Why Merc Landed In The Ditch In India

THE CUSTOMER

Mercedes is one of the best-known status symbols in the world. It was something the upper-class customer always aspired for. But the car has had an unexciting journey till recently, thanks to a misreading of the Indian customer's needs

When you are targeting the upper reaches of the market with super-luxury goods, you can't afford to get any part of your strategy wrong. You can charge top dollar, but your customer knows he's paying that too. Your customer is demanding, and you can't afford to take him for granted. Even more so if you are selling a high involvement product such as automobiles.

And yet, that is precisely what happened with DaimlerChrysler, makers of Mercedes-Benz cars. The Indian market proved a tough nut to crack for Mercedes despite having all the advantages of brand recognition and high customer esteem. There were no problems with quality. No significant problems with distribution or servicing either. But after an initial surge, sales tapered off and in 1999-00 the company sold all of 893 cars. Clearly, the entry strategy didn't work.

It took Jurgen Ziegler, who has been the managing director and CEO of DaimlerChrysler India Ltd (formerly called Mercedes-Benz India Limited) four years - from 1998 onwards - to set things right. In May 2002, as Ziegler moved back to Stuttgart, DaimlerChrysler's home base in Germany, he had the satisfaction of knowing that his company is now back on track, working with renewed optimism. After racking up accumulated losses of Rs 300 crore in its first three years of operations, the company managed a net profit of Rs 20 crore in 2000 and Rs 41 crore in 2001.

Why did DaimlerChrysler falter and fall in India initially? And how has it picked itself up after becoming a BIFR case? To be fair, none of the foreign car manufacturers in India can claim to be in clover. But Mercedes Benz plumbed the depths in terms of underperformance. Its initial failure in India offers a textbook case of how multinationals can misread new markets.

THE INITIAL PLAN

Operating from a plant in Pimpri, on the outskirts of Pune, Mercedes' entry into India was a huge gamble. As Ziegler himself admitted two years ago, "Mercedes-Benz came into the country when the premium segment was non-existent." The company was thus faced with a challenge and an opportunity: to create a segment that would give immense returns in the long run.

Mercedes-Benz kicked off its Indian rally with the launch of the E-class (W124) series. It came with a sticker price of Rs 23 lakh. The car may not have been super-premium in its global portfolio - actually it was about to be replaced by the W210 series - but was certainly more expensive than anything available on the market in India at the time.

Now consider the market in which this car was about to be launched. The total car market was small at 2,64,803 units. Market leader Maruti Udyog sold nearly 1.99 lakh units - 80 per cent of these sales were accounted for by small cars retailing at Rs 2-3 lakh apiece. The domestic auto market was barely getting behind the wheel of mid-size cars such as the Daewoo Cielo (retailing at Rs 5 lakh) and the Peugeot 309 (priced between Rs 5-7 lakh for petrol and diesel versions).

In short, MBIL had to create a market segment where they didn't expect any comptetion whatsoever for many years to come. And they had a brand that didn't need any hardsell, even in a developing market like India. "But," says Bijoy Kumar Y, editor, Business Standard Motoring, "luxury car buyers remained timid. It was almost like a sin to buy a car that cost Rs 23 lakh on the road in those days."

This was reflected in the figures. In the year of launch, the novelty value for a new car usually leads to some surge in sales. Consider the Cielo and Peugeot, which were launched in 1995. In that fiscal, they sold 9,045 and 10,301 cars respectively. Mercedes was launched in February 1996. In the first full year of its launch, it had managed to sell only 1,885 cars ­ way behind the target of 20,000 cars (half of which was to be exported).

This was hardly a surprise. At Rs 23 lakh, the price tag was too steep. Analysts claim that buyers were ready to pay between Rs 10-15 lakh for the luxury that Mercedes had to offer ­ and that this was certainly a market waiting to be tapped. Ziegler admits as much. "It was not a wrong judgement of the potential of the Indian market, but an overestimation of the consumer's willingness to buy," he says. Adds Bijoy Kumar, "Maybe Stuttgart wanted to stretch the life of the W124, which was very popular in eastern European markets and desperately wanted a production base for it."

