VW deal

India Eludes German Carmakers

VW plant in Chakan, India
It's Tata for now. Source: Friso Gentsch/DPA

Volkswagen may be the world’s largest carmaker, but in India, the German behemoth is a dwarf. After years of declining sales in the rapidly expanding market, VW just made it into India’s top 10 highest-selling automakers last year, languishing in ninth place with a 2-percent market share. Fellow German manufacturers Daimler and BMW are even smaller players, competing in the tiny luxury segment of a market dominated by low-cost cars.

And despite VW’s efforts to increase its footprint in the emerging Indian economy, things will most likely stay the same in the foreseeable future: Its Czech subsidiary Skoda and Indian automaker Tata announced Thursday they had suspended their talks to develop a cheap car for the Indian market. Two years ago, a similar alliance between VW and Japanese automaker Suzuki in India ended in a fierce legal dispute.

Although the cooperation talks with Tata ended in a more amiable fashion, their collapse is a blow to VW, who for years has been pushing for growth in emerging markets. “A planned strategic alliance will no longer be pursued for the time being,” Skoda said in a press release, adding that “the two companies have come to the conclusion that at the present point of time the technical and economic synergies cannot be realized in the desired way.”

The Society of Indian Automobile Manufacturers predicted car sales will grow by 9 percent in 2017, before “stabilizing at a higher growth rate in the coming years.”

In March Tata Motors and VW announced a memorandum of understanding for a long-term partnership to explore joint development of vehicles in India and other markets. The German group had commissioned its Czech arm Skoda to make plans for sharing vehicle platforms, engines and production facilities with Tata, using the Indian manufacturer’s vehicle platform as a basis.

But news agency Reuters reported that Skoda pulled out of the negotiation, fearing that joint development of the Tata’s AMP platform would require significantly more investment than it previously anticipated. Skoda will instead consider VW’s own platform for possible further savings, the unnamed source told Reuters.

“With its comparatively more affordable brands Skoda and Seat, Volkswagen is the best-positioned German carmaker to address the Indian market,” Ferdinand Dudenhöffer, a professor of automotive economics and the director of the Center for Automotive Research at the University of Duisburg-Essen, told Handelsblatt Global.

Yet, unlike in China where it is the biggest carmaker, Volkswagen has been struggling for years to make significant inroads into India’s highly competitive car market. While overall car sales in the emerging country jumped by 24 percent to 2.97 million between 2010 and 2016, VW’s sales there peaked in 2012, and then nearly halved to just 66,046 last year (see chart below).

There’s one reason for this: Indians customers want low-cost vehicles with an entry price of $5,000 (€4,240). That’s much less than the cheapest models from Skoda or Spanish brand Seat. “That’s because they’re absent from the low-cost segment,” Mr. Dudenhöffer said.

11 p16 Indian Car Market-01

Earlier this year, the Society of Indian Automobile Manufacturers predicted passenger vehicle sales will grow by as much as 9 percent in 2017, before “stabilizing at a higher growth rate in the coming years.” By 2025, India will be the world’s third-largest automotive market, behind China and the United States.

For Volkswagen, still grappling with the fallout of the diesel emissions scandal, harnessing the surging auto market in India and more broadly in emerging countries is generally seen as a requirement for future growth. But right now, prospects look dim for the Wolfsburg-based giant as manufacturers of low-cost vehicles have a stranglehold on India’s burgeoning market.

The Indian-Japanese joint-venture Maruti-Suzuki sold 47 percent of all cars registered in the world’s second-most populous country last year, ahead of Korea’s Hyundai, with an 18-percent market share, and Indian carmaker Mahindra and Japan’s Toyota. Between them, these four manufacturers control more than three-quarters of India’s passenger vehicle market thanks to their small, affordable cars. “And it’s not just in India that they need to sell cheaper cars, but also in Africa and in other Asian countries,” Mr. Dudenhöffer said.

By contrast, fellow German carmakers BMW and Daimler, the manufacturer of Mercedes-Benz cars, firmly remain in the premium segment, which account for less than 1 percent of India’s vast market, but where margins are significantly higher than in the mass market. Last year, BMW sold just 7,861 cars in the entire country, 14 percent more than in 2015, and Daimler raced ahead, at 13,231 vehicles.

In the first half of this year, sales of Mercedes-Benz cars jumped by nine percent. “For Daimler, BMW or Porsche, it would make no sense at all to cater to Indian customers with a low-cost offering,” Mr. Dudenhöffer said.

 

Jean-Michel Hauteville is an editor with Handelsblatt Global in Berlin. Stefan Menzel, an automobile correspondent for Handelsblatt, also contributed to this article. To contact the authors: hauteville@handelsblatt.com, menzel@handelsblatt.com

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