Auto: In A Different Race

Audi india head Joe King loves India. Stationed here for the last two and a half years, the 46-year-old Australian proudly avers, “My family loves it. I love it”. And why not, the growing sales trajectory of Audi India is no mean feat. In 2015, it sold 32 cars a day, five less than market leader Mercedes-Benz India. Nine years ago, when Audi India was launched, its sales average stood at one car a day against seven a day by Mercedes-Benz India — operating since 1994. Audi India has indeed come a long way. And so have Mercedes-Benz India and BMW, the number three in the luxury car segment.

The combined share of the three German carmakers is over 80 per cent of the luxury car market in India, which witnessed sales of over 35,000 units in 2015.

Be that as it may, all three and even other luxury carmakers in India face a common challenge —the market size continues to be just over 1 per cent of the overall passenger vehicle market in India.

Unimpressive Size
The number of luxury cars sold in India is dismal compared to some of the developing and developed markets. Last year, Audi sold over 5 lakh units in China (1,370 units a day), 2 lakh in the United States (550 a day) and 1.6 lakh (440 a day) in the United Kingdom. Among BRICS nation, the company sold over 17,000 units in Brazil, 25,600 units in Russia, and only 11,000 units in India. Spain with a sluggish economy too saw Audi selling over 44,000 units.

Globally, Mercedes saw stronger growth in China in 2015 where it delivered as many as 373,459 vehicles, a jump of 32.6 per cent. Overall, Mercedes sold 1.87 million cars in 2015, a shade behind BMW that achieved its fifth consecutive annual sales record clocking 1.9 million vehicles globally. In both cases, India’s contribution to their global sales figure remained insignificant.

The Indian luxury car market numbers are extremely low compared to global consumption figures. However, industry forecasts say that by 2020 the luxury car market will stand at over 87,000 units. What no expert tells you is the comparable growth numbers of other countries will continue to be higher than India by 2020.

“I understand we are a small part of the big economy. From a business perspective, the luxury market has been stagnant for the last few years though there is a huge potential. Elsewhere, the luxury car market accounts for 10-15 per cent of the overall passenger vehicles market. Here, it is around 1 per cent,” says King. Therefore, King is focussed on expanding and strengthening the dealer network. “My big focus has been to improve the financial performance of our network. We have put in a strategy for local network to grow and become profitable. We have done a lot of work on people that work for us. For example, 90-95 per cent of our customer facing staff are now globally certified to Audi’s global standards. All this takes time. We have to prepare well in advance for any potential downturns,” says King.

Brand Performance
Audi in India operates as part of the Volkswagen Group Sales India (VGSI) incorporated in March 2007. VGSI looks after the sales, after-sales and marketing of luxury car brand Volkswagen, Audi, Porsche and Lamborghini. While private companies are not mandated to disclose their financial data, they are required to file the same with the Registrar of Companies (RoC). As per these papers, for the financial year (FY) 2013, VGSI posted a gross sales revenue of Rs 8,883 crore; in FY15 the revenue declined by around 9 per cent to Rs 8,111 crore. The fall could be attributed to the fact that VGSI overall sold around 20,000 units less compared to FY13 combined sales numbers. While VGSI sold fewer Volkswagen passenger vehicles and Porsche in FY15, it saw over 16 per cent jump in the sales of Audi passenger vehicles — from selling 9,495 units in FY13 to over 11,000 in FY15. A bulk of the sales happened across tier-II and -III towns, company executives said. VGSI posted a net profit of Rs 95 crore in FY15, recording a 50 per cent jump over FY13 numbers, which clearly demonstrated the growing importance of Audi India in the overall pie of VGSI.

Audi Q3, an entry-level luxury SUV, Audi A3 and Audi A4 are Audi India’s largest selling models. Together, they contribute nearly 40 per cent of Audi India’s sales.

Mercedes-Benz India too clocked a healthy growth of 38 per cent in its revenue and 59 per cent jump in net profit for FY15 compared to FY14 numbers, the RoC filings revealed. In FY15, the company posted Rs 4,182 crore in revenue and a net profit of Rs 302 crore. In FY13, Mercedes-Benz India had posted a revenue of Rs 2,178 crore and a net loss of around Rs 12 crore. In FY14, the company sold 9,718 units of passenger cars and 166 units of buses. E-Class stood out as the highest selling category in FY 14 when the company sold 2,964 E-Class vehicles. Next was C-Class which sold 2,327 units, the filings showed.

Roland Folger, managing director and CEO, Mercedes-Benz India, tells BW Businessworld that in 2015 the sub-Rs 1 crore cars sold very well for everyone. “Mercedes-Benz sold more than 13,500 units in 2015. The E-Class and C-Class emerged as top volume drivers for us,” says Folger. “India is the only market outside of Germany to locally produce the Maybach S500. The Mercedes-Maybach S 600 was sold out before its launch. There is now a waiting list.”

