Global Insight Perspective | |
Significance | Volkswagen is reconsidering the product strategy that it will use when it enters the Indian market in 2009, according to reports. The company will also look to establish a joint components sourcing network with affiliate Skoda in India to support its proposed manufacturing efforts in the country. |
Implications | It is important that VW enters this high-growth emerging market with the right product portfolio if it is not to repeat the mistakes of predecessors such as Fiat. The Indian market has unique characteristics that VW has little experience of, and the whole demographic of the Indian passenger car market could be irrevocably altered by the introduction of Tata's ”1-lakh car”. |
Outlook | VW is undoubtedly right to employ a cautious approach to its model strategy in the Indian market. It is probably the most price-sensitive major automotive market in the world and VW will have to launch the right car at the right price point in order to carve out a niche in the increasingly competitive and diverse market. |
VW Looks to Reassess Model Strategy for India
According to a report in German business publication Manager Magazin, Volkswagen (VW) is looking to reassess the model strategy that will be the foundation for its entry into the Indian market. The company announced plans in November 2006 to build a US$530-million assembly plant in India, having agreed a deal with the state government of Maharashtra to build the new plant near the city of Pune (see India: 29 November 2006: Volkswagen Confirms US$530-mil. Plant Investment in India). It was also reported last year that VW would begin small-scale assembly of models in lndia ahead of the new plant's construction, building the Passat D-segment sedan at SkodaAuto India's plant (see India: 15 November 2006: Skoda to Assemble VW and Audi Models for Indian Market). The rationale behind the assembly of the Passat is to gradually introduce the VW brand to the Indian market as an upper-scale brand, before the mass-market entry with a B- or A-segment car. It was initially reported that the European-specification current-generation Polo would be built at the Pune plant, but it appears that VW is concerned about the rapid development of the Indian market, and has opted to re-examine its Indian model strategy. SkodaAuto India Managing Director Karsten Bogun has also stated that his company will establish a components supply network in India with parent VW. This will allow Skoda to change its strategy in India to full-scale manufacturing, as opposed to the current arrangement whereby it largely assembles completely knocked down (CKD) kits. It will also help VW keep costs down by increasing local content levels with its market entry.
Tata's ”1-Lakh Car” May Change the Face of the Indian Car Industry
It is likely that VW will wait to see what impact Tata's proposed ”1-lakh car” has on the Indian automotive industry before deciding on a final strategy for entering the country. The eagerly awaited model is due to go on sale at the end of next year and will have a price tag of roughly 100,000 rupees (US$2,298), hence the unofficial name of the project. This is around half the basic price of the current cheapest passenger car on the Indian market, which is the 20-year-old Maruti 800. Tata wants to make passenger car ownership a realistic proposition for a new demographic in Indian society who would previously have been restricted to motorcycle or scooter ownership. Tata has yet to release any official sales estimates for the ”1-lakh car”, but Global Insight forecasts that by 2012 the model will have annual sales of 772,524 units, which equates to just over 25% of the total forecast passenger car market. This will make life extremely crowded at the bottom end of the Indian passenger car market, and could influence VW's strategy. However, if VW waits to guage the impact of the ”1-lakh car” on the market, it will allow it little time to prepare for its own 2009 entry.
Outlook and Implications
It is likely that VW is re-examining its strategy with regards to its entry-level model in the Indian market. It has been reported that VW could manufacture a version of the existing European-specification B-segment Polo or even the smaller A-segment Fox, which it currently manufactures in Brazil. However, VW could end up making the same mistake as Fiat with this strategy. Fiat was one of the first foreign carmakers to enter the Indian passenger car market following deregulation in 1993. However, despite some initial success with the Uno, the company floundered in its attempts to increase its market share with its Palio ”Project 178” world car, which was launched in 2002. The Palio was simply too expensive and not superior enough to local competitors from Maruti Uydog and Tata to generate significant sales.
It is possible that VW could do one of two things with its Indian market entry strategy. It could develop its own brand-new budget car to compete head-on with Tata's ”1-lakh car” in India and other developing markets. However, this would be a cost-intensive and high-risk route as a result of the research and development (R&D) costs involved in developing such a vehicle. Profit margins on such a low-unit-cost car would also be negligible. Alternatively, VW could move upmarket. Internationally, VW is perceived as something of a bridging brand between the mass-market and premium brands. It may opt to try to capture some of the middle ground of the Indian car industry by establishing itself as an affordable, yet aspirational brand. With the Indian passenger car market set to more than double by 2012 to nearly 3 million, according to Global Insight, a lot of this growth will be generated in the C and D segments as a result of an increasingly prosperous professional Indian middle class. VW may find itself well positioned to benefit from this.