Riding into the diesel storm

A new pecking order could come into force in 2016, as luxe car brands Mercedes, Audi and BMW rework their strategies to combat a changing environment

As the Supreme Court and the National Green Tribunal (NGT) usher in radical reforms to clean the capital's air, marquee luxury car brands like Mercedes-Benz India, BMW, Audi and Jaguar Land Rover are being forced to rethink their strategies on product portfolios and affordability. Of these, Mercedes appears to be the worst hit as nearly half of its brands in India come under the ambit of the ban on registration of diesel vehicles with engines sizes more than 2000 cc. All eyes are now on the luxe car maker and what it will do to keep its top spot in the Indian market.

Mercedes was the first among the three German luxury car makers to establish base in India in 1994. In 2009 BMW India dislodged Mercedes from the No.1 position, and by 2012, Audi had claimed the No.1 spot. Mercedes went into an overdrive and launched 15 cars in 2015, reclaiming the top slot for itself.

However, around 10 of the 24 Mercedes models currently on offer fall under the ban. Together these models account for nearly 70-75 per cent of total Mercedes's sales in Delhi, while the rest comes from petrol models. The Delhi-National Capital Region (NCR) market accounts for nearly 20-25 per cent of total India sales.

For Mercedes it has been an uphill climb to number one and it has done so primarily on the back of its diesel-powered vehicles. In 2015, when the Stuttgart-based company clocked the best ever January-September sales of 10,079 units, its SUV portfolio grew by 70 per cent beating its sedan segment growth of around 39 per cent. Encouraged, Mercedes brought its highest selling SUV globally, the GLE, to India in October 2015; little did it anticipate the ban and the Court's directive.

Roland Folger, managing director and CEO, Mercedes-Benz India said, "Our product initiatives remain unchanged for 2016 and we don't envisage any major alteration." He further claimed that Mercedes has been the only German luxury car maker to post consecutive double digit growth figures for the last three years. "We have almost doubled our sales volumes from 2012 to 2015 and also almost equaled the entire 2014 CY's volume, in the Jan-Sep 2015 period, itself," Folger said.

The ban will also hit Audi and BMW. BMW, in fact, draws most of its sales from its diesel cars, with the M Series petrol cars being very expensive (Rs 1.2 crore and above). However, as a BMW dealer pointed out, only 3-4 models are impacted as most of its popular cars are below 2000 cc. Audi India too might have some respite as its top-selling models sport sub-2000 cc engines.

Abdul Majeed, partner, PwC India felt, that in the long run, Mercedes will have to revisit its India strategy. "There could be a blanket ban on diesel vehicles, and this means that Mercedes has to be ready with a petrol portfolio. In the short-term, however, they could focus on the smaller cities and other major metros that have not been affected by the ban. Another option is to look at India as an export hub," he explained. Mercedes has already opened dealerships in Dehradun, Raipur, Bhopal, Indore etc.

Majeed further cautioned, while the current ban is till March 31, what's more significant for all luxury car brands is the Union Budget. "If it raises taxation, these brands would have to rework their entire strategy of making the cars affordable," he said. A leading Mercedes dealer said that as of now there has been no move to initiate feedback from the dealers on the upcoming portfolio. "One immediate thing for the company would be to focus more on the Mumbai market, which actually sees nearly 50 per cent of its sales come from the petrol variants," he added.

Mercedes feels that it can switch between petrol and diesel engines as its partner Force Motors (that assembles Mercedes engines) has a flexible line. The ban, however, may impact future investment plans.

Is it time that Mercedes brings in its electric and hybrid cars? Folger thought otherwise; "We still think the Indian market is not completely ready for any hybrid models or electric cars." He added that the company has a host of vehicles running on alternate fuel and could be brought in any time. "Whenever we think the market is ready for such vehicles, we will be ready for an India debut," Folger said. Analysts feel that with diesel's growing disrepute, the time may arrive sooner rather than later.