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Within two years of entering the Indian passenger car market in 2007, BMW toppled rival Mercedes-Benz to become the numero uno luxury car maker of the country.

In 2010, the company recorded a 73 per cent growth in sales volume, maintaining its leadership position in the category.

In conversation with Business Standard, BMW India President, Dr Andreas Schaaf, outlines the company's India strategy and the reasons for its phenomenal success.

"My goal is to establish the foundation for the future organisation," he says.

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How do you think the luxury car market in India is going to shape up in the next couple of years? What are the factors driving the changes seen in the category?

In the last three to four years, the luxury car segment has witnessed a phenomenal 60-70 per cent growth and reported sales of 15,000 cars in 2010.

Assuming a growth rate of 25-30 per cent over the next few years, the segment in 2020 would be 1,50,000 cars, which is 10 times its size today. If that happens, India will be among the top ten countries in the world for the BMW Group.

Also, if, according to research, India becomes the fourth largest car market in the world in a couple of years, the premium segment will come to dominate a much larger portion.

The changes in this segment are driven by several factors. India is at a tipping point where education levels are rising and more and more people have the income to buy a car.

Another major trend is the attitudinal change in the new generation. The younger generation has a different view on work-life balance - they want to enjoy their lives.

India has one of the youngest populations and its wealth is driven by people in the 30s and 40s. All this has influenced growth in this market.

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What factors would you attribute your success in India to?

The fact that BMW is aimed at a target group that drives the future of the country has definitely helped us.

There are a few things that have helped us be different - the product, marketing, dealership network as well as the spirit of the people (employees). Also, the BMW brand is highly attractive for people who have a modern view of things.

We are perceived as a dynamic, sporty, innovative and aesthetic brand, and hence we've have done well with a younger target group. The average age of the BMW buyer in India is 40 years.

Instead of having a huge advertising spend, it makes more sense to us to develop more touch points where people can have a personal connect with the brand.

For example, if you walk into a BMW dealership today, you will see that the place is sophisticated and you will be treated in a certain way.

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We conduct innovative marketing activities - professional golf tournaments, wine tasting sessions, events with fashion designers - that have helped us get close to the customer.

We have also spent a lot of time creating a unique spirit within the company. To give you an example, we became number one in 2009, but the next 10 months we were trailing our biggest competitor.

Instead of losing faith, the group came together - not only at the corporate level but also at the plant, financial services arm and at the dealer network level. The fact that people are emotionally connected within the organisation has made a huge contribution to our success.

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Where does India fit in BMW's global plans? Which are the top five markets for BMW?

BMW has a special focus on BRIC countries, of which India is a part. Also, macro-economic factors indicate that India will emerge the strongest among the BRIC countries.

We are relatively small in India today, but the future belongs to India, and the whole company shares this vision. My goal is to establish the foundation for the future organisation.

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What is your current production capacity? How much have you invested in your production?

We have just increased our capacity in the Chennai plant from 5,400 to 8,000 units. If needed, we will look at a second shift, and also expand the capacity of the plant.

We have 8,000 units for CKDs (completely knocked down unit) and CBUs (completely build unit) which should be sufficient, but if the market develops much faster or continues to develop by 60-70 per cent, then we will expand.

In total, we have invested Rs 1.8 billion (Rs 180 crore) in the Chennai plant. We have adopted a strategy where we invest in bringing a greater degree of flexibility in the production processes - flexibility in terms of how you can change between the different model lines that you produce.

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Last year, BMW launched its financing arm in India to service the credit needs of retail customers, fleet owners and dealers. What is the potential of this business?

India is a strong financing market and 80 per cent of the cars that we sell are financed. The financing option plays a very crucial part in the buying process, and that is the reason we set up the BMW Finance service.

Going ahead, I think this will help us create finance products that are made to measure. Also, it is all about speed -today if we want to create a finance product, we can do it very quickly since it is within the company and you can immediately receive feedback for it.

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How do you gauge demand for a new car?

Compared to other markets, gauging demand in a country like India is very difficult. It is easier elsewhere because the segment is more established and hence more stable.

