Two decades and a billion euros later, Volkswagen Group’s Skoda Auto is poised to revamp its market strategy with a new India 2.5 plan. Will the Czech brand get it right this time, starting with its upcoming SUV?
27 Jul 2024 | 48322 Views | By Prerna Lidhoo
For a century-old automotive brand like Skoda Auto, with roots stretching back to the Austro-Hungarian Empire, the path to becoming the fourth-largest carmaker in Europe has been anything but easy.
Overcoming the stigma of its communist heritage, and with a little help from new owner Volkswagen, Skoda Auto was ...
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For a century-old automotive brand like Skoda Auto, with roots stretching back to the Austro-Hungarian Empire, the path to becoming the fourth-largest carmaker in Europe has been anything but easy.
Overcoming the stigma of its communist heritage, and with a little help from new owner Volkswagen, Skoda Auto was able to implement a turnaround and deliver high-quality vehicles to consumers in Europe at competitive prices in early 1990s.
Today, as it pivots to focus on India following exits from key markets Russia and China, the challenges in front of this Czech automaker are almost as daunting.
The question is — with over two decades of investment exceeding one billion euros — will the European behemoth navigate this make-or-break moment and finally carve out a place for itself in India's automotive landscape? Will it be able to realize the strategic calibration, innovation and market insights needed to pull this off and make India its biggest base outside Europe? Much depends on the success of its India 2.5 plan.
A Strategic Pivot:
The India 2.5 strategy represents Skoda's concerted effort to realign its focus on the Indian market, following strategic exits from other markets. The company exited the Russian market when the country attacked Ukraine, taking a USD 742 million hit. Now, it is planning to phase out its presence in China due to intense competition from local players. It now believes that outside of Europe, India is its best bet.
"From a business perspective, it's not always wise to stand on only one leg," explains Skoda Auto CEO Klaus Zellmer, referring to its European operations. "If it gets a little shaky, you want to stand on the second leg, which for us is India...It is the place to be, going forward." Skoda’s aim is to be the best-selling European brand in India by 2030. The Skoda Auto Volkswagen group — which includes Skoda, Volkswagen and Audi AG brands— currently has a market share of around 2.25%. It wants to raise this to 4% by 2026 and 5% by 2030. In terms of volumes, the automaker wants to sell 1,00,000 Skoda vehicles annually in India by 2026, besides exporting from India to the ASEAN and Middle East regions.
At the core of the company's India 2.5 plan is the launch of a new compact SUV, built on Skoda's proprietary MQB-A0-IN platform and slated to debut in early 2025. The model marks a significant milestone as it will be Skoda's first vehicle in this burgeoning segment and will be tailored specifically for Indian consumers.
In the post-Covid-19 era, the compact SUV has emerged as the biggest sub-segment of the fast-growing Indian passenger vehicle market, accounting for over 25% of the total industry volumes at the end of 2023. The new model will be priced between Rs 8 lakh to Rs 15 lakh, and pitted against notable competitors such as the Maruti Brezza, Kia Sonet, and Tata Nexon.
"With the sub-4-metre, we want to significantly increase our market share in the most demanding segment which comprises more than 50% of the market. I'm convinced that it has hit the bullseye in terms of technology, fit and finish," Zellmer said.
This time, a key area of focus for the company has been to get the pricing right. European brands have typically lost out to their Japanese, Indian and Korean counterparts on this front in India. Moreover, Skoda’s traditional premium positioning in India has led to the perception among consumers that Skoda cars tend to be relatively expensive compared to other options available in the market.
For example, in early 2002, when Skoda Auto entered the Indian market with the Octavia model, it was perceived as being ahead of its time. The Octavia stood out withits exceptional build quality, distinctive exterior design, premium interior, spacious cabin, expansive boot space for luggage, and impressive engine performance. Zellmer has now realised that ‘over-engineering’ was a misstep for the Indian car market.
"We have a lot of lessons learnt in the Indian market. Often we build (a) car according to our own expectations. They tend to be over-engineered. That comes at a price tag. And that's something that weakens your competitive position," he said. The company plans to cut costs by scaling and localising. For example, one of the engine derivatives is now fully built in India. The sub-4m SUV will have 75-76% localisation. The company also plans to use excise benefits and pass them on to customers.
Zellmer is careful about hitting the sweet spot in the cost versus quality trade-off. "That's what we're after. We want to build the cars that customers in India are willing to pay for. And this is a lesson we continuously need to learn. Our price position versus competition is very ambitious. The idea is to provide a car that's even better than what's typically being catered to, in that segment," he said.
"Competitors are outselling us. There's room for more if we get the sweet spot right. People who buy European cars in India go for quality...Nobody wants to end up in a price war. We want to make sure the car is worth its price value and we're trying to hit that sweet spot," Zellmer added. The car will be produced in the same production line where the company’s 2.0 products like the Kushaq and Slavia are made. Skoda and Volkswagen together have a production capacity of 2,70,000 cars per year, at their Pune plant.
Skoda Auto expects a potential annual volume of over 90,000 units, serving the Indian market as well as regions where Skoda is trying to build a presence, such as Southeast Asia, the Middle East, the Commonwealth of Independent States and North Africa. Zellmer said that in the last two years it has sold more than 1,00,000 cars for Skoda in India, which previously took the company more than six years.
"This year is a very special one for us because we're ramping up the production side. At the same time, we're onboarding more dealers. I would also wish for more sales, but 2024 is a little bit of a bridge year and then we're going flat out in 2025, by ramping up the business model and investing heavily to increase our output," he said.
Currently, the company has 250 touchpoints in India and wants to increase it to 300 by the end of the year. The company will soon start producing the Kushaq by the end of the year in Vietnam. "This is the perfect example of engineering and sourcing in India and delivering to other parts of the world. We're already exporting cars to Saudi Arabia as well," he added.
“With Skoda, we are still rather humble, exporting less than 10,000 cars a year. But Volkswagen has shown us what is possible. Other brands within the portfolio are exporting around 40,000 cars a year [from India]. I would want us hitting the one-lakh car in India. Once everything is on full steam; when our portfolio is right, to then also benefit from exporting cars,” he said.
While Zellmer accepts that India has a predatory car environment, he also believes that it's also the one with the most headroom for growth. "We're no. 4 in Europe. We're going to take that success, strategy and portfolio [to India], depending on what makes sense to the Indian market. We're still learning, and humble, and we're willing to be totally customer centric," he said.
Zellmer is optimistic that the company's new compact SUV will not face the same fate as the Fabia hatchback, which was launched in India in 2008 but discontinued due to declining sales and an unsustainable cost structure, among other factors. The success of this new SUV in India, and the India 2.5 plan depends on Skoda's ability to accurately anticipate market dynamics, cultivate strategic alliances, and genuinely resonate with Indian consumers this time around.
This feature was first published in Autocar Professional's July 15, 2024 issue.