Wars of the Luxury Car Makers in India

The Indian Luxury car market is on the verge of exploding, led by the increasing affluent class. this has catapulted Germany’s big 3 into an internecine and long drawn war. Is their any winner in sight yet? 

To understand a nation’s economic growth, one could study many indicators, from GDP rates to consumption indices to even employment levels. But the most fascinating and alluring of all such factors remains the automobile industry growth, which over time has become a seat-of-the-pants clinker of a method to forecast expected economic momentum. In other words, positive automobile industry sales are in general signals for positive GDP growth; and vice versa too. For example, when August 2010 US automobile sales figures were released, analysts realised that these were the worst August auto sales figures in 27 years –immediately, market expectations of and from the US economy fell in an instant. Yes, there are many economists who deride the drawing of such a clunky correlation between the auto-industry and economic growth – but then, the fact of the matter is, such a correlation not only exists but is supremely inevitable.

And for sprightly economies like India’s where in reality there exists no true middle class, and where factors like UN’s Gini index (shows income inequality, with 0 denoting total equality and 100 denoting utter inequality) have become more eccentric by the year – apparently, at 36.8 on Gini, the UN believes India is pleasurably floating on brilliant equality of income across classes – an extension of the auto sales correlation to the luxury car segment throws up brilliant market understanding, again seat-of-the-pants, of how forcefully would India’s top segment of consumers drive our economy.

While this was one of the primary reasons why we took up this issue’s cover storyline, this wasn’t the only one. The lives and styles of the rich and famous fascinate one and all – including yours truly. And there’s always this infatuated fascination with getting to know how richer are the rich growing by the day (well, not many might wish to entertain a commentary on how much poorer are India’s poor) – something similar to how new records in high-end b-school placement packages are followed by everybody. What better a method to study the same, and look intellectual at the same time, than to minutely analyse the luxury car segment, interrogate top CEOs in this sector, and get to drive a few of their dapper suave monster machines – all for the sake of the nation! And given the suspiciously elongated justification we’ve attempted to pull for this article, we jump right into the issue.

The target market: There’s no gainsaying the fact that the current rabid war in India’s luxury car segment is clearly because the target market has undergone a similar rabid growth. Some statistics would put this inference into context. According to the World Wealth Report by Merrill Lynch and Capgemini, India’s HNWI (High Net Worth Income) population came down by 31.6% yoy to 84,000 in 2008 after growing by 22.7% yoy in 2007. The Indian industry, which had suffered a slowdown in 2008, came back strongly in 2009, apparently on the backs of the HNWI population, which grew by 50.9% yoy for the year. The report further suggests that India’s HNWI population will reach three times its 2008 level by 2018. Cut to the luxury car segment in India, and in a similar vein to the HNWI movement, a recent study by AT Kearney projects that the Indian luxury market is set to triple from current levels to $14.72 billion by 2015. And going by SIAM figures, even though the luxury car segment accounts for just around 1% of the Indian automotive market, this minute segment in itself grew by 33.58% yoy in the period of April-September 2010.

Clearly, there’s not much left to imagination about why western car manufacturers, especially in the luxury segment now, are focusing in a mammoth way on developing nations like China and India. For example, German luxury car maker Mercedes Benz assembled its first car in India in 1996, and had had a virtually free run since in the affluent class for years – till the time competitors entered and got on with the battle in double time. Today, the field is still dominated by the Germans, with Mercedes Benz, BWM and Audi (Volkswagen’s premium arm) engaged in an epic battle to capture. Besides them, brands like Porsche, Bentley, Jaguar, Lamborghini, Land Rover, Maybach, Rolls Royce, Toyota, Volvo, Nissan and Mitsubishi are present in one or more segments, since they still don’t feel the Indian market is ready for their products. That’s a surprising take, given that the increasing desire to own luxury cars simply to ‘up’ one’s status has led to India’s luxury car market heating up like how. From a mere 600 units back in 1999 (primarily Mercedes Benz), the luxury car segment is poised to give annual sales of over 15000 units per year.

