VW urges Indian supplier innovation

Despite the ongoing global slowdown and resulting difficulties facing the automotive sector both internationally and domestically, German carmaker Volkswagen is very optimistic about the long term prospects of the Indian automotive market. In fact India has emerged as a strategic market for the Volkswagen Group, which currently sells cars under the VW, Skoda and Audi brands in the country.

The company’s growth strategy for India includes developing products especially for the local market, local production and high levels of local content. To achieve these goals, VW has set up teams of experts in India, in areas like research and development, quality control and procurement to understand and implement the requirements of the Indian market. Volkswagen also views India as a future vehicle export base for its global markets, particularly in the small car segment.

According to its estimates, the Indian passenger car market will grow by over 165 percent from 2007 to 2018, making it the fastest growing market in the world, with annual sales of 3.2 million cars in 2018. This would result in a compounded annual growth rate of 9.3 percent, which is significantly higher than most other markets around the world.

VW’s stated objective is to become the favourite premium car brand in the country and towards this end it has been implanting a top- down model introduction strategy. The first VW model to be launched in India was the Passat premium saloon in 2007, followed by the Jetta saloon in the entry luxury segment during 2008.

Next year VW will launch its made-for-India Polo model in both hatchback and saloon versions and this is the model it is counting on to boost volumes in India. To gear up for this launch, the company is also rapidly expanding its dealer network in India, from just 15 dealers last year to around 120 dealers by the end of 2011.

While the Passat and Jetta models are currently being assembled from CKD kits at the VW Group plant in Aurangabad, the Polo will be made at a brand new manufacturing plant at Chakan near Pune. This facility, which is nearing completion, will have a capacity of 110,000 units per annum and production of the Skoda Fabia is expected to begin here in the next few months.

Set up at an investment of Rs 2,300 crore, the fully integrated manufacturing plant will have its own press shop, body shop and paint shop as well as assembly lines for the Fabia and Polo models. It will also incorporate every aspect of the Volkswagen Production System, Quality Management Systems and Lean Manufacturing and Logistics principles.

Developing Indian supplier base

Another key element of VW’s growth strategy for India is the development of Indian suppliers to ensure high levels of local content in its future models right from the start of production. This would help VW exploit the capabilities of the local supply base, maintain competitiveness and avoid high import duties, while simultaneously lowering logistics costs. Aside from supplying to its local operations, these suppliers would also have the possibility to supply its global operations and VW plans to utilise stringent criteria while selecting world-class suppliers in India. According to Mahesh Kodumudi, executive director – Corporate Purchasing, Volkswagen India, “Indian suppliers have excellent capabilities in terms of manufacturing and hold outstanding potential to explode into the international markets. Once they learn how to manufacture a product, by and large they do a fantastic job of producing consistent quality products and also implement quality systems quite rigorously.”

Globally the VW Group has more than 3,500 suppliers who operate from over 8,500 production sites, employing over one million workers and supplying over 250,000 different types of components. In India, the comprehensive localisation strategy includes close coordination between VW’s headquarters in Wolfsburg, Germany, and its India office in Pune. Among the various elements involved in this process are product development, project management, joint research work, feedback to suppliers, supplier development and certification and finally testing and validation work on the parts themselves. Kodumudi says, “There is a significant engagement with suppliers in India and we are going deep into the supply chain and putting a lot of effort behind this initiative.”

In terms of the type of parts being procured from India, Volkswagen is concentrating on metal parts for the vehicle chassis and body, as well as plastic parts for the interior and exterior trim. It is also looking at sourcing some engine and transmission parts from India. The company is also encouraging its suppliers to set up operations near its Chakan plant, in order to reduce transport costs and simplify logistics. Until September last year, out of the 62 suppliers selected for the upcoming Fabia and Polo models, half of them will set up production facilities near the Chakan plant.

As for its global operations, VW is looking at small, high-value components, including metal and plastic parts, as well as more advanced components like turbochargers, water-pumps and injection systems.

Discussing the criteria used to select suppliers, Kodumudi adds, “We look at the whole range of capabilities including world class quality and delivery, competitiveness in terms of total cost of ownership and technological capabilities and the capacity to innovate.”

However, VW believes Indian suppliers need to improve their product innovation and development skills, as well as manufacturing process innovation. Volkswagen plans to source several hundred million euros in components from Indian suppliers over the next few years.

However, Kodumudi says: “Indian suppliers must learn to innovate at low cost if they want to move up the value chain and become global partners to manufacturers like Volkswagen.”

Looking ahead, the growth potential for Indian suppliers to Volkswagen is clearly huge, provided they think and act innovatively while also meeting the company's tough cost and quality standards.