The Indian market hasn’t been too kind to German automaker Volkswagen (VW). The company has painfully seen the local market shift to compact SUVs and sub-4-metre sedans – mass market segments in which it currently has no products. In a candid interview with BusinessLine at VW India’s Chakan facility near Pune, President and Managing Director Mahesh Kodumudi shares the company’s pain and future plans. Edited excerpts:

VW seems to have had a rough ride in India so far. Would you agree?

I would not call it rough, but it has been difficult. India is basically a new product market, it looks for novelty. If you don’t (offer it), you become stale and customers shift loyalties. It’s been little over four years since the Polo was launched, so we are a relatively young company, and for the first two years, our products were well received. Even in 2013, the Polo had 7.6 per cent market share, while the Vento had 11 per cent share in their respective segments.

You have practically launched only two products in India since you entered. Isn’t that a handicap?

We are aware that our product line-up is aging and there have been a lot of (new models) introductions by our competitors. We had an introductory phase, and then a consolidation phase.

The market shift to SUVs and sub-4 metre sedans as well as 45-50 per cent rise in the forex rate (since the business plan was made) did enormous damage, and our financial planning went for a toss.

As per the original plan, more models were supposed to come. We ought to have had one or two more volume models. But because of these factors, the launch of a couple of models was put on hold. India is a brutal, price-sensitive market with the lowest retail price for the very same product in the VW world. The only way to ensure profitability is to cut cost through localisation.

What are your plans for localisation?

Currently, gross and net localisation on our cars is 65-70 per cent and 40-45 per cent, respectively, of material cost value. We are still not satisfied with this level. So we took the major step of investing ₹240 crore to set up the diesel engine assembly plant (due to go on stream by December). A large part of the announced investment of ₹1,500 crore will go for localisation. I think 85-90 per cent gross localisation is feasible by 2018.

With the prospect of diesel price de-control, does a diesel engines plant make sense?

(Laughs) If we had known of this, we may not have made some of these decisions. But this is an engine especially for the Indian market and local assembly makes it around 10-15 per cent cheaper.

From January-August 2014, 53 per cent of Polo and 75 per cent Vento cars sold were diesel models. And the bigger cars will still be diesel because they are more fuel efficient. We are in the process of also developing a new petrol engine for India.

In 2014, you expect to export around half the production at Chakan. How do you view it?

In the near horizon, exports are an important component, but overseas markets are not devoid of risks. Before 2018, I will like to see domestic sales at 65-70 per cent.

So what is VW’s strategy, going forward?

We are reaching the end of the consolidation phase and are seriously beginning to think of new models, but haven’t still decided on them. We want to be a player in the mass market (compact SUVs and sub-4m cars) so at least one model will come in 2016. We are also looking at an SUV and an entry-level car.

We have discontinued assembling the Passat at Skoda’s plant in Aurangabad, and will like to introduce the new generation one some time in 2015. The car is being unveiled at the Paris Motor show in October.

How do you expect 2014 to pan out?

We expect to produce 112,000 cars. Our current capacity is 150,000 cars a year on a 3-shift basis.

We are studying capacity expansion as we may need it as early as 2016. With a few investments on bottleneck stations, we can increase this to 200,000.

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