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Volkswagen's strategy for India 2.0 has revved up the engines

German automaker Volkswagen has revamped its game plan to gain a bigger share of the country's booming auto market

Manu Balachandran
Published: Jan 16, 2020 02:04:57 PM IST
Updated: Jan 16, 2020 03:33:01 PM IST

Volkswagen's strategy for India 2.0 has revved up the enginesGurpratap Boparai, managing director of Skoda Auto Volkswagen India, is gearing up to grow the Volkswagen Group’s market share in India to 5 percent by 2025
Image: Madhu Kapparath

Gurpratap Boparai certainly knows the importance of planning well. He often spends a few weeks every year riding across India on his Triumph Thruston R and in the last few weeks of December, the managing director of Skoda Auto Volkswagen India (SAVI) rode from Mumbai to Wayanad in Kerala, a distance of more than 2,000 km over 10 days. Certainly, that could not have been done without a detailed plan in hand.

It is perhaps this attention to detail the engineer-turned-business executive is banking on to resurrect the fortunes of the world’s largest carmaker, the Volkswagen Group, in India. A veteran of the Tata Group, Boparai, 50, is known for the phenomenal success of SUV maker Jeep, when as the head of FCA India Automobiles (Fiat) he played a crucial role in bettering localisation levels and ensuring seamless production of the Compass model. At SAVI, Boparai has several challenges in the year ahead.

The Volkswagen Group—makers of Skoda, Volkswagen, Audi, Lamborghini, and Porsche—has struggled in India, particularly against Korean and Indian carmakers, in gaining a sizeable presence for more than a decade. Having begun operations in 2001 through its subsidiary Skoda Auto India, the Wolfsburg-headquartered company is yet to replicate its global success in India, the world’s fifth-largest automobile market. In 2018, the Volkswagen Group sold nearly 11 million vehicles globally; in India it didn’t even cross 100,000. With a combined market share of 2 percent, Volkswagen’s fortunes are in stark contrast to Hyundai Motors, which began operations in India four years before Skoda’s entry and has emerged as the country’s second-largest carmaker, cornering a little over 18 percent of the market. 

“It is no secret that we have struggled so far,” says Boparai, who was roped in from Fiat in 2018. “The market share is not in line with what we expected. As a group we want it to grow to 5 percent by 2025.”  

To do that, Boparai and the Group have devised a new three-pronged strategy, code-named India 2.0: It will merge different units to create an umbrella organisation and increase dealer networks; it has developed a new platform, MQB A0-IN, on which to launch four new vehicles, starting 2021; Skoda, the Volkswagen Group’s Czech subsidiary, has been handed the mandate to lead India operations, in line with a global strategy where one Group subsidiary drives strategy and sales in a specific region. “The idea was to reboot our approach to India,” says Boparai.  

“The real difference in their India 2.0 strategy is that it essentially combines all their efforts,” says Vinay Pipasarnia, global consulting director at Counterpoint Research and former executive director at Ford Motors India. “Individually all their companies have been very small, but when you put them together, they have a wholesome presence in various categories. The most important thing for them is to keep costs down, and hence the pivot towards newer models. When you are chasing together, there will be lesser duplication of efforts and more experience.”  

Starting troubles
Since its launch in India, the Group was simply not able to woo mass customers. Although Skoda Octavia, Volkswagen Polo and Vento did manage to ignite consumer interest, they could never match more popular models from Maruti Suzuki or Hyundai, which boast cheaper vehicles and better service networks.  

Skoda launched the popular Octavia in 2001 in India, followed by the successful hatchback Fabia and SUV Yeti. But the company didn’t localise productions and chose to import Completely Knocked Down units. The arrival of Volkswagen in 2007 allowed the Group to manufacture the Polo, Vento and Rapid within the country.  

