Mahesh Kodumudi makes no bones about the fact that India is a “brutal” retail market which poses a particularly different challenge to his company.
As Chief Representative of Volkswagen Group in India as well as President and MD of Volkswagen India, he knows only too well that profitability becomes difficult to achieve in this part of the world where price is the key. “Today, there is an increasing realisation within VW that it cannot continue to rely on profitable markets like Europe or China. Future growth will come from regions where profitability is not easy to achieve,” says Kodumudi. This is where the company’s engineers and designers need to find solutions that are cost-effective without compromising the brand’s DNA.
“We need to be more patient with India and need to chip away one piece at a time. Future growth will happen in less profitable regions and we need to adapt ourselves to this reality better without giving up on innovation,” says Kodumudi.
India is also an important market for VW thanks to its expertise in low-cost innovation. The carmaker is already putting the lessons learnt here to good use even in developed countries. For instance, it invested heavily in developing the expertise of local suppliers and today they cater to global projects. “We could produce, through the same specifications, much more cost-effectively in India,” says Kodumudi.
Likewise, at the Pune plant, the VW team realised that spare parts for machines and equipment could be done in a much more innovative/cost-effective way. As a result, this is now applicable to developed markets like Germany. “India is a great learning ground that will teach us a lot about low-cost innovation without compromising on quality,” says Kodumudi.
Practical outlook Clearly, things are a lot more focused from the time VW first set up shop here nearly a decade ago. The mood was more bullish then and the auto fraternity gushed about India’s potential. However, the following years saw the country’s image take a beating with news on policy paralysis and corruption. As Kodumudi recalls, pessimism set in and the pendulum swung the other way. Today, VW is more pragmatic about its India outlook. “We need to appreciate that it is different from Europe with its own idiosyncrasies, requirements and customer tastes,” he says.
The company now understands that this India not a short-term game but one played over time. During the last two years, it decided to consolidate operations here in terms of productivity and localisation to insulate itself from volatility in foreign exchange. Clearly, the domestic leg was not enough and an additional one was needed for exports. The global strategy kicked off in 2010 and picked up as the local market began tanking. Last calendar, India exported 65,000 units and this could increase a tad to 70,000 units in 2015. Nearly 60 per cent of the output from Pune is exported with a lion’s share shipped out to Mexico.
Early this year, the focus on localisation saw the opening of the diesel engine plant. Going forward, says Kodumudi, India will be an export base not only for low value-added manufacturing but also for sophisticated cars/high technology.
Expansion plans The coming years will see a slew of products launched in India along with aggressive retail expansion. VW believes it lost out since the segments it was operating in (Polo and Vento) shrunk while the compact sedan/SUV space grew quickly.
Investments of Rs 1,500 crore have been earmarked over the next 5-7 years which will factor in localisation and new models. This includes Rs 240 crore spent on the engine plant. “Apart from growth segments, we will also focus on building our premium brand. Our cars are robust, innovative and safe which are features that need to be conveyed to the customer,” says Kodumudi.
It is here that VW plans to revive the top-down approach of 2006 where it had the Phaeton, Touareg, Passat and Jetta in tandem with the Polo and Vento. It had kind of lost its way and is keen on getting this strategy back on track. “We need premium models to support high volume products and develop the brand,” he adds.
Amidst this upbeat outlook, there are some dark clouds like the new foreign trade policy, for instance, where some of the incentives for exports to Mexico have been affected. “If I am not wrong, it went down from four to two per cent and this will adversely impact us. We intend to take it up with the Government and hope to convince them that it is not the right thing to do,” says Kodumudi. Going forward, he believes India should not focus merely on low-cost, cheap manufacturing but on higher technology production. This is where a free trade pact with Europe could help. “Import of high-end cars will bring higher technology production and this is good for India as it will percolate down to other industries as well,” says Kodumudi.
The writer was in Germany recently on an invitation from Volkswagen