ŠKODA SHIFTS GEAR, PUTS GROWTH PLAN IN PLACE

To invest ^1-2 bn over next three yrs to increase localisation and roll out new cars

When German automobile major Volkswagen entered India in 2001 with Skoda, it didn’t matter that it was seen as a mid-market brand in Europe, and commonly used as taxis. Here, Skoda quickly built a reputation as an upmarket European badge with sturdy suspension, proven diesel engines, top-notch interiors and premium pricing. Annual sales touched their peak in 2011 with 35,000 cars.

Volkswagen passenger cars entered the country in 2009 just as Skoda’s newly launched hatchback Fabia was boosting sales, and the story, along with the parent company’s focus, saw a sudden shift. Skoda’s budget was slashed and marketing resources thrown behind Volkswagen, and the Fabia, which had started to gain traction and contributed to over 60 per cent of Skoda’s annual sales, was discontinued in 2013. Even the expansion of its dealership network slowed down. Even today, Skoda has just 67 dealerships compared to Volkswagen’s 125, despite being in India for a decade longer.

Volkswagen had bold plans for the Indian passenger car market, underscored by a ~50billion investment in the country, which remains the largest by any foreign carmaker. But, the price-sensitive market was something the German auto major failed to crack. For example, when it launched the top-end Polo hatch, it cost almost ~1 million on road, or as much as the Honda City – a three-box sedan.

However, Volkswagen hasn’t been able to make inroads into the highly competitive Indian car market. Its sales

were flat at 47,800 cars, or a minuscule 1.6 per cent in market share, a sharp decline from its peak of 78,000 cars in 2011. In comparison even French carmaker Renault sold more, with 54,000 cars. On the other hand, Skoda sales picked up last year. After declining 13 per cent year-on-year in 2016, Skoda’s passenger car volumes grew 30 per cent to 17,438 units in calendar 2017.

Skoda enjoys a strong position in customers’ minds. Gautam Sen, Paris-based automotive expert and founder of India’s first car magazine, Indian Auto, says, “In the minds of the people in India, Skoda is seen as a superior, upmarket vehicle to Volkswagen, especially by corporates.” This may be one reason why Skoda officials indicate that Skoda would lead the Volkswagen group’s charge for driving volumes in emerging markets. It was officially announced at the Frankfurt Motor show in September last year, and the long-term objective is to sell at least 200,000 cars

from the Indian facility in the domestic and export markets.

According to a Skoda spokesperson, “Skoda will pump in between ^1-2 billion (~76-152 billion) over the next three years to increase localisation, set up an engineering centre, and roll out new cars on the new MQBA0 platform, which will include a hatchback, a sedan, and a cross-over compact SUV each for Skoda and Volkswagen.”

Skoda also would maintain its premium image in the Indian market. Skoda officials say there will not be any repositioning of the brand, which is to say that prices are expected to be at the top of the segments they are launched in and they won’t be competing with Hyundai or Maruti Suzuki.

Kavan Mukhtyar, partner and leader – automotive, PwC India, agrees that Skoda was an aspirational brand when it entered, but service issues and high cost of ownership and parts worked against it. “That combined with the push by Volkswagen globally to reposition its brands in India had an impact,” he adds.

Bernhard Maier, Skoda’s global chief, had said India would be an important country in the brand’s growth. However, market dynamics are increasingly more complex today, as the shelf life of new models significantly drops after three years, and carmakers are under constant pressure to roll out new products ever so often. There’s added pressure with the requirements of regulatory frameworks for BSVI or electric vehicles.

India is also a market where best-sellers have a major impact. Maruti Suzuki Swift, Hyundai Accent, Honda City and Ford Figo have all helped boost revenue. Skoda too needs such a winner.

Mukhtyar adds that the two sister brands, Volkswagen and Skoda, will need to have nuanced differentiators because they can’t be competing against each other anymore. He points to ToyotaDaihatsu, Honda-Acura, and Nissan-Infinity as examples of sister brands that have managed well.

Volkswagen Group's track record in India points to two truths. Sen says the first one is that India is a price sensitive market with no room for hubris, which is clearly what Volkswagen came in with. Second, he says, is that no matter what the pedigree of a manufacturer, headquarters call the shots. To his mind, the only foreign manufacturer that largely operates independently in India, today is Maruti Suzuki. Along with its new cars and increased investments, that's something Skoda will have to be mindful of.