“The group had a serious identity crisis,” says Deepesh Rathore, co-founder of Gurugram-based automotive consultancy Emerging Markets Automotive Advisors (EMAA). “While Skoda was seen as a cheaper brand in Europe, in India it positioned itself as a luxury brand and they managed to find limited success.” But, with the arrival of Volkswagen the Group struggled to position it. “In Europe, Volkswagen competes with Toyota, and in India Skoda was already doing that,” says Rathore. “That created a lot of confusion and they didn’t know where to place the Volkswagen brand.” 

“Indian consumers give good weightage to European brands,” says Puneet Gupta, associate director of Automotive Forecasting at IHS Markit. “Skoda and Volkswagen did manage to create a great impact on their arrival in India, but were not able to sustain the momentum. There were no new launches and replacements, and they failed to target the sub-4-metre category, which could have emerged as a good volume churner.” 

The Group also entirely missed the SUV bandwagon. “If the group could bring out a vehicle in the Hyundai Creta or Maruti Suzuki Brezza segment, with plush interiors and mark it even 10 percent higher than the competitors, they would have a winner,” says Rathore.

Volkswagen's strategy for India 2.0 has revved up the enginesSkoda’s Aurangabad plant (above) will have synergies with Volkswagen’s factory in Chakan, Pune
Image: Madhu Kapparath

Now, the company has opened a new technology centre in Pune that will develop market-specific vehicles. “The SUV segment is booming across the world and not just in India,” says Boparai. “People like the high driving position and the robust and safe feel of SUVs. But we will not be limited to SUVs, and are looking at the C segment and maybe the upper B segment.” 

The company will also be focussing more on petrol in the small car segment, moving away from diesel.  “In the smaller cars, the economics of diesel becomes extremely challenging,” says Boparai.

Last October the Group created Skoda Auto Volkswagen India by merging Skoda Auto India, Volkswagen India and Volkswagen Group Sales. “The plan is aligned with our strategy to re-enter the volume segment in the country,” says Boparai. Re-entering this segment is financially critical for the Group, in addition to re-establishing the brand that has lost sheen largely due to a poor portfolio and higher maintenance cost.

A new structure
Much of the restructuring to which the parent company has committed €1 billion (`8,000 crore) is in line with the Group’s experiments with new strategies. Under a 2018 plan, it distributed responsibility for its subsidiaries in different markets, where one brand assumed responsibility for a region. “This will make it possible to take decisions in a decentralised way and the board of management will be able to concentrate on overarching strategic topics. This will make Volkswagen faster, slimmer and more efficient,” Herbert Diess, CEO of the Volkswagen Group, had said at that time.

While the Volkswagen brand assumed responsibility for the Americas and Sub-Saharan region, SEAT got the mandate for North Africa. Luxury carmaker Audi was given charge of the Middle East and the Asia-Pacific region, while the Volkswagen Group itself retained China, where it sells some 4.21 million vehicles annually. Skoda was given the mandate for India and Russia. While Volkswagen in Germany will be going flat out on electrification, Boparai prefers to wait and watch. “Ours is going to be a top-down approach with battery electric vehicles from Audi and Porsche, and then respond to the other brands,” says Boparai.

Then there is the merger of various units to streamline operations. Earlier, the Group’s three arms worked independently: In Aurangabad, Skoda Auto India made the Octavia, Kodiaq and Superb, in addition to Volkswagen’s Passat and Tiguan, and Audi; Volkswagen India’s Pune plant made the Polo, Vento and Rapid; the Volkswagen Group sales functioned as the sales and marketing arm for Volkswagen, Audi, Porsche and Lamborghini in India. Now, even as the brands will maintain their identities, dealer network and customer experience initiatives, Boparai and the Skoda brand will lead the common strategy for the Indian market.

“One of the reasons for this merger is to have everyone pulling in the same direction. It also gives us synergies of resources. When manufacturing and sales are part of the same organisation, it gives you far more reactivity and speed to react to the market,” says Boparai.