Market share movements: Even to the untrained eye, the critical years that have changed India’s luxury car marketing landscape have been the last two to three years, with 2009 being the watershed year. In 2006, BMW had a market share of simply 9% in India. Cut to 2009. While Mercedes’ sales reached 3,202 units, BMW managed to clock a fantastic 3,587 units. As a result, BMW overtook Mercedes and gained over 40% market share. BMW President Dr. Andreas Schaaf told B&E, “2007-2009 were demanding years for BMW in India, and at the same time, the most successful entry for BMW in any country recently.” Successful because BMW was able to increase its sales by ten-folds from 2006 to 2009. Audi wasn’t far behind, with a record 2009 as well in India. Audi sold 1,658 cars in 2009, translating into a growth of 58% over 2008.

Understandably, this was news that shook the whole industry. In the first five months of this financial year, however, Mercedes again recaptured its leadership position with a sale of 2,212 cars, with BMW at 1,987 units and Audi at 1,876 units in hot pursuit. Dr. Wilfried Aulbur, CEO, Mercedes-Benz India, told B&E, “We will end up with more than 5000 units this year, which means we have had a CAGR over these 5 years of about 30%.” In January 2010, Mercedes broke its own past records by selling 411 units, with BMW and Audi standing at 341 319 respectively. Mercedes-Benz India announced a sale of 321 units in April 2010 taking the cumulative sales for January-April 2010 to 1603 units marking a growth of 80% yoy. E-Class registered 139% growth while the SUV portfolio registered 67% growth. There was a significant month-on-month growth in April 2010 for both C-Class (71%) and E-Class (84%). Such huge growth figures in the face of competition are critically surprising and momentous. Mercedes’ July 2010 month sales of 521 vehicles in India was apparently the best ever month sales since Mercedes entered India 15 years ago. Their August 2010 sales at 573 units bettered that too! And if you were to see the 662 units they sold in September 2010, you’d start understanding why we have been continuously using the term ‘rabid’ to describe this segment’s growth.

The scenario is similar with Audi. The more technology oriented German player revised its 2010 targets to 2700 (from 2300), having exceeded expectations by clocking 63% growth with 2178 cars sold in Jan-Sep 2010. This was the best sales performance for Audi ever in India, which shows how it is also gradually climbing the sales ladder. In fact, Audi India’s countrywide vehicle sales in September 2010 grew to 292 cars as compared to 205 units sold in September 2009. If one were to see the Jan-Sep 2010 period, Audi sold 323 units of its Q7 and A8 branded cars during this period; these brands stand at par with the Mercedes-Benz S-class & SL Roadster, which clocked 343 and 421 units respectively in the same period. “We are confident that we will achieve annual sales of 3000 cars, which is more than our revised target of 2700 cars,” said Michael Perschke, Head, India Operations, Audi.

In all, these three have posted total sales of 7178 units between them in the April-September 2010 period, a phenomenal growth of 84% yoy. But the reality is that going forward, all these luxury car makers are now attempting unique strategies that are brilliantly differentiated on one hand and classically positioned on the other.

Pricing and financing differentiation: Pricing matters in India! If you’re selling in India, the faster you understand the concept of value for money, the better for your sales. Take BMW for instance. On October 5, 2010, BMW launched BMW Financial Services as a new business entity in India; this firm is a 100% subsidiary of the BMW Group and will operate as a Non-Banking Finance Company (NBFC) as per the Reserve Bank of India (RBI) norms. In 2010, we’re informed that the BMW Group will invest $50 million (Rs.2.3 billion) in this arm. The reasons are quite obvious. The financing arm is to make the product more accessible to a wider audience. Look at how superbly BMW’s positioning has changed in recent times to accommodate the lower-upper class of Indian society. BMW’s recent advertisements are already offering the 3-Series at an attractive EMI of Rs.19,999 a month. Imagine the potential such a move holds, where hundreds of thousands of well earning middle management in as many Indian companies suddenly become potential customers. K. Kumar, India Manufacturing Head, Deloitte India, echoes this view to B&E, “The most important factor to expand this segment would be to put these cars within the reach of the upper middle class consumer.” Mirroring BMW’s strategic move, Daimler (the parent company of Mercedes-Benz) also announced that their financial services arm will start supporting India sales.

But BMW already has the first mover’s advantage, because while BMW’s financial arm is ready and active as of right now – and the festive season is the most critical of all times – Mercedes’ financial services are likely to be available only by next year. Audi still hasn’t expressed any views towards launching any financial services arm, as their current strategy encompasses significant investments in branding and marketing, exclusive dealerships and after sales service for the upcoming year. Evidently, this financing round is being won by BMW hands down.

