Global Insight Perspective | |
Significance | It has been confirmed by the German embassy in India that Volkswagen will invest US$530 million in establishing a manufacturing facility in India. |
Implications | Volkswagen's entry into the Indian market has previously been delayed by indecision and a bribery and corruption scandal. The company will look to make significant inroads into the world's second fastest-growing major market with this new facility. |
Outlook | Volkswagen's experience in China should allow it to quickly catch up with better-established global rivals in India, such as GM, Toyota and Honda. There is no information on the model to be produced at the new Pune plant, although the Fox A-segment vehicle is a possibility. |
Volkswagen Finally Commits to Indian Plant
After a long and sometimes controversial gestation period, Volkswagen (VW) has finally committed to building a passenger car assembly facility in India. According to Reuters, the news was confirmed by the German embassy in India. A spokesperson said that the senior VW managers will sign a contract with the state government of Maharashtra today to build the new plant near the city of Pune. The plan to go ahead with the construction of the plant was rubber-stamped at VW's main board meeting on 17 November, and building work will start in the new year. VW has set aside 400 million euro (US$530 million) for the plant, which is due to begin manufacturing operations in the second half of 2009. There has been no confirmation of the models that will be initially produced at the plant, although the facility will concentrate on manufacturing sub-compact A- and B-segment cars. This would make the Fox A-segment model, which is currently manufactured in Brazil, and the Polo the most likely vehicles to be initially produced at the plant. Alternatively, VW may opt to build a bespoke compact car for emerging markets based on the A000 vehicle platform architecture.
VW Will Begin Assembly Initially at SkodaAuto India
VW has already announced that it is planning to begin small-scale assembly of VW cars in India for the first time next year at the SkodaAuto India plant at Aurangabad (see India: 15 November 20006: Skoda to Assemble VW and Audi Models for Indian Market). This arrangement will act as an exploratory entry into the Indian market for the brand. Skoda and Audi vehicles have a head-start in India on the parent brand, which has until now never sold cars in India. Low-volume sales of the VW Passat model will allow VW to introduce its brand to India in a visible high-end market segment. This should in turn pave the way for a positive reception for the company's low-cost, compact car products built at the new factory.
Outlook and Implications
VW's entry into the Indian market has been a long time coming despite the relative success of VW Group brand Skoda in the country since assembly operations began there in 2001. Skoda has itself established a reputation as a quality brand of larger D- and E-segment cars with its Octavia, Laura (second-generation Octavia) and Superb. This in itself poses questions about VW's overall brand strategy in India, which is a highly price-sensitive developing market. With Skoda already positioned as something of a premium brand, it will require VW to slot in below the Czech carmaker in terms of the company's brand hierarchy in India. This will be even more the case if VW focuses on manufacturing subcompacts in India. This goes against the group's positioning of its brands in Europe, where Skoda is very much the VW Group's entry-level brand.
However, it is undoubtedly a good time for VW to be entering India as a volume carmaker. Global Insight forecasts that passenger car sales in the country will rise to over 1 million units for the first time in 2006, with this figure set to more than double by 2011. As the Indian economy grows and income levels rise, Indian car buyers are set to become more brand-conscious. A European brand with a strong global image such as VW could benefit in terms of sales growth from the status-driven and hierarchical nature of Indian society. Global Insight predicts that VW will quickly establish itself in the Indian market, with initial sales of just under 30,000 units in its first year of the new plant's operations in 2009, rising to over 54,000 units by 2011, equating to an overall share of the passenger car market of around 2.5%.