Already, the Volkswagen arm plans to achieve a 3 percent market share in the next five years. “Volkswagen is developing modern and cost-effective retail models called ‘pop-up and city stores’ for tier 2 and 3 markets,” says Steffen Knapp, director, Volkswagen Passenger Cars India. “Not only will it increase the brands’ accessibility and visibility, it will also be an effective and profitable sales tool for our investors.” 

Audi’s plans include the launch of new vehicles through 2020. “While we follow our brand strategy, we will also reap the benefits of being part of SAVI,” says Balbir Singh Dhillon, head of Audi India. “Not only do we achieve internal synergies in manufacturing, personnel expertise and back-office operations, but also find common dealer partners and better sourcing.”

Volkswagen’s gamble comes at a time when the Indian automobile industry is in the doldrums. An overall slowdown in the economy, alongside a liquidity crunch and uncertainties over the transition to stricter emission and safety norms have destabilised the country’s automobile sector. Between April and November 2019, vehicle sales fell by nearly 20 percent. There is also the government’s push towards more electrification.

Volkswagen's strategy for India 2.0 has revved up the engines
Focus on costs
Under India 2.0, one of the concerns the Group is trying to address is the exorbitant price of its vehicles and spare parts. Since their launch, Skoda and Volkswagen had to deal with relatively higher costs because half their components were imported. In comparison, Hyundai Motors built an ecosystem of suppliers in India, which brought it remarkable economies of scale.

“Skoda started very well. It positioned itself very well,” says Boparai. “For the segments apart from Fabia and Rapid, because they are low volume, the localisation isn’t very high. And when you don’t have localisation, prices are high. The other thing we suffered from is patchy services, and expensive spares.” 

The company wants to cut costs by standardising components and production processes. “The localisation percentage will be higher, which will help us address the total cost of ownership,” explains Boparai. For the past two years, the company has managed to bring the share of localisation to about 82 percent, much of it made possible by the progress made by local suppliers who now meet the required standards. “Higher localised contents will help in bolstering the domestic supply chain, agile need-based customisation, and faster service response,” says Boparai. 

The new platform, MQB A0-IN, will also help cut development and manufacturing costs, while enabling 95 percent localisation. “The MQB A0-IN increases flexibility while developing new vehicles. Most of the technical development will take place in India,” says Boparai. The new offerings from the Group include two SUVs and two sedans from Skoda and Volkswagen, built entirely in India on the MQB A0-IN platform. Besides these, MQB A0-IN will support the development of further new models. Built specifically for India, the platform has better emission and fuel consumption norms, in addition to better safety, comfort and infotainment systems.

“While the platforms and dimensions of the new products will be the same, the body style and design language will be distinct for Skoda Auto and Volkswagen,” Boparai adds. “The segments served by each of our brands appeal to a distinct audience.”

“If they can find success with one model, then the dealers will begin to line up,” says Rathore of EMAA. “By streamlining operations and localisation, they will save millions. That means if they can bring out a vehicle that retains its build quality at a competitive price, they have a winner in hand.”

Will it work?
As the Group gears up to capture 5 percent of the market in the next five years, it won’t be a smooth ride. “It all depends on the competitive environment,” says Gupta of IHS Markit. “The Chinese players are making their entry and there are companies such as Kia that are becoming very competitive. To take away market share from them won’t be easy. But 5 percent certainly looks achievable, especially since the Group has a reputation for building good quality vehicles.” 

Others agree that with the brand reputation the German group has garnered over the years, the India 2.0 plan could work for it. “If they can offer a product, which is well known for its safety and engineering, and package it well, it could help with the turnaround,” says Pipasarnia. Rathore also reckons that the decision to hand over the lead to Skoda will help the Group, particularly since the Czech brand has a relatively better brand positioning.  

On paper, the India 2.0 plan has the potential to succeed. And who better than Boparai to know that the better the planning, the safer and smoother the journey.

(This story appears in the 31 January, 2020 issue of Forbes India. To visit our Archives, click here.)