In an interview with FE’s Vikram Chaudhary, Roland Folger, managing director & CEO, Mercedes-Benz India talks about expectations from the upcoming Union Budget, GST and the outlook for 2017.
Established in 1994, Mercedes-Benz India pioneered the luxury car market and is today the largest luxury car player in the country. Despite market challenges in 2016 – first the Delhi NCR diesel ban and then demonetisation – it crossed 13,000 units in annual sales for the second year in a row (13,231 units sold in the January to December 2016 period). The company, whose guiding philosophy for 2017 is ‘One Team, One Goal’, saw strong growth in the SUV segment, which grew by 20% in 2016, with the GLE emerging as the highest selling SUV in its portfolio. Also, the C-Class sedan remained the highest selling Mercedes-Benz model. The company today has 89 outlets across 41 cities, which is the densest network among the luxury car market.
Roland Folger, managing director & CEO, Mercedes-Benz India, says that 2016 was a year of challenges, but despite that the company made the best of the opportunities. “We remain bullish on our outlook for 2017, and will continue with our customer-centric initiatives, which are instrumental to our success in this dynamic market.” In an interview with FE’s Vikram Chaudhary, he talks about expectations from the upcoming Union Budget, GST and the outlook for 2017. Excerpts:
What are your expectations for the auto industry in general and for luxury car players in particular from the upcoming Union Budget?
The auto industry has taken a hit in 2016, due to factors like demonetisation and the eight-month-long diesel engine ban in the Delhi NCR market. The customer sentiment is yet to pick up and the government needs to create demand to revive the auto industry, in general.
The support for the luxury car segment, in particular, will be required more, considering it comprises 1.3% of the entire passenger vehicle industry. We would expect that the government expenditure should create a ‘multiplier effect’ in the overall economic system and should be able to create some demand. It is also expected that further measures would be taken for a smooth transition from the current tax system to the GST system of taxation. There lies an opportunity with the government to use the GST implementation, to create some incentives for the luxury car industry as well, and help it grow. We firmly believe GST implementation is an opportunity, and the government should use it to move forward and provide incentives to manufacturers who have been investing locally into new technology and plans to introduce products which are environment friendly. This would also expedite introducing Bharat Stage VI norms well in time.
We also strongly feel that the excise duty rates need to be rationalised for a higher growth of the luxury car industry in specific. In fact, rationalisation of excise duty would expand the base of the luxury car industry in particular, and help in generating higher revenue for the government.
Mercedes-Benz India had earlier stated that “it can bring in models with alternative drivetrains including plug-in hybrids and full electric vehicles from its global portfolio.” However, currently, customs duty is charged at a high rate on the import of even electric and hybrid vehicles. Should the government change the customs duty structure for environment-friendly vehicles?
Globally, we have a comprehensive portfolio of both plug-in hybrid and electric vehicles, and Mercedes-Benz aims at emission-free motoring by introducing highly environment-friendly vehicles. However, we estimate it will take some time before such environment-friendly vehicles are locally produced in India at a large scale. To reap the benefits of environment-friendly vehicles early, it is necessary that customs duty rates be reduced and some incentives are provided to manufacturers to encourage making of such vehicles. The end-customers should also be incentivised for using such vehicles to make them more popular.
However, it is not only about lowering the customs duty alone to pave way for such vehicles, we also need proper infrastructure in place to ensure successful, large-scale introduction of plug-in hybrid and electric vehicles. We need a holistic approach towards introducing such vehicles in India.
If the government finally lowers the customs duty on the import of environment-friendly vehicles, which all models from your global portfolio are likely to be launched in India?
We have to wait and watch what would be the government’s policy on this front. Accordingly, we will shape our product strategy.
But does lowering the customs duty on CBU import of environment-friendly vehicles goes against the whole idea of FAME India (Faster Adoption and Manufacturing of Hybrid and Electric vehicles)?
For quicker benefit for introduction of electric vehicles and plug-in hybrids, the custom duty rates need to be reduced first. In the longer run, since these vehicles will be produced locally, it will not be against the idea of FAME, rather it will support it.
As of now, in the GST structure, cars could attract a fixed rate of 28%, but luxury cars might attract ‘additional Cess’. Do you think the suggested GST structure is unfair for the luxury car industry?
It appears to be unfair at this stage, as luxury cars are being clubbed with sin goods. We are investing in our facilities, expanding our retail infrastructure, employing at our factory and at dealerships. We have been making global products in India, and we have been increasing our localisation content, contributing to the economy of the state. Our vehicles are highly compliant and meet all the safety and environmental requirements of the government, by a very large margin. It’s a natural expectation from the government that we should be given some incentive to grow.
The luxury segment, by and large, imbeds better technology and safety features in their products. These technologies then trickle down to mass-market products. Further, with ad valorem tax structure, luxury cars automatically yield higher excise duty to the government. In this situation, it is unfair to tax these with additional Cess over and above the GST rate of 28%.
How much has demonetisation impacted luxury car sales?
We view demonetisation as a short-term pain that can lead to long-term gain. However, one cannot compare demonetisation to the impact that the above-2000cc diesel engine sales ban in effect in Delhi NCR last year had on luxury car sales. And Delhi is one of the most prominent markets for us, contributing 25% of sales. However, the good thing is people have understood that the high pollution levels in Delhi NCR were not caused by cars powered by 2000cc-plus diesel engines; there were multiple other reasons.
Do you see another diesel ban coming?
No. I don’t see a diesel ban coming ‘as the one’ that we had. Anybody would be too embarrassed to bring up anything like ‘above-2000cc ban’ again. However, there could be a ban on diesel vehicles, say, older than 10 years. We would prefer a treatment or a ruling that looks at the specific emission levels of vehicles.
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Will demonetisation impact the way people buy luxury cars in India?
Not at all. It’s not that, overnight, people have gone poor. Yes, buyers have focused their attention elsewhere and demonetisation initially resulted in footfalls going down at our sales outlets, but demonetisation won’t change buying habits of Indians. I must add that December 2016 sales were higher than the same month last year, despite demonetisation effect.
What is your 2017 growth strategy?
We will launch new products across segments, some of which will be without a predecessor. There will be a mix of volume cars and performance cars. We will also undertake the next phase of initiatives in the after-sales domain, including the roll-out of ‘My Mercedes, My Service 2.0’. Service excellence will continue to remain our key differentiator. Creating a novel luxury retail experience across outlets combined with market expansion will drive new customer base creation.