India’s luxury car market set for explosive growth

There is no big jump in the country's economic growth in the last couple of years. Macroeconomic data is also indicating the same. In this backdrop, what factors will drive the growth of the luxury car market in the country?India is one of the fastest growing economies in the world. The GDP growth rate is in the excess of seven per cent. Not many countries can boast of such an economic growth. Of course, India had also gone through difficult times. But the growth is back now, though not yet completely. Also, we see a lot of positive reforms being initiated by the central government. These reforms obviously send positive signals to the investors, pay dividends sometime in future and will encourage market growth. For us, India offers huge growth potential.

It’s only a question of time when the tipping point will come and the luxury car market here will explode. Today, the luxury car market constitutes just one per cent of the total car sales in India, which is miniscule by global standards. Mass purchasing of luxury cars will start in the country as and when the middle class starts earning more. I can’t tell you whether it will happen in five or ten years. But it will certainly happen in future. Therefore, we have to set the foundation right and ready for the explosive growth.

So, we are not unduly worried about the kind of market share we have now because the overall pie is very small. We are interested in the bigger cake that’s going to be there in future. Also, we are not in a wait-and-watch mode as the market grows by itself. We are here to shape the market expansion and make the cake grow bigger through our initiatives. So, we are fairly optimistic about the development of the Indian car market and also the premium car market.

You talked about the reforms that are being implemented in the country. Which of the reforms that impressed you the most?
First of all, it’s a great achievement for India to have the GST (Goods & Service Tax). It’s probably the biggest tax reform the country ever had. It’s going to a ground-breaking change and will simplify the tax processes. Most importantly, the GST will turn India into a single market – a good development for all the companies. But the key aspect is going to be what GST rate the government will decide.

There are ample indications that luxury cars will attract up to 40 per cent tax in the GST regime. Will such a high rate adversely impact your prospects here?We had a long discussion on the GST rates in SIAM (Society of Indian Automobile Manufacturers). Of course, we - SIAM members – had lot of differences initially. But we have arrived at a consensus on what we want. The industry body is pitching for two rates – one for small cars at the standard GST rate of 18, 20 per cent or whatever it will be. All other cars which are bigger than four meter in length should be taxed at a maximum eight per cent higher than the standard tax rate. That could be 26 or 28 per cent.

But the government is planning a cumulative tax rate of around 40 per cent on luxury items which obviously include luxury cars. The proposed tax which includes additional cess will also be levied on demerit or sin goods such as tobacco products. How do you react to such proposal?That’s what we are fighting against. Such a high rate is not acceptable.

Why should we be put in the same category as tobacco products or bad things? We are manufacturing our products here. We are creating jobs and adding value to the Indian economy. Also, we are bringing in new technologies and environment-friendly practices. We feel it’s not fair if we get penalised and taxed the same way as the tobacco products. Therefore, we are completely aligned with SIAM which has requested for just two tax rates for the automobile industry. Moreover, tax rates for electric and hybrid cars should be fixed less than eight per cent.

Some of your competitors like Audi and Mercedes-Benz have come out with more number of affordable luxury cars. What’s BMW India’s strategy on this?We already have affordable luxury cars in our range. But we also look into the overall cost of ownership. Lots of people are scared of buying luxury cars as they fear about aftersales costs. Traffic is challenging in India and you never know what will happen to you car. Therefore, we are creating peace of mind schemes so that people will know upfront what will be the costs of maintenance four or five years down the line.

What is your strategy for the two Telugu states of Telangana and Andhra Pradesh?India is a very fragmented market. One needs to have local sales representation as a lot of growth is happening in tier 2 and tier 3 cities. We are opening additional sales facilities in such cities. But such facilities have to be tailor-made for India. As far as the Telugu states are concerned, we already have two outlets – one each in Hyderabad and Vijayawada. We are planning to open more outlets.

Indian luxury car market has been going through a fast-paced churn for the past few years with three German giants - Mercedes-Benz, BMW and Audi - vying with each other for the top sales slot. BMW, which drove into India in 2006, went on to become the top luxury car brand in India within a short span of three years in 2009, replacing a well-entrenched Mercedes-Benz. However, BMW's span at the top was short-lived as Audi overtook it in 2013. But, Mercedes-Benz reclaimed the No 1 position in luxury car sales after a gap of seven years in 2015, indicating how intense the competition is in the country’s luxury car landscape.

Despite such a competition, penetration of luxury cars in India is miniscule, accounting for just one per cent (about 37,000 units) of the total annual car sales. India offers huge growth potential for luxury cars as the current penetration levels are very small compared to China and other global markets. It’s just a question of time before the luxury car market explodes here. And we are gearing up for that explosive growth,” Frank Schloeder, President (Acting), BMW India Group, told P Madhusudhan Reddy in Pune earlier this week. Excerpts: