India Proves Hard to Crack for VW as Swift Outshines Polo

For Volkswagen AG, the route to being the world’s top carmaker was meant to go through India.

Instead, auto sales in the country are headed for their first annual drop since 2002, the German carmaker has captured only a third of the 10 percent market share it’s targeting and factories are producing about 40 percent of the cars they are capable of making. Not only are Volkswagen-badged vehicles typically more expensive than other brands, they also compete against models from sister marque Skoda.

Volkswagen isn’t alone in stumbling in India -- General Motors Co. has a share of about 3.5 percent there -- as global carmakers struggle to figure out how to succeed in what KPMG predicts will be among the fastest-growing auto markets through 2020. While Volkswagen may own Audi and Bugatti, such engineering talent may be of little use unless the company churns out cars cheap enough for the Indian consumer.

VW’s “fundamental problem is an engineering culture that is incapable of building low-cost cars,” said Max Warburton, an auto analyst at Sanford C. Bernstein, who calls India the toughest place for a carmaker to compete in. “Skoda’s brand position has further complicated their job, but the issue is more cost than branding or marketing.”

Take Volkswagen’s Polo hatchback, which at 510,000 rupees ($8,180) is 11 percent more expensive than market leader Maruti Suzuki India Ltd.’s Swift. Here’s what Indian consumers will get for German engineering: less horsepower, weaker acceleration and, in a country where many car-owners are chauffeured, cramped backseats compared with the Swift.

Expensive Cars

The Polo also competes with Wolfsburg, Germany-based Volkswagen’s own Skoda Fabia, which is about $115 cheaper at 502,800 rupees. By comparison, Maruti’s Swift starts at 458,000 rupees and Hyundai Motor Co.’s i20 is offered at 492,000 rupees, according to their dealers in New Delhi.

Volkswagen, which aims to be the world’s largest and most profitable automaker by 2018, arrived at its models and pricing for India after comprehensive research and evaluation, Arvind Saxena, managing director of Volkswagen Passenger Cars, said in an e-mail.

“The definition of what is right or wrong for the Indian market is liable to keep changing over a period of time,” said Saxena. “The Indian car market has seen an unforeseen and unprecedented downturn over the last 12 months, which is due to a range of macroeconomic circumstances.”

Slipping Sales

Skoda said it operates independently from the VW brand.

“We don’t look at where VW is when we are positioning our products,” Sudhir Rao, managing director of Skoda Auto India Pvt. said by telephone. “And we don’t see our products cannibalizing VW in any way.”

VW’s lack of progress in India echoes the automaker’s also-ran status in the U.S., where it is being outspent on advertising and slow to plug gaps in its lineup. That is contributing to a decline in sales this year even as industrywide demand rose.

Sales of VW-branded vehicles in India fell 6 percent in the first seven months of the fiscal year and those of Skoda tumbled 34 percent. The slump has led Volkswagen and Skoda, which share facilities in India, to only utilize 40 percent of their combined capacity, according to Deepesh Rathore, director of New Delhi-based Emerging Markets Automotive Advisors.

Still, other carmakers have seen falling demand too as industrywide deliveries fell 4.6 percent during the period as the economy slowed. The industry average for factory utilization is about 55 percent in the past year, Rathore said.

Maruti Suzuki, majority-owned by Japan’s Suzuki Motor Corp., dominates India with a market share of 40 percent in October, followed by South Korea’s Hyundai Motor at 15 percent. VW’s share stood at 2.4 percent, while Skoda had 0.9 percent.

Enter Datsun

Count Nissan Motor Co. among companies taking steps to offer cheaper cars.

Nissan, which began selling its first locally made hatchback in India in 2010 and is ranked below VW by market share, is reviving the Datsun brand after three decades to cater to low-end demand. The company is so confident about Datsun’s prospects that Chief Executive Officer Carlos Ghosn said in July that Nissan will capture 10 percent of India’s market by 2016.

Volkswagen has made similar predictions before. In March 2009, Jochem Heizmann, then Volkswagen’s production chief and now overseeing China, had targeted the group to win 8 percent to 10 percent of the Indian market over the long term, though he didn’t specify a date.

Despite the difficulties of operating in India, global automakers can’t ignore its potential. With 13 cars for every 1,000 people, car ownership in Asia’s third-biggest economy is lower than in China, Malaysia and Mexico, according to government data.

Auto sales in India will more than double to 7.6 million cars in 2018, catapulting it to become the biggest after China and the U.S., KPMG said in the September report.

“If they feel India should be a significant contributor to their 2018 goals then they would have to realign their product development accordingly and focus on smaller, cheaper and more frugal cars,” said Rathore.