Here's what ails Volkswagen in India

New Delhi: Volkswagen, the second largest car maker on the planet, is facing a bit of a struggle in India. It got an enthusiastic response to the premium hatchback Polo and the Vento sedan initially but could not sustain the momentum in 2012. These two cars account for the bulk of the company’s sales in India. According to report in the Economic Times earlier this week, VW managed to double sales in 2010 and 2011 but in the first half of 2012, sales declined by 3.4 percent. It sold 78,408 units in 2011 and is not really looking at surpassing this number in 2012.

So what ails VW India?

Multiple industry sources told us that there appear to be problems at the supply end for brand VW. Also, slower-than-expected expansion of dealership network and lack of products which can directly compete with market leaders like Maruti Suzuki are two other factors which are hurting VW’s immediate growth prospects.

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But John Chacko, VW Group Chief Representative India, denied any problems with the group’s operations in the country.

“We are facing no issues at the supply end. Even our dealership network at 108 outlets is enough for the type and number of vehicles we have.”

[caption id=“attachment_447217” align=“alignleft” width=“380”]  s VW India is planning to add more markets and will expand the dealership network to 150 by the end of the year from 108 at present. AFP[/caption]

A prominent parts’ supplier to the group said on condition of anonymity that the German car maker is in the midst of a major restructuring of its supplier agreements as well as its entire marketing setup.

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“In the previous years, VW adopted a very skewed policy of selecting suppliers in India, completely at divergence with its global policy on this subject. Suppliers were chosen on price competitiveness and not necessarily on the basis of quality.”

This supplier also said that now, when the headquarters in Germany have realised that some “wrong policies” were followed, sourcing decisions of a number of parts for the group are being taken directly by Germany. “A whole lot of suppliers would change when the new Polo is launched. That’s because the headquarters are taking things in their own hands and the global supply policy would be implemented in India finally.”

A large bearings supplier said VW is expected to assess its facilities by December this year but will take a final decision, after inspection and making this company understand its quality and other specifications, only by 2014. So VW will take close to two years to begin supplies from this bearings maker, and then only if everything if found in order. Perhaps this long, exhaustive due diligence was missing in its earlier selection of suppliers?

Chacko admitted that initially VW had found a big mindset gap between VW suppliers globally and those in India. “But these gaps have been bridged and now, some of our suppliers are even exporting their products”.

He also referred to increasing localisation on VW products, which currently stands at about 70%. “We are conducting a feasibility study to set up an engine assembly plant in India by 2014. But any further investments need to be justified against sales projections”. Agency stories quoted Chacko earlier today to say that VW will invest another Rs 700 crore in India over the next two years in improving facilities, model changes etc.

Meanwhile, another parts’ supplier to VW said refreshed Polo and Vento models are being planned and production for the new Polo should begin in another six months. He said as per company estimates, 80,000-one lakh units of the new Polo would be produced in 12 months and about 60,000 units of the new Vento, He described changes in the new cars as “cosmetic, mostly on the styling side”.

The ET story quoted earlier says VW India is planning to add more markets and will expand the dealership network to 150 by the end of the year from 108 at present.

Arvind Saxena, the newly appointed MD of VW India, said the immediate emphasis of the company is on offering more value to the customers. No wonder then that VW has recently slashed prices of the Polo premium hatchback and Vento sedan by up to Rs 40,000 and Rs 20,000 respectively. Saxena said this was made possible by bringing in greater efficiencies at the Chakan facility.

That VW’s operations in India are in a churn is apparent from whatsuppliers said and also from the large-scale changes the organisationhas seen in the last few months. Saxena, a veteran from Maruti andHyundai India, has already come in and is expected to give a renewedimpetus to the company’s brand building efforts in India. He will manage the function of Neeraj Garg, who was member of board, director - passenger cars, Volkswagen Group Sales India Private Limited.

Chacko saidchanges are happening at mid and junior levels also.

Volkswagen offers the Polo, Vento, Jetta, Passat, New Beetle, Touareg and the Phaeton in India.