Ever since Mercedes-Benz entered India with its line of trucks in 1954, the German auto maker has been expanding operations around the country. India’s luxury car market is tiny — at 0. 06% of the total market. China, in contrast, is much larger. How does Mercedes-Benz plan to leverage its strong brand recognition in India to appeal to the younger generation? India Knowledge at Wharton discussed this question and others with Wilfried Aulbur, chairman and managing director of Mercedes-Benz India, a division of Daimler.
An edited transcript of the conversation appears below.
Knowledge at Wharton: How do you see the vehicle market in India today?
Wilfried Aulbur: If we look at the monthly sales of passenger vehicles, commercial vehicles, and both goods and people carriers, we see that after the collapse of Lehman Brothers, there was a very sharp contraction in the market due to the unavailability of funds. On the truck side in the commercial vehicle market, we have seen monthly sales contractions. In some segments — for example, vehicles larger than 25 tons — it’s been contracting 80% to 95%. De facto, some of these segments have vanished overnight, which has had significant consequences for some manufacturers.
If we look at passenger vehicles, the market went down between 10% and 30%. It is now stabilizing. Buses have not been affected due to the government’s support…. But as far as luxury cars are concerned, we will see in all likelihood that it is still growing.
Knowledge at Wharton: What are the reasons for that? Wouldn’t tight credit affect luxury cars, as they do other vehicles?
Aulbur: As a rule, the luxury car market is affected by credit; typically 70% to 80% of our vehicles are financed. This is not the case anymore. We are looking at a finance rate of about 60%. There has been a shift from finance and credit to cash in the luxury car market. The second thing is that luxury car penetration in India has been historically low. We are at about 0. 06% of the overall market. In China, the market is substantially larger, in terms of both absolute volume and percentage of overall market.
Knowledge at Wharton: Why is that? Are you using those reasons to shape your strategy for the Indian market?
Aulbur: There is a clear cultural reason. India is a country of many cultures. In terms of consumption patterns, probably north Indians are closest to the Chinese and Russians in that they have a good sense of self and… they like to drive cars corresponding to that sense of self, which is very good for us. The west [of India] is somewhere between the north and the south. The southerners typically are very conservative. You will have a man walking into one of our show rooms in a white cotton shirt, white cotton trousers and chappals [or sandals], and he potentially has hundreds of millions of U.S. dollars, but may still just buy two i20s rather than a Mercedes-Benz.
Knowledge at Wharton: How do you convince the man in the white cotton shirt and trousers and chappals that there is value in a Mercedes-Benz?
Aulbur: That is an ongoing effort. As Mercedes-Benz, we have one huge advantage: We have been in the country for a long time. Some of the Maharajas and business tycoons have been importing Mercedes-Benzes as far back as the 1920s and some of them have beautiful collections, not just of Mercedes.
The second factor is that [in terms of our own] investments, we have been here for a long time — in 1954 we entered with trucks, in 1969 we entered with vans and in 1994 with our cars. The brand recognition is very high and we see that while the older generation is a little bit hesitant, the younger generation in the south is much more adventurous and they definitely want to have everything and they want to have it now. That cultural change is happening across the country, and it is helping luxury sales in general.
Knowledge at Wharton: How many cars do you sell in India every year?
Aulbur: Last year, we sold 3,625 passenger cars and 240 trucks, and we sold the first 16 buses. These are tiny numbers compared to what is happening around the world. That is why we are confident that with the country’s economic development, with the kind of changes that we have seen — even though there is a slight dip in consumer sentiment — India will be a growth story for the next 30 years.
Knowledge at Wharton: Moving on from Mercedes-Benz to other parts of the auto industry, one car that aroused a lot of curiosity about India’s auto industry [since it was unveiled in 2008] is the Nano. What struck people is not somuch the price point, which is certainly a factor, but that the designers thought differently about the whole concept of the car. Is Mercedes-Benz thinking differently about the way autos are designed and made for India or other emerging markets?
