Volkswagen's India Strategy

For all the talk about companies coming to an emerging market like India and setting up shop, no one has been more passive aggressive then the Volkswagen Group. VW is most famously known for its Beetle – one of the best selling cars of all time at over 21 million units. In a bid to move beyond the Beetle, VW in the 90’s started to acquire many brands and their complete portfolio is quite impressive: Audi, Bentley, Bugatti, Lamborghini, SEAT, Skoda and VW. The VW Group also owns 49.9% of Porsche and set to take 100% ownership in the near future. The linkage between VW and Porsche goes way back, VW was founded by Ferdinand Porsche. Then Ferdinand went on to start Porsche where his son created the iconic 911. Even today the bonds are strong, the Porsche Cayenne and VW Touareg share the same chassis (platform in car speak).

Long Term Commitment
Enough of the history lesson, back to VW’s big bet on India. VW’s foray into India started in 2001 when it launched the Skoda brand and started selling the Octavia. Around 2007, the VW Group also added Audi, Bentley and VW to their Indian product line. These cars were available by importing them individually, however servicing was always an issue since they didn’t have official dealers on the ground in India. In another sign that VW is here for the long haul it opened a massive manufacturing facility in Chakan (near Pune) in 2009 and spent USD $500 million in the process. Towards the end of 2011, VW will add the high-performance brand Lamborghini to the mix. They will most likely unveil the first Lamborghini showrooms when they ship the highly anticipated fire breathing 691hp Aventador to India.

Breakout Hit
In the 4 door mid-luxury segment, the market leader for years has been the Honda City. The break out hit for VW has been the Vento which was introduced in 2010 and already has beaten the Honda City as the number 1 selling car in that segment. The Vento’s success is a combination of Honda lagging and VW bringing the right product to the market, namely a diesel engine. With petrol prices only going up VW was right to tap into the Indian psyche of affordability. The Honda City has been around since 1998 and all the brand loyalty it built up went down the drain once the Vento was launched and petrol prices started to rise. Honda hit back in early June 2011 with price cuts by attributing it to “cost reduction efforts in the supply chain” which sounded like public relations speak then reality. But it didn’t matter, by then the damage was done and the Vento took the top spot.

Audi’s Rise
Around the world Audi has always been number 3 when compared to the more well known German brands of Mercedes and BMW. However, that is changing in India partly because Audi was able to capitalize on the new designs featuring the “LED eyelids” that are now copied by every other car company. In addition, the Japanese strategy of not bringing their luxury brands of Acura, Lexus and Infiniti to India was a missed opportunity that Audi used towards its advantage. Toyota which has been in India since 1997 has built a large distribution channel and could have easily used that existing network to seamlessly introduce the Lexus brand but failed to do so. Lastly, Audi got some great mileage with their feel good advertising campaign featuring cricketer Ravi Shastri. Ravi was shown sitting on an Audi 100 on the cricket field when India won the World Championship of Cricket in 1985 where he was selected as the man of the match (most valuable player). Obviously it was unplanned and Audi capitalized on the imagery.

Market Segmentation
Possibly the only issue with the VW Group’s arrival into India is their market segmentation for their brands. When Skoda first came to India, it’s reputation in the Western European countries was not very high and thought of as a sub-standard product. However, under the VW umbrella it slowly upgraded its perception and in India it’s often thought of as a premium brand. Many consumers gravitate towards the  Skoda Superb who want luxury but want to “fly under the radar” and not appear to flashy. With the arrival of Audi and VW the lines of market segmentation have started to blur. The Audi A4, Skoda Superb and VW Passat are all very similar and in fact share the same chassis. And therein lies the problem, if a consumer wants to spend Rs. 30 lakhs on a car which one – A4, Superb or Passat?

Summary
Overall, the timing of VW’s entry into India couldn’t have been more perfect as other competitors have been busy with their own problems. The American automotive giants are dealing with their domestic demand issues. The Japanese automakers are taking a very slow approach to India when it comes to their luxury brands – Acura, Lexus and Infiniti.  Lastly, the German automakers Mercedes and BMW have been battling for the top spot for number of cars sold in India. BMW took the crown with over 6,200 cars sold in 2010, which is a very small piece of the overall Indian car market. Since the VW Group has many brands and able to target a much wider audience it will most likely lead overall sales in the years to come.

