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How Volkswagen plans to take on competitors

May 23, 2014 14:55 IST

How Volkswagen plans to take on competitors

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Surajeet Das Gupta in New Delhi

After losing market share, the German car maker wants to enter its competitor’s turf of compact sedans and SUVs.

German car maker Volkswagen made two mistakes in India.

One, it did not respond fast enough to a fundamental shift in the market from classic hatchbacks and sedans to compact (under 4 metres) value-for-money sports utility vehicles, or SUVs, and sedans.

While the overall market is in a bind, the compact segment has grown handsomely. In 2013, compact sedan sales grew over 28 per cent, even while the industry remained stagnant.

Ford sold over 45,000 units of its compact SUV, the EcoSport, in just one year.

Two, Volkswagen did not launch new products with the same frequency as its rivals, which caused its market share to dip. Every new product, because of its novelty factor, produces a spike in sales.

With others launching new products rapidly, the performance of Volkswagen’s bestseller products too was impacted.

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Image: Volkswagen Polo
Photographs: Courtesy, Volkswagen

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Mahesh Kodumudi, president and managing director of Volkswagen Group India, agrees hesitantly. “We have seen a sharp rise in sales of new models whenever they are introduced, followed by either gradual or precipitous fall. We cannot deny that some of these products have taken away volumes from the Vento (sedan) and Polo (hatchback),” says he. 

“You can conclude that a constant pipeline of new products is necessary to maintain high volumes in the Indian market.” 

The numbers clearly tell the story. Domestic sales of Volkswagen fell 19.77 per cent in 2013-14 to just 52,528 vehicles. Polo sale were down and the Vento was outsmarted by the Honda City and Hyundai Verna in the executive segment.

But the German car maker seems to be learning from its mistakes. It has decided to come out with compact sedans and might even look at a compact SUV. But this is unlikely to happen in a hurry: the first compact sedan will come only in 2016.

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Image: Volkswagen Vento
Photographs: Courtesy, Volkswagen

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Analysts say it could be too late by then because rivals like Maruti Suzuki with its Swift Dzire and Honda with its Amaze (compact sedans) will have grabbed this fast growing market because of their first-mover advantage.

It also needs to get into the compact SUV category quickly. At the moment, Ford, with the EcoSport, has a free run in the market. The problem is that Volkswagen does not have any readymade product in this category.

“Volkswagen considers the global market and demand. So it would always come up with products that can be sold in multiple markets,” says Kodumudi. But his competitors say the sub-4-metre category is unique to India and does not sell in other markets. Such product strategy could therefore prove costly for the company.

Still, Volkswagen had showcased the concept for its compact SUV, the Tiguan, at the Auto Expo held earlier this year in Greater Noida. It is not yet ready in a sub-4-metre avatar for India.

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Image: Volkswagen Tiguan
Photographs: Courtesy, Volkswagen

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Experts don’t expect it to be launched before 2016. Meanwhile, others like Maruti Suzuki, General Motors and homegrown Mahindra & Mahindra are readying compact SUVs for India.

Volkswagen has also realised it needs to create some excitement in its existing product range. So it will launch the revamped Polo this year. It is banking on the sportier exteriors and interiors of the hatchback, as well as its new more fuel-efficient engine, to revive its sales which fell to 30,878 in 2013-14 from 36,848 in 2012-13.

Its market share stands at below 4 per cent. A small upgrade in the Vento too will happen this year and a major overhaul is slated for next year. It is also planning to launch a new revamped Passat in 2015.

New revamped models are not the only area of attention. The car maker knows pretty well that indigenisation alone will help it prune costs and thus become more price-competitive in the market.

Perhaps that is why it is investing Rs 1,500 crore (Rs 15 billion) in India, a part of which will go to build a diesel engine plant with a capacity of 100,000 per annum.

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Image: Volkswagen Passat.
Photographs: Courtesy, Volkswagen
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This should go on stream by the end of this year. After all, about 65 per cent of its cars are powered by diesel engines. This, Volkswagen executives say, will help the company increase indigenisation from 70 per cent to 80 per cent. It is also mulling setting up a gear box facility. Once that starts production, indigenisation will reach 90 per cent.

The group is also keen to push exports. In fact, it was the overseas market that helped the Volkswagen factory in Pune stay afloat last year.

For Volkswagen, it is a key strategy: in case the domestic market is not growing, as in last two years, it pushes the pedal on exports.

In 2013, says Kodumudi, the Pune factory had produced 100,011 cars, of which 25 per cent were exported. This year, the plan is to sell 45 per cent of the total production—  around 50,000 cars — abroad.

Volkswagen has successfully tapped the Mexican market where it plans to export about 40,000 Ventos this year. 

That apart, it is also selling parts and components of the Polo to its venture in Malaysia, in which 70 per cent of the car is built in India. That has kept its factory busy.

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Image: Volkswagen Cross Polo.
Photographs: Courtesy, Volkswagen

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But with this large export push and hopes that the domestic market might make a  recovery with the new Narendra Modi-led government in place, won’t Volkswagen run out of capacity very soon? 

Won’t it have to put in more money to expand its Pune factory?

Its current capacity of 130,000 per annum can be pushed up to 150,000 with some minor tweaking and by introducing a third production shift.

“For us to achieve (annual production of) 200,000, we need not only an expanding export market but also an expanding domestic market. And for the domestic market to expand, we need another new model in our line up.

We expect to reach (production of) 200,000 by 2018,” says Kodumudi.

So will the new compact sedan, the revamped upgrades of old products and aggressive push abroad change its fortunes? 

What might help is that after a flurry of launches, other car makers have hit the pause button and may not launch too many new cars or upgrades in the next one year.


Image: Volkswagen plant at Chakan.
Photographs: Courtesy, Volkswagen

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