TO GET A SENSE OF WHAT Volkswagen is attempting in India, chat with any of its component suppliers. F. Walter D’Lomen is the director, business development, at Mutual Industries, a Rs 370 crore automative plastics manufacturer in Pune. The company supplies bumpers to Volkswagen, and D’Lomen says he’s had to “strive to match” the German company’s requirements. The bumpers have seven layers of paint applied on them (most carmakers settle for four or five) and there are 800 points on a single bumper that are checked for quality. “Volkswagen brought in its experts, trained workers at Mutual, and raised the bar. Today, we can deal with anybody, from Honda to Renault,” says D’Lomen.
A few days later, K.K. Rao, a former technical engineer at Tata Autocomp Systems and currently working at another auto component company (name withheld at his request), explained how Volkswagen uses special-purpose ultrasonic machine guns to weld dashboards. If six points on a dashboard need welding, all other manufacturers use one gun to weld them sequentially. “Not Volkswagen,” says Rao. “They use an ensemble of six guns to ensure simultaneous lock-ins, with no room for misalignment. But it also takes costs up, from Rs 20 lakh for one gun to Rs 1.2 crore for six.”
Over the last three years since Volkswagen began operations in India, it has flown in experts from Germany, made upfront payments (the industry norm is payment on delivery), and pleaded with, and sometimes even bullied, vendors to make sure that its fabled manufacturing prowess isn’t compromised. Pawan Ruia, chairman of the Ruia Group, which supplies fasteners and other components, says Volkswagen has 200-page supplier manuals, which are changed constantly. “You can end up banging your head against the wall. Their expectations are higher than the Japanese,” he adds.
This kind of obsessive, spare-no-expenses, precision even goes into the making of the Polo, Volkswagen’s entry-level car that retails for around Rs 5 lakh and competes against Maruti Suzuki’s Swift, Nissan’s Micra, and Hyundai’s i20. If that’s too much effort by a company that accounts for barely 2.5% of the auto market here, up from about 1.1% a year earlier, stop to think why.
Last year, Volkswagen announced it was gunning for the top slot among global auto majors by 2018, a position currently occupied by Japan’s Toyota Motor, which sells roughly 8.4 million cars every year, 1.2 million more than Volkswagen. Volkswagen chairman Martin Winterkorn says the company would like to sell more than 10 million vehicles a year by 2018, and his sights are set on profitable growth in “key markets” worldwide. “There is a clear focus on emerging markets, and, of course, we want to make Volkswagen the world’s best and most future-proof automotive group by 2018,” Winterkorn told Fortune India. “With a growth of 30% in the automotive market during the last year and a solid future forecast, India is an important pillar of our global growth strategy.”
Winterkorn’s observations reaffirm what auto watchers believe—given its ambition to become world No. 1, Volkswagen is best placed to reshape the industry here. This, even without factoring Volkswagen’s stake in Suzuki Motors, the parent of India’s largest car company, the exact nature of which is still hush-hush, though it’s expected to go much beyond a mere portfolio investment. For all the other auto majors here, Volkswagen is their biggest threat, ever. It’s a company that’s all tooth and claw.
Competitors such as Tata Motors have begun reacting. Recently it launched the Aria, priced at about Rs 15 lakh, aiming to top the multi-purpose vehicle segment. Similarly, Maruti’s recently debuted Kizashi has been positioned between the Jetta and the Passat. A senior auto executive says that while India continues to be a small car market, the emphasis is shifting towards premium hatchbacks since they are more profitable. And Volkswagen’s entry will hasten this movement.
Component makers say that other car companies are increasingly benchmarking themselves against the materials used in the Polo. Toyota’s local operations reportedly did a case study on the Polo launch. (They did not respond to Fortune India’s queries.)
FROM HIS OFFICE in Wolfsburg, Germany—the drive is a little over one and a half hours from Hamelin, where the mythical Pied Piper played his tune—Winterkorn’s world looks like this. Volkswagen is already No. 1 in China, South Africa, and Argentina. It also leads in Germany and 22 other European countries (Poland, Norway, Bulgaria, Portugal, and so on). The fastest way for it to close in on a gap of a million cars with Toyota would be to feed larger markets such as the U.S. and China.
