Volkswagen – 3Ds, Thums Up, and the Thunk!

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A few weeks back the Volkswagen Group scaled down its target to grab a 20% share of the Indian passenger vehicle market by 2018. The new target is 7%-8%. Considering that the group managed a 2.29% share of the market in the first 10 months of 2014, that target is somewhere in the grey area between fantasy and pipedream.

More than that 2.29%, what should be sending alarm bells ringing in the VW India offices would be the fact that this share of the market is nearly 1% lower than what the two brands achieved in 2013.

In contrast, the brands had a combined 4.33% share of the market in 2011, the best year ever for the

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group. In that year, Volkswagen group’s two mainstream brands had dispatched 109,151 units to the showrooms. By 2013, this was down to 82,270 units, a 24.6% decline. In the same duration, the overall passenger vehicle market had improved by 1.37%.

If this was bad, 2014 is an absolute nightmare. In the first ten months, the two brands haven’t managed 50,000 in dispatches and EMMAAA does not expect the Volkswagen+Skoda combined dispatch volume to cross 60,000 units.

Even at the best-case scenario of 60,000 units, it would be a brutal 26% fall in dispatch volumes for Volkswagen.

How did things become so bad?

To analyse things, we use one of the most abused phrases in English writing.

“Let us begin from the start.”

Volkswagen had a rocking start in the Indian market. Sales in the first year (2009) were 2,223 units. That’s not bad for a brand selling a couple of luxury cars in the market.

Things changed dramatically when the Polo entered the showrooms in April 2010. The Vento followed in September 2010 and the two together propelled Volkswagen 2010 sales to over 30,000 units in sales in 2010.

Next year, sales had surpassed 78,000 units.

This was mildly (and pleasantly) surprising for the brand. They expected a good reaction but at 78,000 units, sales had surpassed expectations and the diesel models with top-end trims had painful six-month waiting periods.

Perhaps Volkswagen wasn’t prepared for the response as well. Their dealer training had been pathetic. But that is something we will talk about later in this analysis.

If Volkswagen’s start was a four and a six off the first two balls of the innings, it spent the next few overs prodding clumsily outside the off-stump and generally behaving like the proverbial babe in the woods. Sales dropped; a round of senior management exited; and the Germans, and their dealers, quickly earned a reputation of being greedy and unprofessional.

The Big 3D-Problem

Where 3D is for Dealer, Delivery and Dependability. Later on D would mean Duped, which many customers felt.

To a large extent, the Indian passenger vehicle market is dealer driven. Brands with professional dealers survive and thrive even during downturns. Dealers are one of the core reasons why Maruti-Suzuki has been able to gain market share in a depressed market and Volkswagen has been losing it.

With any new brand, especially one that has a rich heritage and one which has spent a lot of money (expensive ads on newspaper front pages!) on building itself, the first many thousand customers are guaranteed. These are the fashionistas – guys who wait with cash in their hands to grab the next gen iPhone from Tim Cook as he walks off the stage at an apple event.

They will buy anything at any price.

So it didn’t matter that the Polo compared poorly on features to the Hyundai i20 or even the Suzuki Swift. ‘Solid German Engineering (SGE)’ was a good enough reason to make these customers buy.

So far so good.

The problems started right after that

These buyers were also the ones who drive the word-of-mouth for the next few waves of customers. That is where Volkswagen lost the plot. As time progressed, customers started talking about the problems they faced with the cars, a natural occurrence.

Now every car brand on the road will only keep 99% of its customers happy. The remaining 1% will always crib about things – the quality of air-conditioning, fuel efficiency, audio quality, or the absence of an automatic grape peeler. This is the nature of the beast and one cannot stop customers from cribbing. It is the maturity with which the manufacturer deals with these complaints that decides the future.

Volkswagen and its dealers behaved like spoilt brats.

What spoilt the dealers?

Germans are a proud race, proud and professional. However, there is a fine line dividing pride and arrogance. Unfortunately, most dealers forgot the pride bit and replaced it with arrogance.