Product ‘UN’ Differentiation: BMW is winning the war in another quasi-battleground, which is worth the analysis. BMW realised that the demand patterns of certain high volume business customers in India, for example premium hotels and cab owners, was more for stripped-down versions of their luxury cars, than for the whole hog. With high sales numbers backing these stripped-down versions, BMW apparently finally decided to put forward this type of model to even the retail customers; and the sales jump, as mentioned above, was astonishing due to the lower price point! In the process, BMW was accused by Mercedes of discounting and de-contenting its products in the Indian market. BMW has denied this allegation, also commenting that it was only endeavouring to reach more consumers. Be that as it may, the fact remains that this is another example of one-upmanship for BMW.

Production Economies: Setting up production bases in India will be the next big move for these luxury car giants to grow the market further and move lower down the price pyramid. Currently, the trend is to bring in CKDs (Complete Knocked Down units) for higher volume models (this attracts 50% duty) and CBUs (Completely Built Units) for lower volume models. Mercedes-Benz India currently assembles C-class and E-class at its manufacturing facility in Chakan with a capacity to churn out up to 4,000 vehicles in a year. BMW’s plant in Chennai has presently increased its production capacity to 5400 units per year on a single shift basis from the present 3000 units. Audi has plans to ramp up their India production volumes for the models A4, A6 and Q5 by 2015 with investments of around €30 million. Recently, it began assembly of the Q5 in India with plans to assemble up to 1500 units per year. By 2015, Audi expects that up to 6,000 units will be rolling off the Audi India assembly line each year. If mastering economies of scale is the question, and assuming that import duties will always disadvantage the importer, Audi seems to have delayed a critical link on the cost control stream to much later.

Re-inventing the Wheel; the used Car Segment: As the fight for their regular customers continues, these market players have suddenly found out the value of the so called ‘used car segment’. Mercedes is already in this market with their “Proven Exclusivity” showrooms; BMW has announced a similar intent, but would be in the market only by the end of the year. If trends in the overall auto segment were to be extrapolated to the luxury car segment, then the used car segment has the potential to be astoundingly massive. For example, the used car segment in America is approximately 2.5 times larger than the new car segment. Even in India, at current rates, the used car segment is larger than the auto segment. In such a scenario, the fact that Mercedes earlier this year had already entered this market is a big plus in its strategic positioning.

Going Forward: “Perception once made, can’t be changed,” said branding guru Al Ries. He perhaps had no idea what Indians are capable of. For an Indian consumer, perception is equal to the advertisement he saw last week. In other words, irrespective of how ‘valuable’ in international terms your brand might be, until you don’t advertise/market regularly, your product is not going to sell. Look around; age-old traditional fortresses are being restructured in India; from the Marutis to the Nokias, all legacy monopoly leaders have given way to new incumbents who’ve focused on advertising and promotion as the key to gaining market leadership – of course, at value for money offers. This assumes bigger importance when one sees that the newer market growth could well come from Tier 2 and 3 cities, which have their focused target markets of ultra rich buyers (for example Mercedes, in October 2010, got an order of 150 cars from Aurangabad in Maharashtra). While adding newer products into the portfolio is a good thing (Mercedes-Benz, which already has the largest portfolio of 38 models across 10 product segment, got in 21 new models to India in 2010; BMW got in 10), beyond a certain point, there is no differentiation advantage that can be obtained from the same – rephrasing the same, there is more advantage to be gained from investing in appropriate distribution and marketing a value-for-money luxury product in India, than in attempting to improve, say, the car’s engineering magnificence.

Fortunately, India’s luxury car makers are not ignorant about that and are even working on these concepts at brass-tacks levels. The coming years will see harsher wars between these players, with case studies ready to be written and recounted innumerable times on how India was the only world where global behemoths like BMW and Mercedes were forced to market luxury products as value-for-money affordable propositions. But then, these case studies will also show how while these three together managed to sell 15000 units in India in 2010, they sold close to 400,000 units in the same year in China. In short, perhaps all this is much ado about nothing. That’s the wonder of what the Indian market is, and will be, and the faster global players realise this factuality, the better!