But Volkswagen’s American journey hasn’t been spectacular. And while India’s no substitute for the U.S., it’s a large enough market to potentially help Volkswagen win the world. Last year, India was the second-fastest growing market after China (31% vs. 32%). Booz & Co., a consultancy, predicts that India should record an annual sales volume of 6 million cars by 2020, up from the current 1.8 million. Also, by 2015, it expects India to be one of the three biggest markets in the world by volume, along with China and the U.S. Volkswagen’s internal estimates predict that India will be a five million car market by 2018.
Ironically, Volkswagen has been one of the last to come here. Though Skoda, a part of the Volkswagen Group, has been around since 2001, Volkswagen itself, the group flagship, entered India much after Toyota, General Motors, Hyundai, Ford, and Honda. A tale that’s forever retold is that the Germans did evaluate India in the early 1980s, around the time Suzuki Motor’s chairman Osamu Suzuki was making his rounds. However, they did not make Suzuki’s leap of faith.
Winterkorn changed that, says Volkswagen Group’s India head John Chacko, an IIT Madras alum who speaks fluent German, and has been with them for 33 years: “He made the call for VW to go to the U.S., Russia, and India.” The original evangelist, though, was Ulrich Hackenberg, way back in the 1970s, a director on Volkswagen AG’s supervisory board who’s been coming here for decades (he’s married to an Indian). “I was a bit of a promoter to be in India. I guess I wasn’t strong enough in pushing it. China and other markets appeared more important with their growth rates. But I’m happy we are now in India,” says Hackenberg.
For Volkswagen, being a late mover shouldn’t really matter, says Maruti Suzuki’s former managing director Jagdish Khattar, who now runs Carnation Auto, a car service company. “Everyone has the potential to snag market share in India, and Volkswagen has the financial muscle to go the distance. Still, it’ll boil down to execution, pricing products correctly, positioning, and customer interaction.”
Last year, when most carmakers were in retreat, Volkswagen announced a 20% growth in revenue to €127 billion (Rs 8 lakh crore) with profits of €7.2 billion. Its turnover is double that of India’s largest conglomerate, the Tata Group, and its profits are more than the revenues of Mahindra & Mahindra, the largest SUV maker in the country. Volkswagen’s willingness to spend big bucks was visible at the Polo launch campaign in March 2010, across dozens of channels, magazines, and newspapers. The splurge totalled nearly Rs 40 crore according to estimates (they never disclosed a number)—the biggest on a single brand by any auto company.
As Fortune India went to print, news broke that the Reserve Bank of India has given the Volkswagen Group permission to start a non-banking finance company (NBFC) that could lend to potential customers. No car company, which is looking at volumes, has so far set up its own NBFC here.
It’s not just money that Volkswagen is investing. It’s also senior management time. In the past year, quite a few of the group’s biggies have stopped by. Horst Neumann, Volkswagen AG’s board member for human resources, visited in July last year with a bunch of executives, as did Christian Klingler, board member for Volkswagen passenger cars, in January. Jurgen Stackmann, a member of Skoda’s global board, has been visiting nearly every month. Even Winterkorn showed up on Germany’s Reunification Day, October 3. (In 1990, East and West Germany reunited on that day, which is since a holiday and an occasion to celebrate).
Predictably, Winterkorn’s timing sent a message to all 5,000-plus employees here—that India was an important piece of Volkswagen’s global plans.
ON FEBRUARY 28 THIS YEAR, hours before the 81st International Motor Show in Geneva was formally inaugurated, Volkswagen, as per tradition, invited several hundred people to its L’Esprit des Marques (The Spirit of the Brands) event for a preview. From his private table, Ferdinand Karl Piëch, chairman of Volkswagen AG’s supervisory board, and grandson of Ferdinand Porsche (creator of the Beetle), watched his captains display an array of automobiles. It included Volkswagen passenger cars, Volkswagen commercial vehicles, Scania, Audi, Bugatti, Lamborghini, Bentley, Skoda, and Seat. Much of the wide range of brands is the outcome of a series of mergers that Volkswagen orchestrated right through the 1990 s. It’s precisely why Volkswagen is such a formidable competitor—no other carmaker has that. Tata Motors perhaps comes closest, starting with the Nano and going all the way up to the premium Jaguar Land Rover models, with commercial vehicles thrown in.
Having nine brands, 10 if you count Porsche, with which Volkswagen plans to merge later this year, means more resources. “We cover the whole range—from frugal engineering to high-end design, and the know-how does go back and forth,” Walter de’Silva, Volkswagen’s group design head, explained at the show. “New materials like lightweight carbon fibre, lowered emissions, greener technology ... those are some of the things that we will bring to future markets in a big way.”