In many cases, dealers were ill trained to handle customer complaints, ruder than the US TSA, and had the attitude of a Lindsay Lohan; never a good thing even all by itself.

Perhaps the dealers’ arrogance stemmed from Volkswagen’s own communication. From spending a small fortune on Page 1 ads in newspapers to the tagline ‘Das Auto’, Volkswagen’s communication has been borderline cocky.

As time progressed, problems started piling up and the situation deteriorated quickly. Arguably some of the SGE was ill supported by the quality of critical components like cylinder heads, clutches, gearboxes and brake cylinders.

However, SGE, and the dealers (some of whom had already morphed into weasels), meant that component prices were high. Replacing a clutch often meant selling your left kidney. At times the sum of component prices of a few critical components surpassed the value of the entire car – not logical and downright extortionist.

In many cases customers realised that the independent aftermarket was selling comparable components at a fraction of the price; they felt cheated. Like true fashionistas, some of them aired their views on the Internet, giving Volkswagen India the reputation that it has.

Rush Parekh, Moderator and owner of the Team-BHP automotive forum pointed out that “There are a couple of hundred threads on Team-BHP where owners have complained about problems with their VW / Skoda cars and / or their dealers. This number of threads is significantly high, especially when you consider the small sales volume that the VAG group manages in India.”

Now, reputations are easy to get, but difficult to shrug off.

Volkswagen lost volumes as time progressed which further complicated the problems. The dealers, accustomed to selling an X number of cars every month and waiting lists stretching into a few months, suddenly found themselves selling a third of X and suffering with piles of inventory.

Like true short-term entrepreneurs allured by SGE, they moved to cut their losses the only way they knew.

By further overcharging customers.

Somewhere in this vicious circle, quality customer service, professionalism and sense were thrown out of the window.

What About Skoda?

At this point, let us digress a bit and talk about Skoda. Somewhere in 2001, the Czech brand, a subsidiary of Volkswagen, entered the Indian market with the Octavia (Typ 1U). While an entry-level brand in Europe, Skoda benefitted from the platform sharing it did with Volkswagen. The Germans had also taught the Czech how to make cars as the first generation Octavia came with a solid build quality.

To their credit, Skoda also did a commendable job with the Typ 1U, a car which fared better than the Volkswagen Golf Mk5 in an Auto, Motor und Sport comparison. Top Gear UK in a 2006 survey would describe the same car as a ‘Masterpiece of Dependability’.

The Octavia came with a nice 1.9-liter TDI diesel and also some Petrol engine, which no one cared about. It didn’t matter – the diesel was enough to get people flocking to Skoda showrooms.

In short, the Octavia was soon identified as a quality German car and the brand was catapulted to the top of the semi-premium brands list in India. At that time, customers recognised it as the only brand – apart from the much expensive Mercedes – offering SGE.

Skoda-VW Mass Market Car Sales

Volkswagen HQ didn’t mind the elevation – a sister brand selling 2000 odd cars in an obscure market hardly warranted any attention. Secretly they might have been happy as well.

Till the day, they decided to bring Volkswagen to India. That is when they faced identity problems. If Skoda was semi-premium in the Indian market, what would Volkswagen – always a notch above – be?

Logic says Premium. But then where would be place Audi? Luxury, says logic again. But in a market where Premium is being squeezed by ever expanding Luxury car brands from the top and mass-market brands from the bottom, this was a doomed strategy for Volkswagen.

Something had to be done.

Thums Up!

Let us digress a bit even more and talk about Coca Cola in India.

Once upon a time, long-long ago, 1993 to be precise, the mighty Coca-Cola Corporation decided to enter the second most populous country in the world. The market was huge and Coca Cola wanted to hit the ground running. This was important, as Pepsi had already been peddling its cola in the Indian market.

However, Thums Up, a cola brand from small Indian manufacturer Parle soft drinks, ruled the market. In the early 1980s, the brand accounted for 85% share of the market and had a loyal following because of its unique, strong flavour.