But the financials of BMW India are not as clear as its counterparts. Tax and dealer issues dominated its filings. As per the RoC filings for FY14, the company reported revenue of Rs 2,023 crore and a net profit of Rs 107 crore. A year before that, the company had reported revenues in excess of Rs 2,300 crore but a net profit slightly short of Rs 10 crore.

Scope For Growth
According to a survey by consultancy firm IMRB, the ownership of luxury cars is the highest among all luxury goods owned by Indians. The report also shows that 60 per cent of high-networth individuals residing in tier-II and -III towns own a car priced above Rs 35 lakh. This is true for all luxury car makers in India.

“We moved into Ranchi, Guwahati with the service-first approach. Guwahati was 150-200 Audis-a-year market before we opened our showroom. Now we are doing 240 a year. That shows growth,” says King. Mercedes and BMW too have found a market in the tier-II and –III towns. The recent Confederation Of Indian Industry-IMRB report on the luxury market in India show that 35 per cent of the sales of luxury brands in India are coming from non-metro cities such as Aurangabad, Ludhiana, Kochi and Bellary.

To drive home brand Audi, the company is pushing its Audi mobile terminals (AMT) in smaller towns. AMTs are showrooms on wheels. Last year, AMTs travelled to Jodhpur, Kota, Ambala, Hisar, Muzaffarnagar, Saharanpur, Meerut, Moradabad, Aligarh, Agra and Amritsar. This year, 20 cities including Siliguri and Jamshedpur will be covered too, says King.

Folger of Merceces-Benz India too has a strong customer-engagement strategy. “Mercedes-Benz India has initiated its own consumer-engagement programme by opening Mercedes-Benz pop-up store in Mumbai. Through this initiative, Mercedes will engage and interact with customers directly. It plans six more stores this year in the same capacity,” he says.

BMW India spokesperson says the company has introduced BMW experience tour where future customers can experience driving pleasure across a range of BMW sedans and SAVs (sports activity vehicle) on a specially designed test course. BMW says, “To increase the customer outreach in emerging markets in India, we have introduced the innovative concept of BMW experience tour. In 2016, the tour will be hosted across 35 Indian cities.”

Smaller Towns, Bigger Markets
For Mercedes, 55 per cent of its sales come from markets other than Mumbai and Delhi. And that is where the company is focussing going forward. But for Audi, it is not the same. Metros account for over 50 per cent of the sales currently. The tier-I and -II cities are contributing 20-30 per cent each, but the growth rate is much higher here due to base affect, says King.

While Mercedes will open 10 new outlets this year having inaugurated one each in Vijayawada and Pune thereby taking its total dealership network to 83 outlets in 40 cities, BMW India will add 10 more outlets to its existing 40 sales outlets. “With the BMW mobile showroom, customers in tier II and III cities that are not covered by the existing dealer network get an opportunity to experience the BMW brand, test drive vehicles, interact with product experts and avail promotional finance offers from BMW financial services,” says a company spokesperson.

For Audi India, its AMT is helping the brand not just display its luxury portfolio of cars but also the Audi accessories. “The mobile terminal concept serves as a hub for conducting test drives and enables customers and prospects to connect with Audi dealers in the comfort of the Audi Lounge. This increases Audi network footprint to tier-II and -II cities,” says King.

Duty Burden
In India, import duty on luxury vehicles continue to be as high as 60 per cent and 100 per cent for completely built up units (CBU); 30 per cent for semi-knocked down units (SKDs) and 10 per cent for completely knocked down units (CKDs). Hundred per cent duty is on CBUs whose value exceeds $40,000 or those that come with a petrol engine over 3-litre or diesel engine with over 2.5-litre capacity. The 60 per cent duty on CBUs is on cars valued at less than $40,000 (or those that have a petrol engine with a capacity smaller than 3 litre/diesel engine of less than 2.5 litre).

The controversy around diesel vehicle is yet another big challenge for manufactures. The impact is such that manufactures are delaying their investments. “Most of the decisions are postponed rather than being completely cancelled. If the ban continues, then certainly cancellations will come into play,” says Folger of Mercedes.

Subrata Ray of ratings agency ICRA says in other emerging economies, original equipment manufacturers have set-up manufacturing facilities which allow them to reduce vehicle prices by avoiding high import duties. “This is not the case here as India is a very small market,” says Ray. Abdul Majeed, partner and auto expert at consultancy Pricewater-houseCoopers says the localisation level in luxury cars is only 30-50 per cent on average. “Companies hesitate to manufacture cars 100 per cent because the market isn’t that big,” says Majeed.

In future if companies have to yield profit, they will have to increase localisation. Currently, Mercedes-Benz India locally produces eight models, achieving up to 60 per cent of localisation. Audi too is working on boosting the local sourcing from around 8-10 per cent to a higher double digit figure.

ashish.sinha@businessworld.in arshad.khan@businessworld.in;
@ashish_BW, @arshadkhan_BW