That evening, there was also no missing the blue-and-white signage all over. It could have been a repeat of the scene two years ago, at the inauguration of the Chakan plant near Pune, when Volkswagen flooded the place with its distinctive signage. Built as part of a 575 acre campus, the Rs 3,800 crore factory was completed in 17 months so that the Polo could be launched. One senior executive of a rival auto company had said the show put up at Chakan was no different from Volkswagen’s Spirit of Brands night. “It’s just like a small Motor Show, but by one company,” he had said. And Chakan was equally meant to impress.
The factory is ground zero of Volkswagen’s battle for India. That’s where it manufactures the Polo and the Vento (a 1,600 cc three-box car). Others like the Jetta (2,000 cc), the Passat (2,000 cc), and the Audi are assembled in Aurangabad, Maharashtra. It’s also likely that a variant of the Up, positioned between the Tata Nano (600 cc) and Maruti’s Swift (1,300 cc), will be made in Chakan.
For Winterkorn, “one of the success factors in a new market is local production”. The Chakan plant has a capacity of 110,000 vehicles annually, or 6% of the cars sold here every year. In 2009, Volkswagen sold 19,000 cars, which rose to around 53,000 by 2010. By end of this year, Volkswagen should double sales again and then will likely exhaust its current manufacturing capacity.
Even though Audi, Lamborghini, Skoda, and Bentley are available, the focus is on Volkswagen. “Our priority is to get the core brand, VW passenger cars, sorted out, and then the other brands will fall into place,” says Chacko.
Hackenberg says Volkswagen is looking at around 8% market share (140,000 cars) in the immediate future, going up to 20%. That explains why Volkswagen is working so intently with its suppliers to bring them up to scratch. You can argue that Volkswagen’s road to India dominance passes through its own shop floors and those of its suppliers, all 110 of them.
As Winterkorn explains, expanding facilities at Chakan and going beyond, if required, is very much part of the plan. “In our Chakan plant, we already produce volume models for the Indian market. We are closely monitoring the growth of the market and will match our production to the demand of our customers.” He adds that if this growth continues, the factory will need to expand. More manufacturing facilities will depend on future products, he says. Chacko adds that the Chakan factory’s capacity will be expanded to 130,000 in the near term.
What makes Volkswagen a formidable presence is its willingness to build a business in a systematic way, step by single step. Ruia, who has three ancillary factories in Germany, of which two supply components to Volkswagen, says the company is never in a hurry. “They make no mistakes.”
Rishabh Sheth, a director with Group Shaman, a Volkswagen dealer in Mumbai, witnessed this methodical approach when the showrooms were being built. Volkswagen first brought over a corporate identity expert who’s been with the group almost all his life and built showrooms globally, for advice on what needs to be done here. Then, prefab showroom units were shipped in large containers, and assembled locally, inside stores for a quicker ramp-up. “They have a very precise way of setting up their business. I haven’t seen others do it that way,” says Sheth. (Volkswagen is looking at increasing the number of distributors from 71 to about 100 over the next year.)
That also explains why Volkswagen is focussing on a car’s engineering capabilities to differentiate itself here: It wants to be seen as the folks who sell well-built cars, unlike, say, the Japanese or Koreans—they control nearly 60% of the market—who have positioned themselves on price and fuel efficiency. Some of Volkswagen’s cars may lack the sexy looks, but the allure is really under the bonnet. Thus every ad of theirs has the tagline ‘German Engineering’. (Little wonder, Volkswagen is showcasing Lamborghini, Bugatti, and Bentley here despite their limited appeal, so Indians get a sense of the firm’s engineering capabilities and scale.)
The emphasis on ‘German Engineering’ fits in with what Chacko is attempting: positioning Volkswagen cars perceptually at the top of every segment they operate in. Traditionally, the market here was partitioned by price into the A segment (Rs 2 lakh to Rs 3.5 lakh); B (Rs 3 lakh to Rs 4.5 lakh); C (Rs 4.5 lakh to Rs 7 lakh) and so on. However, new categories like mini cars (Tata Nano), premium hatches (Polo and i20), or SUVs (Mahindra’s Scorpio or Skoda’s Yeti) have been created, cutting across price bands.