Coca Cola started off with a bang by acquiring Parle’s soft drink business. In one shot they owned Thums Up and most of the Indian cola market.

After that they did a Volkswagen India and shot themselves in the foot multiple times. Some over jealous marketing executives, high on Coke, decided that Coke needs to be the main brand in India and Thums Up should be the supporting, sister brand.

So they wanted to take a brand with 85% market share and cool it down while pitching a brand, which had a 2% market share.

In one word, Bullshit! In two (milder) words, Bad strategy!

Advertising for Thums Up was pulled and Coca Cola started pushing Coke, hoping that Thums Up customers would switch to Coke.

They didn’t. A lot of them found Pepsi.

It is the kind of strategy that ought to spin-off marketing case studies for B-School students. It is also the kind of strategy that was perhaps framed by expat executives with little understanding of the Indian market. It is also the strategy that gives us a sense of Déjà vu for Volkswagen’s strategy for Skoda.

Thankfully saner heads prevailed at Coca Cola and they started pitching Thums Up directly against Pepsi. Over the years, the strategy has worked well and both Coke and Thums Up have found their own space. Together, they control the cola market with Thums Up controlling 42% share (questionable 2012 data from the internet) of the market.

Coming back to Volkswagen

However, it doesn’t seem like Volkswagen is still clear about what they want to do with the two brands. Both occupy the same space; share the same platforms, engines, transmissions, interior components, switches and much more. Heck, both also have dealers in need of an attitude adjustment.

Skoda-VW Premium Market Car Sales

In most cases, customers swear they find Skodas better put together and feature rich. As the sales graphs also show, Skoda manages to sell more in the Premium segments (Executive & Premium) than Volkswagen while the parent brand is selling more mass-market cars.

So why does Volkswagen want to flip things around?

The answer lies in the catacombishly complex structure of Volkswagen headquarters and how small the Indian operations are in the entire group. What the global headquarters decide has to be implemented in India. At a global level, Volkswagen wants Skoda to be positioned lower than the main brand and so one can understand the product draught that Skoda India currently faces.

Product Lifecycle Problems

Sales numbers from their launch to Oct 2014 indicate that while the Polo has been more resilient to normal vehicle lifecycle related issues, the Vento has seen a sharp fall. The trend is similar for Skoda as well, where the Rapid has seen a huge drop in sales after the first few promising months. Thanks to the Hyundai Verna and the new Honda City, recovery for the Vento & Rapid is likely to be limited.

The group’s product core range revolves around the Polo, Rapid and Vento. Everything else is showroom decoration and tools for helping dealers make some money off atrociously priced spare parts.

The Polo is now 53 months into its lifecycle while the Vento has spent 48 months in the showroom. While the initial response to both was promising, Volkswagen has failed to build on the mini success. Apart from the two, the brand has little to offer the customer.

With Volkswagen following 78-84 month lifecycles, a replacement for either model is still many quarters away.

Thunk! And the Problems That it brings

Both the Polo and Vento, and every product in the Volkswagen showroom, share the same DNA – products that are highly priced, feature poor, well engineered, and remarkably underwhelming. Sure, the brand uses high tensile, galvanized, borderline-exotic steel in the body construction, the same material that makes the doors feel like those on a vault and close with a reassuring ‘thunk’.

But then that is exactly the problem.

We like that steel and the thunk; but the last time we checked, there were only seven of us in this office. The rest of India gives two hoots for SGE, unless it’s also supported by steering wheel mounted controls and LED lamps. After all, we are a country of Johnny Walker drinkers – we like swilling it the glass and talking about it but don’t know and don’t care that being a blend, it is not as pure an art form as a single malt.

Nor can we tell that half of our intake is bootlegged counterfeit. Our palette is not mature enough to make out the difference.

So the smiling Koreans and the dependable Japanese, with their car bodies crafted out of compressed cardboard thinner steel, still gets the Indians’ wallets.

