Volkswagen India to merge 3 companies to save cost and boost sales

It’s been an insignificant player in the Indian passenger car market with a paltry 2 per cent share, despite selling its products here for over 17 years.  And like many other European and US car makers, Volkswagen group’s high cost of production, failure to indigenise quickly and problems with consumer service reputation have plagued its brands for years. If that was not enough, it was hit by the global impact of the scandal involving cheating on emission norms, which inevitably hit sales.

 

 Undeterred by its chequered past, however, the German giant is now making a third major attempt to capture the Indian market. A fortnight ago, Volkswagen group announced that it would be merging three of its companies in India — Skoda India Auto (with its factory in Aurangabad), Volkswagen India Pvt Ltd (which manufactures cars in Pune), and Volkswagen Group Sales India (which sells all the Volkswagen brand cars, including Audi and Porsche but not Skoda). The merged entity will be led by Skoda, and its former boss Gurpratap Boparai will oversee the new entity, having been designated head of Volkswagen group. 

 

The group now has a clear target: It wants to grab 5 per cent of the Indian passenger car market by 2025, which would require a five-fold increase in car sales to 250,00-300,000 a year. It will invest Euro 1 billion in the next few years to make that a reality. Already in the works are two sports utility vehicles launches, one each from Skoda and Volkswagen, which will be followed by one sedan each sometimes in 2019-20. The key difference will be that these new products target a net indigenisation of 95 per cent compared to 75 per cent in the Pune plant and as low as 10 per cent for the premium cars in the Aurangabad plant (most of them come as CBUs). 

 

This exercise marks the second time that Skoda will be at the helm for Volkswagen group in India. The group came to India in 2002, led by Skoda, which set up a plant in Aurangabad and launched the Octavia, just when General Motors decided to withdraw the Opel brand from the country. But in 2007, Volkswagen decided to become more aggressive, and set up a new plant in Pune in 2010 to produce a more mass-based car in the Polo, and it took over the leadership of the group’s ambitions in the country. Despite initial successes, sales stagnated and the group was forced to focus on exports to keep its factories going. So from a peak sale of 114,045 cars in calendar year 2012, Volkswagen group sales (which include Audi and Porsche) nearly halved to 61,242 in 2018.

 

So will the merger bring back the magic? Boparai thinks so. “The proposed merger of the three companies will make use of the existing synergies more efficiently towards the development of this important growth market, will primarily focus on optimisation through localised product development, synergies in manufacturing processes and cohesive sourcing partnerships and procedures across the Volkswagen Group companies,” he says. 

 

For instance, both Volkswagen and Skoda will use the common MQB –AO platform, which will be tweaked for India in its new technology centre, to build their upcoming car models that will be compliant with the new emission and safety norms. This will save costs. It will also be able to combine the technical and managerial expertise of the three companies. Plus, with the sales and manufacturing companies of Volkswagen merging, the gap between what customers are looking for and what engineering is producing can be narrowed.

 

Though the business case for the merger appears logical, auto analysts suggest that the move could be more about optics and the gains might not be so significant. For instance, they point out that using common platforms between group companies is not new – both the Rapid sold by Skoda and the Vento from Volkswagen in India basically used the same platform. Despite the cost synergies, neither could sustain volumes. The Octavia and the Jetta are based on similar platforms as well. 

 

Those who have followed the company say common purchase teams negotiated with vendors before the merger and manufacturing was also synergised too — for instance, the Skoda plant in Aurangabad would manufacture niche, premium products which apart from Skoda cars included the Volkswagen Tiguan and Passat and various Audi models. They, however, agree that the only significant benefit would be merging sales with manufacturing. “A car’s success requires a few things – imagery, which is created from sales and marketing, pleasure of driving and styling which is created by engineering, initial cost which is a function of engineering and the purchase department and ownership cost which is determined by a combination of engineering, purchase and sales. In Volkswagen these functions were divided between two companies which made it not very effective. The merger will resolve this problem,” says a senior auto expert.

 

But the key question remains: will the group will be able to get its return on the substantial promised investment by merely increasing its share of the market by 3 per cent?