The above article was syndicated on VCCircle.com.

Entrepreneurial Excuse #8

Recently, I ran into someone who I have met several times before and we both have a similar backgrounds in the financial markets. He told me he recently left his job and was looking for another place to work. I casually asked him why not start something instead of working for another corporate giant. His response was “he was too young”, I almost fell out of my chair and had brain freeze for a couple of minutes.  I believe I’ve heard all the excuses in the book, but this was the first time I heard that one.

I looked straight at him and said “really, ever heard of Mark Zuckerberg?” I named a couple more people and his response was “in the financial markets I’m too young to start something on my own.” At this point I figured there is no point in mentioning anyone else but I did, I asked him if you knew John Arnold, who left Enron in his early twenties and started what is now one of the larger energy trading firms in the world – Centaurus Advisors. It was pretty clear he was getting all defensive and said “he left Enron, did he cause the collapse?” At this point I just backed down and said “yeah you are right, you are too young.” Not because of his age but his immaturity.

I didn’t mention the other person I had in mind, Barry Silbert. I recently had a chance to listen to a speech he gave at Stanford (via a podcast) and he was really impressive. At 25 years old Barry left investment bank Houlihan Lokey and started selling illiquid assets using nothing more then some phones and an Excel sheet via a firm called Restricted Stock Partners. Now, his firm is one of the most recognized names because when you hear those crazy valuation numbers for Facebook, Barry’s renamed company SecondMarket is behind those transactions.  SecondMarket has become the de-facto platform for Facebook employees to unload their restricted stock options on the partially open market. SecondMarket has created a whole new market for startups that are making money but don’t want to IPO for whatever reasons they have.

Actually, I could give several more examples but there is a bigger picture here. For this young kid maybe being an entrepreneur is not for for him and sometimes I question is it meant for anyone. With all the ups and downs and the constant strain on your health, wealth, friends, etc. Most startups are usually doing 4 things: begging for business, tweaking their product, getting publicity or addressing customer issues. And, those 4 things are not very sexy but once you have achieved your goals all 4 of them make for a great story.

In most instances people feel they are above doing the “messy” work that I mentioned above, such as begging for business. Begging might be a strong word but in essence it means cold calling, going to events where customer might be or giving product demos. I know many people that are working for large companies and they are really good at their job but would absolutely die in a startup and vice versa. I need to realize it’s a choice and it’s not for everyone.

Article on Barry Silbert and SecondMarket in Bloomberg BusinessWeek (link)

The above article originally appeared on VCCircle.com.

Can 12 Digits Save the Poor?

Over the past couple of years an initiative by the Government of India has been gaining momentum which could have far reaching implications for its residents. In early 2009, the Unique Identification Authority of India (UIDAI) was setup to issue universal ID’s (UID), they have called the program “Aadhaar” which means foundation or support. However, most people still refer to the program as UID. This is the one rare initiative from the Government of India that excites me because it could help the people that need it the most – the poor.

Currently, most government aid programs are pilfered so heavily that at one point Rajiv Gandhi famously said only 15% of the benefits reach the poor. The Public Distribution System (PDS) distributes subsidized food and non-food items to India’s poor via a ration card that is issued. However, the ration cards get duplicated and “ghost” accounts are created, then the food is taken and sold on the open market. Even before the food gets to the recipients there is “leakage” all along the supply chain – transportation, warehouses and government officials.

The aim of Aadhaar is to create a central database and provide proof of identity when using government services. Aadhaar will be technologically advanced in that it will be a combination of a person’s iris scan, fingerprints, photo and optionally include demographical information such as age, sex, address, father, mother, etc. With an iris scan you can be sure that only the receipt of the food or cash-subsidy is receiving the benefit and not a middle man, which is often the case today. Aadhaar has an ambitious goal of issuing 600 million numbers in the next 4 years. The Aadhaar number will be 12 digits long and oddly enough there is no card, it’s a piece of paper with a number. Users would authenticate their identify via fingerprints and an iris scan hence no need for a smart ID card. Aadhaar will be useful in 5 areas – 1. food distribution via PDS; 2. National Rural Employment Guarantee Act (NREGA) ; 3. health services; 4. education; and 5. financial services. Number 5 excites me the most since it might put an end to the poverty tax that so many citizens of India face on a daily basis.

