Corporation for $2.5 billion. The crown jewel of Suzuki, of course, is its Indian subsidiary, Maruti Suzuki. Ever since the acquisition, there has been speculation that Volkswagen and Maruti Suzuki will soon explore synergies in various fields. There have been reports that top executives from the two companies have met to kickstart such discussions. But sector experts doubt if the co-operation will extend to distribution because their car models clash. But Maruti Suzuki’s expertise in cost-effective and high-volume production is something Volkswagen could leverage to good effect.