Luxury cars makers put up strong show amid slowdown

Luxury car brands are holding their own in a weak Indian automobile market even as global mass market carmakers continue their struggle to add some so-far-elusive black ink onto the balance-sheet. The contrast couldn't be more striking. In fiscal year 2012 (the latest period for which these unlisted companies have declared results), the combined losses of General Motors (GM), Ford, Honda and Toyota stand at a little over Rs 1,500 crore. In contrast, BMW managed to keep its head above water with a neat profit of Rs 80 crore (although it's down 52% over a year ago). Mercedes did sink into the red after a Rs 203-crore profit in 2011, but the loss was a nominal Rs 11.6 crore.

And if the Volkswagen group, which includes Skoda and Audi, was able to show a profit of Rs 59 crore, it is because of the efforts of the luxury car brand in its stable. Analysts say the market is polarised with the mainstream brands hitting a rough terrain as they struggle to get the right product at the right price to market. Luxury cars on the other hand are being lapped up by recession resistant consumers, although these sales comprise less than 1% of the total car market in volume terms.

Strong Showing

When it comes to value, of course, the gap narrows significantly. For instance, BMW's sales of Rs 2,349 crore in fiscal year 2012 are not far behind Honda's Rs 3,185 crore; and if the VW group had jumpstarted sales from Rs 4,620 crore in fiscal year 2011 to Rs 8,237 crore a year later, it would been on the back of a solid contribution from Audi (VW did not give a brand-wise sales break-up). Audi for its part continued its good show in fiscal year 2013, with the launch of the Q3 SUV in June 2012, which has further consolidated its position in the luxury SUV segment (a petrol version was launched in February this year).

Says Audi India MD Michael Perschke: "The first quarter of calendar 2013 was a winning quarter for us. We sold close to 90% of our total annual sales of 2,010 units and recorded the best-ever quarter in the history of Audi in India, a proof of the brand's growing appeal." Perschke is gunning for pole position in luxury cars by fiscal 2015; currently it is at No. 2, with BMW ahead and Mercedes trailing. Globally, Mercedes lost the No. 1 position to BMW in 2005 and, six years later, Audi overtook it. Mercedes has been relegated to No. 3 position in India, too; and BMW too is feeling the pressure from Audi, which is rapidly closing in. "BMW witnessed an unprecedented price war from the competition in the Indian luxury car. We decided to stand our ground in a fiercely competitive environment and are prepared to meet the challenges head-on. They will pay off in the long run, both in profitability and growth," says Philipp von Sahr, president of BMW Group India.

Hit by Recession

The mainstream brands most of which have been in the country for a decade and a half cannot afford to be so sanguine. Their cause isn't being helped by a depressed market, with sales witnessing their steepest decline in the past 12 years in the just-concluded financial year. Industry experts say luxury carmakers have a huge advantage at least on the profitability front because of the handsome margins these high-priced cars enjoy. "The mainstream brands invest more in plant, infrastructure, product development and testing, vendor development, and human resources. Luxury carmakers have limited capacities and rely more on completely knocked down [CKD] operations," says Deepesh Rathore, MD, IHS Automotive, a strategy firm. Unlike the mass-market brands, which rely heavily on aftersales service, the contributor to the bottom line of luxury segment is pure sales. "While mainstream brands make money on after-sales service, luxury carmakers make profits on new car sales," says VG Ramakrishnan, MD, Frost & Sullivan.

Setting up Plants

For their part, the luxury brigade is focused on driving up sales by making their products more price-competitive. The best way to do that is to produce more locally. Audi, for instance, currently produces Audi A4, Audi A6, Audi Q7 and Q5 at its facility in Aurangabad and by June it will begin local production of the Q3. In 2013, BMW India will launch the new 7 Series, and its first premium compact hatchback, the BMW 1 series. Both will be locally produced at the Chennai factory, the 7 Series by mid-2013 and the 1 Series by year-end.

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BMW produces the 3, 5 and 7 Series, X1 and X3 in India. Mercedes will begin production of the GL SUV in India; for now, it makes the C, E, S and the M classes in India. "India holds great promise for the future and is one of the most important markets for BMW Group. If you want to benefit from the dynamics of the Indian market later, you need to act today," says BMW's Sahr. Mercedes Benz, too, is readying to strike back. "The year 2013 is the 'year of offensive' for us," says MD & CEO Eberhard Kern.

Younger consumers with the purchasing power to buy into the entry-level segment of luxury carmakers between Rs 25 lakh and Rs 30 lakh will help these marquee brands keep their head above water in a dull market. The mainstream brands meantime have their task cut out to identify new segments of buyers and lure them with attractively-priced products in a highly-competitive market.