Aulbur: No. In terms of price point and manufacturing, we have very innovative concepts but these are focusing on safety and emissions, not on price, because one brand cannot cover a US$2,000, US$1,500 or US$1,000 car and a US$150,000 car. But innovation is definitely there.
What I find remarkable about the Nano is that it put India on the manufacturing map globally for the first time. Before that, it was just the Chinese. When you thought India, you thought Information Technology; when you thought China, you thought manufacturing. Now we have a very good example of innovative thinking, technology and manufacturing receiving recognition across the globe. That is very good for the country.
Knowledge at Wharton: What is your view of developments in the U.S. auto market?There are lots of questions about the viability of the “Detroit Three” — GM, Chrysler and Ford.
Aulbur: Clearly these companies have had the wrong lobbying policy. They have been pushing the government hard to avoid something that is inevitable. All of us know that global warming is an issue, and rather than tackling that, they have tried to [avoid] investing in fuel-efficient cars.
The second problem of the U.S. automotive industry vis-à-vis, for example, Japanese competitors is the legacy costs… of health care and retirement benefits. That is a significant disadvantage. If you are looking at a car costing US$20,000 and you have a return on sales of, say, 5%, you are really pressing margins with these kinds of burdens.
The third problem would probably be the fact that the Japanese yen has been favorably valued against the U.S. dollar. That again has led to an additional competitive advantage for the Japanese of about US$1,000 per car. These are just ballpark figures. The U.S. industry could have addressed some of these components earlier, and some of them are simply sins of the past that they have to live with.
Knowledge at Wharton: Do you have any thoughts on the bailout versus bankruptcy debate?
Aulbur: This is a decision that a government has to take because of the relevance that these big automakers have for not just the U.S., but also the world. All the suppliers are interconnected — 50% of the suppliers working for GM, Chrysler and Ford are alsoworking for Asian and European manufacturers. If one of the big U.S. companies fails, these suppliers will get into trouble. I do not think any OEM today has the money to help suppliers on a large scale. Everybody would get into trouble. It is a complicated issue that has national relevance [here in India] and it is not only an economic, but alsoa political decision.
Knowledge at Wharton: Some people think plug-in hybrids might be the solution. Such vehicles are believed to be more energy friendly than the present offerings, which consumers do not seem to want. Is that the way to go?
Aulbur: You would have to look at the whole range of options. One is bio-fuels, whether it is bio-diesel or bio-petrol. The other thing is electrifying the vehicle to make sure that you are emission-free locally. A battery vehicle is nothing more than an opportunity to drive a vehicle with local zero emissions. The important point is then to look at the whole value chain, and tell me how you are going to generate this energy sothat you do not create dirt somewhere else. That is very important.
At some point, we will hopefully alsosee fuel cell vehicles. In 2010, we will have the first fleet of fuel cell B-classes. Hybrids in the U.S. context do not have an advantage as far as fuel efficiency is concerned vis-à-vis diesel vehicles. So just saying hybrids are the solution is simply jumping too short.
You would use less fuel driving a diesel SUV from Mercedes than the Lexus hybrid SUV from the East Coast to the West Coast of the U.S. I’ve heard that if you replace a third of the light-vehicle market in the U.S. with diesel vehicles, you could save the amount of fuel that [the country] imports every day from Saudi Arabia. The impact of fuel-efficient technologies available today in the U.S. is very substantial, and some of these fuel-efficient technologies are not as expensive as hybrids.
Knowledge at Wharton: What do you think of all-electric vehicles like the Tesla, which is an US$110,000 car. Do you see potential or problems?
Aulbur: Every OEM today has to work on battery-operated vehicles. We have a number running in Berlin and Rome, where we have a partnership with energy providers. You see vehicles with batteries around those cities, and you have about 100 charging points to make sure that you can extend the normal reach of a battery-operated vehicle, which typically is 60 to 80 kilometers [37 to 50 miles].
While it is nice for the auto industry to be totally clean, the challenge is to make sure that we have energy generation that is clean along the whole value chain. If you look at India, 60% of our energy is thermal energy. It is high carbon intensity, and as a consequence even if you had only electrically operated vehicles, the impact on the environment would not be as positive as you would hope.