In fact, expect a rejig across segments to continue. “Don’t expect market leaders like Suzuki, Tata, and Hyundai to stay quiet. They will respond with equal measure and new models across all price points,” says Abdul Majeed, auto practice leader for PricewaterhouseCoopers. “Also, expect new distribution mechanisms and new customer demographics to be created.” He adds that players such as Tata and Suzuki have multiple plants and for Volkswagen, dominating India will need sustained investment. “You can’t operate long-term on an import model.”
The battle for perception is acutely visible in the super-premium segment. Unlike Mercedes, which has sometimes discounted its price in bulk orders, Audi hasn’t. Audi’s chairman (and Volkswagen AG board member) Rupert Stadler’s answer is insightful. “We’ve been asked in the U.S. also why we don’t push the brand more—and we have the same answer: It’s qualitative, and we find Indians go for the best (luxury) option, not the cheapest one.”
As a Volkswagen executive explained, their approach to cracking open emerging markets such as China, Russia, Brazil, and now India, has rarely varied—focus on the long term and slowly build scale by combining engineering capabilities with local market insights.
In January 2006, shortly after the India plan was signed off, Volkswagen put together a scouting team of 16 young managers. Their mission, according to Maik Stephan, managing director, Volkswagen group sales: “Go to India to engage in a six-month-long recce project so we know what we are getting into.”
The team was cross-functional (sales, marketing, finance, and HR) and travelled through the country—from metros such as Delhi and Mumbai, and vacation hotspots like Goa, to border areas in the Himalayas. Along the way, they talked to suppliers, customers, dealers, and prepared detailed dossiers for the board. “It wasn’t easy. These managers worked for 16 to 18 hours a day, six days a week,” says Stephan, who steered this team. Also, they weren’t told that Volkswagen was planning a plant in India.
The insights came flowing in. The Germans had never seen car owners who did not remove the protective, factory-fitted plastic seat covers for months after buying a car. “That was a revelation on how important durable seat upholstery was. Equally important was the need to have space on the dashboard to keep Ganeshas or mobile phones,” says Stephan.
Many of these have now become standard features in their cars. Not only does Volkswagen pay attention to upholstery or have wider dashboards, even the horns here are louder. Then, since cars the size of the Vento are typically chauffeur driven, it provides passengers at the back easy access to a lever to move the front passenger seat for more leg space. Volkswagen even toyed with the idea of building an LED component that would create a ‘divine light’ effect where the Ganesha sits on the dash.
The sensitisation is expected to be part of its commercial vehicles foray. “We are studying the market closely and have observed that most use these vehicles at night, when they [can] avoid traffic and it’s cooler,” says Jochem Heizmann, board member of Volkswagen AG, who is responsible for the group’s commercial vehicles. “That means in India, broadly you don’t need to build a truck with an air conditioner.”
BUT FOR ALL ITS CAREFUL planning, there exists a curious anomaly in the Volkswagen family. Skoda is perceived to be a more upmarket label here than Volkswagen. In almost all other parts of the world, it’s the opposite.
Some of it has to do with Skoda’s history here. It was launched in 2001 with the Octavia, a premium car. The only other choices in the segment at the time were the Honda City, Hyundai Accent, and Maruti Baleno, and the Octavia immediately became a CEO car. Then came the Laura, then the Superb, and finally the Fabia hatchback. Also, most of these used diesel engines and were more expensive than their Japanese petrol-engine counterparts. So, by the time Volkswagen arrived, the Skoda family had already been positioned at the top.
For Volkswagen to succeed, it now needs to upend that. Already, a cheaper, stripped-down version of the Fabia has been launched so that the Polo is seen to be more premium. Also, the launch of the Skoda entry-level sedan, which was built on the same platform (SK 251) as the Vento (VW251), will happen later this year, perhaps almost a full year after the Vento launch, so that the latter can get a headstart on sales.
But what does the group do with Skoda’s larger sedans? Skoda’s Stackmann says they move in tandem with Volkswagen cars, with the former positioned around space, and the latter, technology. If Volkswagen chooses, it could keep Skoda’s premium cache, because it’s part of the same group. But doing that would mean positioning its core brand lower.
IN 2008, AT THE OPENING of Volkswagen’s new U.S. headquarters in Herndon, Virginia, Winterkorn quoted Frank Sinatra to the audience saying, if they could make it in the U.S., they could make it anywhere. In India, the more appropriate Sinatra song may be My Way.