Porsche tarnished by more dealer arrests

VW Group moves to dismiss those who defaulted on loans

Just when it seemed that Porsche India had overcome a series of legal tussles and business upsets, the legendary sports carmaker, owned and managed by the Volkswagen Group, has hit the skids again. Last week, Porsche and Audi dealers Rashpal Singh Todd and Mandhir Singh Todd were taken into custody by the authorities at the New Delhi airport. According to an HDFC Bank official who confirmed that the bank had filed an FIR, the alleged wrongdoing involved defaulting on collective bank loans of ~2.7 billion.

The Todds own the Zenica Group, a dealership firm that sells Porsches as well as Audis. They are part of the Volkswagen portfolio. The two men had borrowed from a consortium of banks, including HDFC Bank, and failed to repay. The setback comes at a time when HDFC officials say that the company had been generating consistent sales and profits till recently.

Audi has already reacted by sending a notice to dealers and customers indicating the Todds are no longer associated with it. According to a source, Porsche is going to follow suit in a few days. Porsche India officials declined to confirm or deny if they were going to pull the plug on Zenica as well. Rashpal Todd didn't return calls or messages.

Standing up in their defence is a car dealer who knows the Todds well and says they cannot be totally in the wrong. “They have been performers for both Porsche and Audi in terms of volumes and consistent sales over the years. So clearly, something was going right,” he says.

Perhaps the pressures of running a sports car dealerships are underestimated. Running a Porsche showroom is expensive, with anywhere from ~250-300 million in expenditure in fit-outs for a store alone. Parts and materials have to be on a par with showrooms worldwide, in addition to the costs of employees, land, and rentals. While car dealers are independent of car manufacturers, customers see them as one and the same. “A customer's confidence is impacted when these things happen,” said Shailesh Surve, a doctor who also runs a shipping firm. “I’ve bought Mercedes-Benz cars thrice and there's never been a doubt in my mind about their dealings.”

In the past, Surve had booked a Porsche Cayenne whose delivery was delayed for nine months while his advance of ~7 million, to his dismay, was kept by the dealer. “There is some major issue with the due diligence that is being done for dealers at the corporate level," Surve said.

Other sports car buyers say it is hard to know where the buck stops. Yohan Poonawalla, chairman, Poonawalla Engineering Group and also an auto enthusiast who owns Ferraris, Lamborghinis, Rolls Royces and, in the past, Porsches, said that in a company as large as the Volkswagen Group, specific blame is hard to pinpoint.

That being said, he added that “ultimately, however, the building or deconstruction of any high end car brand is in the hands of the dealer because that's the last and constant point of contact with the buyer”.

When asked if the firm was doing thorough diligence and whether it ought to be using executive search firms to hire its partners, Anja Wood, Public Relations Manager for Porsche's operations in the Middle East, Africa and India, said in an email response that “due to ongoing legal investigations, we ask for your understanding that we cannot provide a response at this stage”.

Rakesh Batra, partner and national leader, automotive sector, EY, said multinationals need to take a step back and not just look at a dealer’s access to realty and VIP clients but also the viability of the business, depth of management, corporate reputation, and so on. “Most auto firms are large and have entire divisions dedicated to dealers, monitoring their activity and this is an extremely crucial function in any OEM,” said Batra.

In the past, firms have experimented with the model of a master distributor, as Porsche did with Precision Imports, but it failed. “Bringing in a third party who is basically a broker and adds no value between a dealer and a manufacturer doesn't make business sense,” said Batra. Nissan Motor, for example, experienced friction with Hover Automotive, a sole distributor partner it had appointed for six years. Eventually this resulted in both parties parting in 2014 and Hover shutting down soon after.

With the removal of the Todds from Audi, it seems that Volkswagen has lowered its threshold for anyone not playing by the book.

“Most auto firms are large and have entire divisions dedicated to dealers, monitoring their activity and this is an extremely crucial function in any OEM” RAKESH BATRA, Partner and national leader, automotive sector, EY