International auto majors, who have been speeding into the rapidly growing Indian automobile market in recent years, are trying innovative strategies to expand market share and boost sales. Many are now setting up finance subsidiaries that offer loans to consumers, institutional buyers and even dealers. As in many other markets, a majority of vehicles – two-wheelers, passenger cars and commercial vehicles – that are sold in India are bought by consumers with automobile loans. About 75 per cent of cars in India are bought through loans, whereas the figure for commercial vehicles is as high as 90 per cent. International auto manufacturers, including Volkswagen, Mercedes, BMW and Toyota – all with significant operations in India – have decided to set up their own financing arms here to provide a fillip to sales.
The auto-loan business in India was worth around US$6.7 billion last year, but the finance crunch has led to a sharp decline in funds available for the business. German auto major Volkswagen, for instance, recently set up Volkswagen Finance Pvt Ltd, a fully-owned subsidiary, to offer financial products not only to the consumer, but also to its channel partners, including working capital for its dealers. The new subsidiary will also cater to consumers and dealers buying or selling other group brands, including Volkswagen commercial vehicles, Audi and Skoda models. It will also tie up with other domestic financial institutions and insurance companies to increase market penetration. “It was necessary to establish a financial arm in India to support the VW Group and its brands in the best possible way and to generate synergies between the manufacturer and the consumer,” remarks
Oliver Schmitt, managing director, Volkswagen Finance. “This is happening in most of the places globally where we have production facilities. It has turned out to be a successful move.” The German auto major is investing US$730 million in a new plant – with a capacity of 110,000 vehicles per annum – near Pune, which will becme operational this year. The company will also begin importing light commercial vehicles over the next few months. Schmitt says the new finance firm –which could be upgraded to a non-banking finance company (NBFC) later – aims to capture a 10 per cent market share in due course. According to him, it was the right decision on the part of the group to set up a finance arm in India, especially with the Pune plant likely to start rolling out
vehicles later this year. Skoda Auto, part of the VW Group, which has done extremely well in India, is leveraging its Volkswagen connection and has announced a tie-up with Volkswagen Finance to offer loans to potential buyers.
Thomas Kuehl, sales and marketing head, Skoda Auto, says the company will include insurance and maintenance in the loan package and also do away with the initial down payment to those opting for a car loan from the new subsidiary. “We are looking at developing our sales and service network through Volkswagen Finance,” says Kuehl. “We will provide loans at affordable rates to our distribution channels to support our brands.” Another German company, Daimler Auto, which is in the high-end commercial
vehicles segment, is planning to set up Daimler Financial Services to help sell its premium range of commercial vehicles,
almost 90 per cent of which are sold through auto finance. Daimler has set up a 60:40 joint venture with Hero Motors, called Daimler Hero, for the manufacture of commercial vehicles. The new plant near Chennai, with an initial capacity of 70,000 units, will be ready by next year. “We want financing options for our prospective customers in place by the time we launch our products in the market,” explains Suhas Kadlaskar, director, corporate affairs, Mercedes-Benz India. “Daimler Financial Services is obviously one of the options.” Daimler AG is the parent company of Mercedes-Benz. According to Joachim Schmidt, head, sales and marketing, Mercedes-Benz India, having a finance arm helps since it is flexible unlike banks, and helps in trades and swaps. Daimler’s main rival in the commercial vehicles segment, Volvo India, is also considering setting up its own finance arm.