In a market like India and Korea which is experiencing 70 per cent growth, it is difficult to estimate the natural demand for a car.

There are certain tools and methodologies you can use but they all have their limitations. We can look at the number of cars that have been sold as well as the various price points, but this neglects the psychological aspect of the business.

Given that, sometimes you can experience very surprising numbers. I think we have achieved in the second year what we put in the business plan for the fourth and fifth year.

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Do you source components from Indian suppliers for your global network?

Let us look at the big picture. India will become one of the biggest automotive markets and as a consequence there will be a reasonable skill level.

You have to consider Indian suppliers to supply to your network. I will not look into Indian suppliers to service the demand for India alone as these are relatively small numbers and thus will not make sense.

The idea is to identity Indian suppliers who are qualified to deliver their parts to the global network. Currently, we have two-three Indian suppliers for our global network but this is still at a relatively early stage as we started only a year ago. Rico Auto and Sundaram Clayton are two suppliers who deliver castings like oil pan, differential case and brackets.

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We have set up international purchasing offices in a couple of emerging markets in the East, as the East is the engine of future growth and hence you have to look at the supply structure in this region.

We are increasingly sourcing components from Korea, China, Japan and India. India is still small but going forward we will identify more suppliers.

The Indian car components market has a very different characteristic - it is geared more towards the economy car, rather than to a premium luxury product. You need to have different skills to deliver as a supplier for a premium car maker as compared to a mass manufacturer.

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How do you decide on dealers and their locations?

In my experience, whenever you put a person who is eager to develop a market, there will be success.

The top down approach doesn't really work. Also, within a city, you know where the buying potential is - you see upcoming areas and established areas, and based on the perceived demand we set up our dealers.

We do not have company owned dealerships, but retail partners. It is wrong to assume that a company that is very strong in design and manufacturing of premium cars should also be the best in selling those cars.

Selling a premium car requires a good network. Hence, the fundamental belief at BMW is to leave the selling to the retail people who have a local connect. We call them the local heroes.

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Will you design a car only for the Indian market?

I do not think it would make sense to come up with a specific car for the Indian market. We have what we call the one-global-brand-approach and that is our strength.

Every localisation would weaken this fundamental positioning of the brand.

We have minor adaptations for the Indian road and weather conditions. This includes a higher suspension as ground clearance in India is low, and different intake filters as the air in the country is more polluted.

These are minor changes to guarantee that products are running without any fault.

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The X1 model is the least expensive car in your portfolio. When launching future models, will you focus on a similar price range or target the high-end segment?

The launch of the X1 was an important part of our product strategy. If you look at our product portfolio in India, we have covered the entire range except the entry level.

We believe that when you enter a new market, the business does not start with entry models. Our experience shows if you enter a market which has a relatively small target group, you need to build a premium image for the brand through the high-end models.

We thought the X1 is the perfect car for the Indian market since it is SUV (sport utility vehicle) style - has the ground clearance. But this is not the end so far as launches in the segment are concerned. As the market grows and fragmentation continues we will launch products across segments as well.

For example, one thought no one will buy a convertible in Korea. But we went ahead and launched the 3-series convertible and it sold 500 in the first year. The world has changed dramatically and everything is in a flux. There are no given patterns these days and therefore you should not have pre-conceived notions.

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You plan to enter the used-car market. Won't that dilute the BMW brand equity?

We will start our used-car business soon. In terms of brand equity, there are two aspects. When you talk about the new-car business, you need to have your discount level in control as that can impact your brand reputation.

Also, the used-car business does not dilute your brand; it tends to do the opposite. If you run the used-car business in a professional way, it will help increase value for your customer as the resale value goes up. It will allow a new set of people to experience the brand for the first time, and eventually they might buy a new car.

We are developing premium-used car operation centres, where cars will be sold out of the dealerships. These will not be sold out of the parking lot or the basement, but out of a 100-per cent dedicated floor in the showroom. It will have a great atmosphere - with the same standard as a new car dealership.