Product is the Catch-22-to-the-grave problem for Volkswagen – they cannot make it less engineered; it is not in their culture. Which means that anything lower / smaller than the Polo is out of question – Volkswagen had already evaluated, reevaluated and rejected the Up! small car and found it impossible to price it at Wagon R levels.

A promising acquisition of Suzuki was also scuttled. Thus the future of Volkswagen India hinges on products like the Taigun small SUV and the sub-four metre Vento. In both cases, Volkswagen is struggling to bring the costs down to match Indian expectations.

Skoda on the other hand is awaiting its next hot balloon – a seven-seater SUV.

Considering Volkswagen was planning to swap both brands for premiumness, this – sending the premium product to Skoda and mass market to Volkswagen – is hardly a good start.

The Road to Nowhere

With the Indian operations performing lower than expectations, one can also imagine a traditionally conservative Volkswagen headquarters not committing resources to India specific product development. Even if they did, the very Volkswagen DNA restricts them from developing anything that Hyundai or Suzuki can in their sleep.

In short, it makes sense for them to pretend that they are semi-premium; they just don’t have the firepower or the intent to take on the ever-smiling Koreans and Japanese.

Volkswagen realises the problems and is working towards rectifying them. However, there are limitations to what the company can do; remember, nearly everything is dictated out of Wolfsburg.

What they can do, and they probably would, is to work at the ground level to improve brand Volkswagen’s standing. Image, especially a tainted one, is difficult to change in a hurry but you have to start somewhere.

Parekh further points out that the two brands have at least been keen about resolving customers’ problems. “VW and Skoda have usually intervened if a member voices a complaint on Team-BHP. Either they drop a line to us asking for the member’s contact details, or have the dealer escalate the matter at its end,” he added.

However one stays sceptical. Summing up the entire issue, Parekh hits the nail on the head “Buying VW & Skoda cars remains a tricky affair. For one, their reliability is far from Japanese & Korean car standards. It’s a double whammy when you realise their dealerships suck and the brands have a poor understanding of strong, effective after-sales service (like say, Maruti or Hyundai). Truly sad because most of their cars are so good to drive and greatly appeal to enthusiasts.”

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5 Responses

Leave a Reply
  1. perspective
    Nov 27, 2014 - 12:37 PM

    Well written. Witty and (just about) insightful ).

    Skoda and VW share (favoured) dealer principals, and hence one sees similar customer experiences.

    Time for (another) overhaul at Volkswagen and Skoda?

    Reply
  2. Gkr9900
    Nov 28, 2014 - 05:40 AM

    Awesome write up! A big thumb up to you sir!

    Just wanted to bring to your attention..the small car VW had initially planned is the Up! (not the ‘Go’)

    Waiting for future articles from your site 🙂

    Reply
    • DR
      Nov 28, 2014 - 07:13 AM

      Thanks for pointing out. Article has been redakted.

      Reply
  3. PagalFellow
    Nov 28, 2014 - 07:28 AM

    Decently well put through. States the truth of what has happened.

    Whatever few numbers they do is because of the branding advertisements. Most buyers are well footed, even quite influential individuals willing to be identified distinctly.

    Stating the obvious, quite a few of those well educated clients face issues, they then come as anonymous owners on online forums and pour their hearts out!

    My friend owns Dealerships of TATA, FIAT & Chevy apart from Swaraj Mazda & Isuzu. When people like him faced issues dealing with the Skoda service center for the Fabia, what would normal consumers do !

    YET, Some well articulated, overtly proud owners would defend their brand choice. Makes me cringe.

    SOLUTION : As long as it doesn’t cost a fortune, STOP ignoring customers mailing in to the HQ asking for help! Simple.

    But can the CEO manage that ?

    Reply
  4. Kumar
    Dec 01, 2014 - 01:54 PM

    I had called up VW showroom a few days back to inquire about offers going on for the POLO. I was informed by the sales executive that currently there were no offers for VW cars. The next day I saw a VW ad in the local newspaper offering about Rs.20,000 discount for the Polo. Seems VW dealers nowadays don’t want to sell any cars.

    Reply

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