August 1, 2012: Peter Honegg, CEO & MD, Mercedes-Benz India

The B-class marks a new chapter for Mercedes in India. How do you plan to position the car?
Indeed, it is a new chapter and we are stepping into a new segment of around Rs 25 lakh for the first time. The B-class is what we call a sports tourer, spacious and sporty but we do not know yet the Indian consumer’s reaction to it. By bringing the B-class, we are bringing a new car concept into the market. We are sure it will be a success. This will be followed soon by all the other members of the family.

When do you plan to locally assembly the B-class?
There are two issues. Firstly, the infrastructure. The second is how fast I can get the cars in a knocked-down version. There’s a challenge here as there is a huge demand globally for the car. The B-class is made at Rastatt (Germany) and at the recently opened factory in Kecskemet (Hungary). Demand is exceeding production capacity by 50,000 units. We have to convince HQ to give us CKD kits. From that perspective, it’s difficult to five you an answer, but in normal circumstances it should be available as locally assembled within one or two years.

You said you will look at the long-term picture and not at the numbers game. But invariably, people end up comparing the Big Three in the luxury car segment in numbers. How does that affect you?
It affects the way people see the brand, but it’s not an apples-to-apples comparison. If one considers the segment comprising C, E, S and M-class, we are clearly leading. This is the luxury segment and there is no doubt about it. When you add the X1, or the Q3, an equivalent to which I don’t have, it’s a different story. We do internally, as our competitors do, say there is a luxury segment and a premium segment. The B-class is in the premium segment. If you add premium and luxury models, it (the current pecking order) is right. My existing customers of the S-class and E-class are the most loyal globally. In India there may be 10-20 percent who may shift. My challenge is with the new customers. More and more of them are coming. They also build a perception, and that is the challenge. Everything plays a little bit of role, which is why we have started to communicate more about how sporty we are. We are going to MTV, to Hard Rock Café rather than an opera. We are looking at new ways which no one expects from Mercedes. I am not in the numbers as I don’t have my portfolio. Let’s have a level-playing field and then talk about the numbers game. I wish to have both (volume and profitability). But the priority is profitable growth.

Your current plant in Pune was designed to produce the entire range of Mercedes cars. How are you going to utilise it, going forward?
Yes. We have even extended that. I recently inaugurated the new paint-shop with an annual capacity of 20,000 units. Our installed capacity is 10,000 units. Our plan for the next 8-10 years is to ramp up to 80,000-90,000 units annually. With a third shift, the paint shop can reach 30,000 units in a year and with a little bit of investment we can go to 40,000 units. We can expand as we need, up to 90,000 units per year.

Will the B-class meet your profitable growth strategy?
We are driving at the edge of profitability. It is still profitable, but it is nothing to write home about. We are willing to swallow nearly all of the profits of Mercedes-Benz India and in Germany, but profitability of the dealers will not be compromised. We have launched a petrol version knowing that we will not have queues in our showroom but it is better to launch it now and get the feedback we need.

There are talks of diesel prices being deregulated. If that happens, petrol may not be a bad option. Will it?
Selling a petrol car is complicated. Customers who buy petrol cars drive 10,000km while the diesel car customer drives 16,000km. We explain all the real-world calculations but the customer is not ready to buy a petrol car even if it is the cheaper proposition! If I cut petrol cars today, and the diesel excise duty goes up then the demand for petrol will go up. We can go the other way around. The surprises in India are on a daily basis!

Currently, what portion of your sales are petrol?
It’s gone down from 30-40 percent when I came (to India) to 10-15 percent now.

The mass market players are struggling with the volume factor but is it the same concern that a premium carmaker has?
We should have certainty in the long run. In the last Budget, the excise duty revision killed a few of my product launch plans. The government requires us to homologate the cars which takes nine months. We wanted to bring in the CLS diesel, or the R-class diesel. I have to produce the car, homologate it and get an okay from Germany to get the R-class diesel. The current R-class is not selling because it is petrol. We already have cars produced; then suddenly the excise duty goes up, making a car that otherwise would have cost Rs 65 lakh suddenly cost Rs 80 lakh now. We need reliable, long-term strategies.

What are the challenges you face in such a situation?
We bring in some niche CBU models which sell, say, 50 units a year. If the game changes, then you have those many cars which are unsellable. Then there is the diesel issue. To change the portfolio to diesel took us a year. Germany plans three months of production and that cannot be changed, then there’s the shipment time and other factors.

In eight years or so, you want to sell up to 90,000 cars annually?
We have a clear strategy from our board which tells us that in 2020 we want to be back at No.1 globally both in profitability and numbers. We cannot achieve that without being in a leading position in India. My task is to lay a strong foundation for the right portfolio, the right partners, and the capacity and portfolio that will be right for 2015-16 and then we should compete for the number one position.

By 2020, what is the kind of volume you expect in the India’s luxury segment?
Predictions done in December 2011 suggest that the Indian car market will be between 8-11 million units by 2020. The luxury segment will account for one percent of that. India sold 2.3 million cars last year, out of which 23,000 were Mercs, Audis, BMWs and Jaguars. We know that in China when they started 10 years ago, the luxury segment was four percent of the market, which is much higher now. We don’t expect the luxury segment to grow very, very fast, but definitely much faster than the normal segments. Let’s assume a market of eight million by 2020. The luxury segment can be expected to be between a realistic two and four percent which is 240,000-300000 units. That will be divided between Mercedes, Audi, BMW, Jaguar, Volvo and maybe a Japanese player too. I want to have a market share of 20-25 percent or 50,000-60000 units. I want to be able to do ten times what I am doing today.