VW’s Indian Small-Car Plans Stall

MUMBAI – After years of planning to enter India’s low-cost, small-hatchback segment, Volkswagen India and SkodaAuto India suddenly decide to delay two model launches by two to three years.

VW’s Up! and Skoda’s Citigo, based on the same platform, were part of VW’s plan for a new family of small cars. Their scheduled display at the New Delhi auto show in January was called off at the last minute, and their 2012 launches now are on hold.

The auto makers either are unwilling or ill-prepared to enter this market just now. The reasons for the reversal of plans are many – some of them real, others perceived.

VW fears entering the entry-hatchback segment now might create problems for the auto maker.

“Immediate entry in the low-cost segment might compromise quality and safety of the vehicles,” says John Chacko, VW Group India representative. “Operating margins (are) so thin that it was difficult to make money in small cars.”

The Up! and Citigo were to be launched as minicars with five seats, measuring 12 ft. to 13.3 ft. (3.6 m to 4 m) and engines no larger than 1.2L, qualifying them for the lowest tax bracket. Prices were set between Rs300,000 to Rs350,000 ($5,000 to $6,000), compared with compact-car prices ranging from Rs400,000 to Rs750,000 ($8,000-$15,000).

Up! was to be placed below VW’s compact Polo hatchback, and Citigo’s niche was to be below Skoda’s similar Fabia. That was the real concern of VW management, which worried the low prices and lower positioning might erode the brand value the auto maker so patiently has built up.

Jurgen Stackmann, SkodaAuto India board member and director, says the auto maker is interested in the segment, but notes, “The Volkswagen Group cannot enter the lowest part of the industry.”

VW sells seven models in India: the Polo 4-door compact hatchback, Beetle 2-door premium compact, four notchback sedans and an SUV. The auto maker neither believes Up! fits within this portfolio nor that Citigo matches Skoda’s upmarket repertory of Yeti, Laura and Superb sedans.

An unstated reason for VW’s withdrawal is a serious rift with Maruti Suzuki. Their mounting differences and allegations exchanged in public have precluded cooperation in sharing small-car technologies and small diesel-engine development. By exiting from its commitment to Up! and Citigo, VW is concentrating on what it knows best: upmarket cars.

So the auto maker’s game plan seems to be buying time, not rushing to launch the small hatchbacks and focusing on leveraging investments already made. “We are studying and analyzing the super-compact segment dominated by Maruti, Tata and Hyundai,” Stackman says.

VW also is aware of the recent trend toward smaller sedans and SUVs being redesigned to fit the small-car definition that would place them within the lowest tax bracket of 12% under the government’s new budget. So it chooses to wait.