Indeed, former employees who were associated with the launch say that the initial demand estimation was made on the assumption that the C-class, which would have cost Rs 3 lakh less, would be the first model to hit Indian roads. The W-124 series was, in fact, something of an afterthought because Mercedes was unsure of demand ­ in a way, it had underestimated its brand equity in India. But Ratan Tata, chairman, Tata group, a large stakeholder when Mercedes set up base in India, owned up responsibility for the decision to bring the W124 to India, while speaking to the media during its launch.

THE GAMEPLAN

According to industry analysts, the thinking went like this. If Mercedes was to produce the C-class with a lower price tag, the volumes would have had to be increased substantially. This would have called for a larger commitment from Mercedes, both in terms of investment and a bigger plant, which it reportedly wasn't ready for.

The W124 series appeared a safer bet. As a launch pad, it had the Mercedes exclusivity to offer. And at Rs 23 lakh the company could afford to work with lower volumes. The company had good reason to believe that it had selected the most appropriate car for India. At that time, the W124 series, powered by a 2200 cc petrol (E220) and 2500 cc diesel engine (E250D), was one of the most successful models worldwide, selling more than 2.2 million units.

Analysts say Mercedes-Benz probably thought that size mattered most to the Indian consumer. The E-class was longer and wider than the C-class saloon. Though this strategy made sense on paper, it didn't work on the roads, mainly because Mercedes-Benz underestimated the premium Indian buyer. Even as it introduced the W124 (also called E 220 and E250D) series in India, new versions of the E-class - the W210 series - were ready to roll out from plants in Germany. As a result, affluent and prospective Mercedes buyers in India, who were conversant with international trends, probably felt they were being given hand-me-downs.

Imported car buyers also shunned the Indian-made Mercedes. Imported car dealers in India usually sell one to two year-old used cars of international manufacturers like BMW, Toyota and Mitsubishi for Rs 12-16 lakh. Many felt that at Rs 23 lakh, they would rather buy the latest model of an imported car.

The W124 was clearly not delivering value at that price tag, and this put Mercedes in a bind. Its market was clearly a niche one ­ corporate chiefs and film stars ­ so there were limits to how far it could garner the volumes needed to scale back the price. Says an analyst, "For any car manufacturer to make an impact in India, it will have to reduce costs to bring in the volumes, and for volumes to grow, costs will have to be kept under control ­ a chicken and egg situation."

How did Mercedes go so badly wrong? The company reportedly saw some homogeneity between the Indian market and markets in China and Brazil. While they patronised domestic cars, there was a growing market for the foreign name plate. Says Bijoy Kumar, "Mercedes could have entered the Indian market via the 'approved used car' route, the way they did in Sri Lanka, but government regulations prevented it."

The car-maker also did not consider the peculiarities of buying patterns in India. For any purchase above Rs 15 lakh (like real estate), high-net-worth Indian buyers tend to pay partly in cash. Obviously, Mercedes-Benz could not allow this. So its inability to "undervalue" a new Mercedes proved to be a deterrent for purchase. (Ziegler says that with lower rates of income tax and the simplified process of tax administration, this is no longer a hurdle.)

Sales of the brand new Mercedes-Benz suffered due to its rapid rate of depreciation. A two year-old W124 series was available in the used car market at half the price of a brand new model ­ much faster than the rate of depreciation that was being accounted for. Ziegler denied this in interviews a couple of years back, but the trade-in-schemes introduced in 1999 speak for themselves.

Under this scheme, Mercedes allowed customers to trade in their old W124 series for new models for an additional Rs 10-12 lakh. The old series which the company acquired was then refurbished and later sold between Rs 15-16 lakh. This helped many customers upgrade their cars. The company claims to be selling 150-200 refurbished (pre-owned) cars a year.

After a brief spike to over 3,000 cars in 1997-98, it was clear that Mercedes was on the wrong track. There were warning signals in a study conducted by a leading consulting firm during a health test of the small car (A-class) in 1997-98. The study showed that a Mercedes-Benz priced between Rs 10-12 lakh would sell 5,000 units every year.

However, if the price was increased to Rs 14 lakh, demand would fall by 40 per cent. If it touched Rs 15 lakh, demand would drop to negligible levels. Ziegler said that the study did not have any relevance as Mercedes had no plans to launch a vehicle in that price range.

