As the luxury car market expands, BMW can't help flirting with the thoughts of overtaking Mercedes.
Not too long ago, Peter Kronschnabl was ensconced in Munich, Germany, working as a general manager with luxury car maker BMW.
Entrusted with market development in the Asia-Pacific, Africa and central and east Europe, his job was to evaluate markets where BMW had the potential to set up its own subsidiary. He had already done Poland and Hungary when India began to beep on his radar. And that changed his life.
At first, it was like any other project report — a desk analysis in June 2004 followed by two weeks of field analysis in September that involved meeting industrialists, consultants, potential buyers and long stretches of road travel.
At the end of it, Kronschnabl submitted a very optimistic opinion of India. “I gathered that everybody in India was on the move. The people were eager to achieve and open-minded. I could feel the drive of the country,” he says.
In the normal course, he would be done by that stage and head to his post in Munich. But the BMW bosses decided to add a twist to the plot and asked Kronschnabl to make good his own report.
“A project like that… India is BMW’s most strategic project globally… You do the entire groundwork and entry… you can prove in reality that the strategy was right.”
He proved that so quickly that he surprised himself. Unmarried, Kronschnabl moved to India in August 2006 as country head and president and ignited operations in January of next year.
Nineteen months later, he is already breathing down the neck of Mercedes-Benz India, which pioneered the luxury car segment in India with its launch 13 years ago and whose three-pointed star has been the badge that thou shalt covet.
BMW India’s target for 2007 was to sell 1,000 cars. It sold 1,387. It toyed with 2,000 as this year’s target before pegging it at 2,800 — a number it is on course to achieve. That will be more than the 2,491 cars Mercedes-Benz India sold in 2007.
Mercedes does not reveal sales targets. However, its director, corporate affairs, Suhas Kadlaskar says the company’s sales in January-June this year have grown 50 per cent. At this rate, it will be comfortably ahead of BMW in this year’s sales, though not very comfort-ably ahead.
Wheels of luxury
As the two German giants try to outpace each other, there has been a sharp surge in luxury car sales in India, with the volume rising from 3,050 in 2006 to 4,200 in 2007.
This year, the total volume is expected to touch 7,000 — a number referred to as “magical” by automobile analysts and writers though, as is the case with psychological landmarks, it’s not very clear why.
“This is just the beginning. This segment is poised for continuous growth. The top two layers of the income group (called globals and achievers, respectively, in the Bird of Gold report of McKinsey Global Institute) are poised to grow 10-15 times in the next 10 years. The result will be a substantial rise in discretionary spending,” says Rajat Dhawan, partner, McKinsey & Company.
With India hitting a purple patch of economic growth, personal incomes and corporate profits have risen sharply. As the feel-good factor became pervasive, people felt comfortable making a statement of their success and bought a luxury car as a symbol of having arrived in life.
“There has been a sense of bullishness all along. The feel-good factor has been very strong,” says Ramnath S, director-research, IDFC-SSKI Securities.
A new set of buyers of luxury cars has cropped up. “We wouldn’t have come (into India) if the economy was not growing. India has a lot of successful entrepreneurs and professionals. Our business is related to people’s passion and how they want to reflect themselves,” says David Panton, senior vice-president, Asia Pacific (excluding China) and South Africa, BMW Group.
Mercedes, too, is seeing a new rush of buyers. “The average age of Mercedes buyers has dropped to 35 and above from over 50 four years ago. New entrepreneurs who have generated wealth in this life want to spend it in this life only. They want the best they can afford,” says Kadlaskar.
A big chunk of the sales goes to fleet owners and segments like travel and hospitality, especially those catering to foreigners. The new Four Seasons hotel that has opened in Mumbai has just bought 20 BMW cars.
“On the supply side, we so far had CBUs (completely built units, or imported cars), which attracted 109-110 per cent duty. That made luxury cars out of the reach of even some of the achievers. But in the last year and a half or so, a lot more assembly has begun to happen in India. With that, the price elasticity effect has kicked in,” says Dhawan.
The local alien
It was not like BMW only had to turn up to sell its cars. “That would be paradise,” says Panton.
Adds Kronschnabl, “It is not like I am opening a bakery and selling bread. Everyone needs bread. But everyone does not need a luxury car.”
The automobile expert of a very reputed consultancy firm says BMW’s India strategy holds the promise to become a case study.
From the beginning, it had the clear focus to become a local player. Thus, it began the India operations with assembling the 3 and 5 Series at a new plant constructed in Chennai. Of the 2,800 cars BMW is sure of selling this year, only 600 will be CBUs.
A believer in the one world culture, BMW has built showrooms and dealerships that will not be out of place anywhere in the world. Its showrooms in Gurgaon and Delhi are a feast for a car lover’s eyes.
“Finally, luxury cars have begun to be sold in India the way they deserve to be sold. In India, the word of mouth and dealerships play the most critical role in the sale of luxury cars. If you want a comparison, the internet channel in China is generally more in use by all car segments,” says Dhawan.
Extending the one world belief, BMW quickly brought nearly its entire bouquet of cars to India.
Even the high-performance M Series and the X Series of sports utility vehicles are available in Indian showrooms. The only ones it has kept away are 1 Series and Mini. The first is a small car by BMW standards. The second is not meant to be a volume catcher anywhere; it sells on the lifestyle plank, which is not seen as a big market in India yet.
The standards, processes and design are standardised across the world. The only things modified for India are safety and emission systems to meet the local criteria, and small things like not using cloth, which Indian buyers despise, as upholstery.
“We have brought world class to India in terms of showrooms and sales staff. All the machinery in the Chennai plant is of the latest technology. Our plant in India is the first BMW plant anywhere to have that kind of machinery,” says Kronschnabl.
There is a lot of emphasis on training. Everyone working for BMW in India has undergone brand training either in West Asia or in Germany. Trainers have been flown into India.
The India office reports directly to Munich and the two are constantly in touch. “Someone from one organisation is speaking to someone in the other organisation, through phone or video conference or in person, every hour,” says Panton.
On their marks
It was a different era when Mercedes came in. “When we entered, there was no market for luxury cars. We developed the market,” says Kadlaskar.
According to reports that have appeared earlier, Mercedes was slow off the blocks. From 1,800-odd cars sold in 1996, its sales plunged to 734 in 1999.
Mercedes' opening gambit consisted of E220 and E250 Diesel models, part of the W124 series. The new E Class W210 series was already ready to roll out in Germany. Indian consumers knew that, as the luxury car buyer is inevitably an extensive traveler and well-informed.
But that was a long time ago. “When a car is launched in Germany, it is in India within six months,” says Kadlaskar. He dismisses the idea that BMW is catching up with Mercedes, saying that the overall pie is growing and creating room for new players.
Nobody these days wants to comment on rivals, but Kadlaskar exudes immense confidence in Mercedes' network. "We have the edge. We are very strong in after-sales (service support). We are present in 28 cities. We give a lot of importance to training. Our entire network is certified by ISO."
Kronschnabl, though, is unfazed. "We have 12 dealers in 10 cities. This we wanted to have by 2009, but have already achieved. We will have 15 dealers by the end of the next year."
When it comes to the race with the three-pointed star, BMW is cautious, but optimistically so. Says Panton: “It is not an absolute objective to be ahead of Mercedes in India. I think we will be ahead of Mercedes as a natural outcome of what we are doing -- whether in 2009 or 2010, I don’t know.”
(With S Kalyana Ramanathan)
