May 17 (Bloomberg) -- As India’s car market took off in recent years, global luxury brands focused on selling sumptuous sedans and big sport utility vehicles in Mumbai, Delhi, and Kolkata, home to the bulk of the country’s wealthy. Germany’s Audi shows that’s changing.
The unit of Volkswagen AG has overtaken Bayerische Motoren Werke AG as India’s top seller of luxury vehicles, and Audi executives say that’s due to their rapid expansion outside large urban centers as well as a smaller SUV introduced last year.
To maintain its advantage, Audi is planning to add more SUVs and won’t immediately offer a compact hatchback like those its biggest rivals expect to fuel their growth.
“For us, first it’s SUV, then sedans and then hatchbacks,” said Michael Perschke, Audi India brand director. “India is a country where SUVs have multiple benefits.”
To win more customers in smaller cities, where roads tend to be rougher but not as narrow, Audi may introduce a new range of sportier SUVs to add to the three it already offers, Perschke said without giving a timeframe. The automaker will also offer the compact A3 in India next year, but in a sedan version rather than the hatchback it sells in Europe, he said.
In contrast, BMW, the world’s biggest luxury-car brand, and Daimler AG’s Mercedes-Benz, No. 3 globally, are adding hatchbacks in India, where slowing economic growth has choked demand for cars.
Audi’s sales rose 43 percent to 9,350 units in the year ended March, while BMW dropped 9.5 percent to 8,686 and Mercedes fell 5.4 percent to 7,015, according to data compiled by Bloomberg based on figures from the companies and the Society of Indian Automobile Manufacturers. BMW India did not respond to e-mailed queries about Audi overtaking it in sales.
The fight is over a luxury vehicle market estimated by IHS Automotive to quadruple by 2020 from about 30,000 last year. Within seven years, India will become the world’s third-biggest car market, up from No. 6 today, researcher J.D. Power & Associates predicts.
In India, more than many other markets, being the top-selling brand can provide a big boost to marketing, said Deepesh Rathore, managing director for IHS Automotive in India.
“It’s quite significant to be No. 1 in India,” Rathore said, “especially in smaller cities where customers don’t really know much about luxury models and their heritage.”
Audi has benefited from the introduction of its 2.9 million rupee ($53,000) Q3, a smaller SUV, last year. BMW’s rival X1, starting at 2.8 million rupees, was introduced in late 2010. Mercedes’s cheapest SUV is its M-Class, introduced last year, which starts at 4.9 million rupees, according to carwale.com, an Indian auto research website.
Given how close their sales are and the relatively small volumes in India, Rathore expects the top slot to rotate among the three German brands over the next several years.
Mercedes was the first of the German luxury carmakers to enter India, in 1995. In 2007, BMW opened a factory in the country and Audi established a local unit. Mercedes led luxury car sales in India until 2009, when BMW took over.
Mercedes is betting a compact car from its global lineup is the right vehicle to boost sales in India. The automaker says it will unveil its first hatchback, the entry level A-Class, this month. This will be followed with a diesel variant of the B-Class compact.
“There is a worldwide trend to compact luxury,” said Eberhard Kern, managing director of the automaker’s local unit. “I’m quite sure Indians will buy into this trend as well.”
BMW says it will add its 1-Series compact hatchback in the second half of this year. At the high end, BMW introduced a new version of the 9.3 million rupee 7-Series last month, and Mercedes this year will unveil a redesign of its flagship S-Class, which starts at 9.1 million rupees. Audi last refreshed its A8, a large sedan starting at 9.5 million rupees, in 2011.
While India is the world’s biggest market for hatchbacks, convincing customers to pay 10 times the price of an Alto from Maruti Suzuki India Ltd. -- the top selling car in the country - - is a hard sell.
Many customers in smaller cities, though, will choose an SUV over a compact, according to Wilfried Aulbur, managing partner at Roland Berger Strategy Consultants GmbH in Mumbai.
“Hatchbacks have an advantage in cities such as Mumbai or Bangalore, where you get the sense of luxury, features and space as well as being easy to maneuver and park,” Aulbur said. In smaller towns, buyers “may opt for SUVs because of the bad roads and their size.”
Audi expects its SUVs to make up 40 percent of its deliveries in India this year and 45 percent in 2014. About 38 percent of BMW’s 2012 India sales were the four SUVs it offers, the company said in January. Mercedes sells three SUVs, but didn’t immediately say what percentage of its sales they represent.
To win buyers across India, Audi is adding eight more dealerships this year, in cities such as Rajkot, Lucknow and Vadodara, with populations ranging from 1 million to 3 million.
Audi currently has 25 sales outlets across the country, with nine located in the five biggest cities, according to its local website. BMW has 28, with 10 in the metropolises, while Mercedes has 33, with 13 in the big cities, their sites show.
Sanjay Sharma, who runs a software company in Bhopal, a city of 1.9 million in the state of Madhya Pradesh where the German company opened a dealership last year, replaced his Honda CR-V with an Audi Q3 SUV 10 months ago.
“I was looking for an SUV that was more similar to a car and yet I can take into the hilly places around Bhopal,” said Sharma, 45. He says he’s “found the driving pleasure to be unexplainable. I never let my driver drive it.”
Mercedes plans to add as many as 10 new outlets this year, Kern said in an interview after inaugurating a new dealership in Noida, a dusty, potholed suburb of New Delhi. And he says he expects to add a version of a compact SUV concept called the GLA that the company showed at the Shanghai Auto Show last month, though he didn’t say when.
“It is important that you are present in smaller cities,” said Kern. “The first car will sell, but from the second car, you have to be present with sales and service. You have to have financing and service in place.”
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