MARKETING GLITCHES

Another area that could have made a difference to its fortunes was the direct marketing plan. Mercedes had set up offices in Delhi, Mumbai and Chennai to contact and service customers directly. This was soon after Mercedes' tie-up with the Tata Engineering dealers was called off in end-1996. Telco, which initially had a 49 per cent stake in Mercedes-Benz India, reduced its holding in the joint venture to 14 per cent. This happened when the Mercedes parent increased its share capital for setting up infrastructure which included establishing the vendor base and dealer networks.

Ex-employees say that the direct marketing effort was haphazardly executed. Prospective customers from the corporate sector, who comprise 70 per cent of Mercedes-Benz India's clients, were not followed up consistently. As for the dealer network, it didn't get activated till as late as February 1998.

Today Mercedes-Benz has 13 dealers and 15 service centres across the country. This is slated to be increased to 15 dealers and 17 workshops by December 2002.

Since 2000, five years after Mercedes set foot in India, the company started showing signs of learning from its mistakes. With the establishment hurdles out of the way, the priority today is to get in the profits to "wipe out the accumulated investments" by 2005. A company spokesperson claims that the company is moving on the right track. It has managed a net profit of Rs 20 crore in 2000 and Rs 41 crore in 2001.

This would not have been possible if Mercedes did not spruce up its fleet. It started in 1998, when it relaunched the E-class with a new body priced at Rs 25.7 lakh. Another upgraded version - with a new engine - was launched in March 2000 for Rs 33 lakh followed by the super-premium S-class in September 2000.

The S-class car brought the first important signal of a turnaround for the company. Priced at Rs 65 lakh, this most expensive car to be made in India notched up bookings of 84 cars - the target for the whole financial year - within a month. Said Ziegler at that time: "The response to the S-class is positively surprising." He said he hoped to sell 100 S-class cars every year.

If the S-class gave Mercedes a fillip, then the launch of the C-class in May 2001 added wings to wheels. A company spokesperson points out that of the 1,456 cars that DaimlerChrysler sold in January-December 2001, 750 cars were C-class. In March, 2002, the company started selling its CBUs (imported completely built units) including the sports convertible (SLK), the luxury convertible (CLK) and the M-class on Indian roads. DaimlerChrysler claims to have sold 34 CBUs already and expects to sell 150 units by the end of the year.

In 2002, the company also launched an enriched version of the E-class with features like a sunroof at a price of Rs 32 lakh. A new E-class car has been unveiled at the Brussels Motor Show this year. Analysts point out that this car could possibly find its way into India in the next six months.

SHIFT IN PREFERENCES

Ziegler believes that recent moves are steps in the right direction. "Market statistics in recent years clearly show the shift in consumer preferences from small cars to semi-deluxe and deluxe segments. More and more consumers are shifting towards contemporary technology, safety and environmental aspects," he says.

Of the 750 cars that Mercedes-Benz sold in 1999, 450 were E-class, 150 were MB vans and 150 CBUs (completely built units which were imported). In 2001, of the 1,456 cars sold, 750 cars were C-class, 500 were E-class, 72 were S-class, and 100 vehicles were CBUs. They say that E-class sales have increased by 25 per cent since the launch of the upgraded versions in 2000. Recent moves have shown that the company has been losing no time in capitalising on market trends. A case in point is the S-class. After noticing that over half its imports were for the S-class, DaimlerChrysler introduced the S-320 into India within six months of its international launch. Also it is looking at the used car market by refurbishing and selling pre-owned cars.

Mercedes estimates an annual demand of 600 cars in this segment. If Ziegler is to be believed, Mercedes-Benz plans to get an even more exciting range of Mercedes and Chrysler products into India over the next three years ­ including a small car. This is courtesy the "Asian car" which is being developed in partnership with Mitsubishi, in which parent DaimlerChrysler has a 34 per cent stake, and Hyundai, in which it has a 10 per cent stake.

In three years, Mercedes also plans to have more than one face in India, with the introduction of its car financing, insurance, fleet management and retail activities under Debis, the services wing of DaimlerChrysler. Ziegler estimates that 70 per cent of the automobile business is from these areas, including after sales servicing.

The company is exploring the possibility of introducing financial and insurance activities in India. In April 2002 the company also tied up with ICICI Bank and Kotak Mahindra for its used car financing. Clearly, after several false starts, DaimlerChrylser is getting its act right. The three-pointed star is beginning to take up the roadspace it was always expected to occupy.

(This article appeared in the June 2002 issue of Indian Management magazine)