The poverty tax is everywhere if you are poor in India.  If someone wants a loan they can’t goto their local bank because they don’t have the required documentation, which leaves them to the loan sharks where the interest rates charged would bring a tear of joy to any investment banker. When you receive money from someone you can’t put that into a bank account so you lose out on the interest that you might have received from a bank. If you receive a pension, you might have to pay a “fee” to the clerk to speed up the transaction. Same issue with food, subsided kerosene, government jobs, etc…if you want something you have to pay a fee.  That fee hurts more if you earn less and hence it’s called the poverty tax.

Financial institutions are thrilled at the prospect of Aadhaar because they can start to market their products to potentially 600 million new customers. With the large number of mobile phone users it also means that banks don’t have to setup branches in every corner of the country, they could use the mobile phone to keep track of balances instead of the old school passbooks. Near-field communications (NFC) is probably a couple years away from being adopted by the mass market but that is potentially another game changer in the way people transact in India.

Aadhaar would also streamline the plethora of numbers that many middle class people need to keep track of. If you are a taxpayer and an investor you might have several numbers such as PAN for taxes, TAN, TIN, MIN, DIN and folio numbers for investing in mutual funds. The reason for multiple numbers is because each group has a vested interest in keeping their numbering system because it creates jobs for them and more importantly they have access to the money flow. Knowing where the money is coming and going is a source of information that can be used against an individual.

For Aadhaar to work it needs to be made mandatory, currently it’s optional and that might be more of a political move. If Aadhaar was mandatory on day one then people would jump to the next logical step – using Aadhaar for voting. And changing anything to do with the voting process would absolutely disrupt the status quo and would be shot down by politicians in a heart beat. However, once end-users start craving for the “optional” Aadhaar then nothing would stop its mass adoption which would make it mandatory in the end. The second thing that needs to happen is that Aadhaar should be an acceptable form of Know Your Customer (KYC), this would help financial institutions, mobile phone providers or really any one that needs to authenticate an individual for a companies product or service. Since the government would have validated someones identity then why go through the process again, this would also lower the acquisition costs for companies and allow them to provide “no frills” type services.

Facebook Connect in the virtual world has turned into the de-facto standard for identify, whereas Aadhaar has the same potential in the real world for India. Aadhaar could be the catalyst to open up many more markets for companies and also bring products to a set of customers that have previously been excluded from financial services.

The above article was syndicated on VCCircle.com.

Update:
June 4 – View a quick 10 slide summary about Aadhaar (via SlideShare)
May 18 – India’s Poor Yet to Reap Full Benefits of Its Anti-Poverty Programs (World Bank report)
April 30 – India’s $9 Billion Jobs Program Fails its Poor (WSJ link)

The Customer is King

I recently read through “Delivering Happiness” by Tony Hsieh who started Zappos.com, the worlds largest shoe store, and it surprised me how quickly the company multiplied around a simple decision – be customer focused. It’s almost cliche when a company says they are customer focused or care about their employees however at Zappos it’s genuine.

At one point within the company they were debating whether to outsource customer service, but they decided it was a core function of the company and that should never be outsourced. That decision is what defines Zappos today. It’s not some new technology they created, it’s not some cool application they coded, it’s just basic customer interaction in helping a customer with their buying needs.

Have you heard this story before? I have, it’s called Nordstrom. Nordstorm is a large department store chain in the US that was known for their customer service back in the day (I don’t know about today, have not visited in years). Like Zappos they also wrote a book documenting their path called “The Nordstrom Way to Customer Service Excellence.” In one story, a customer wanted a refund for tires that were bought.  The salesperson refunded the money to the customer even though Nordstrom does not sell tires.  I’m guessing the salesperson figured they could take the tires to the actual store and get a refund and then payback Nordstrom. I’ve noticed more and more companies emulating the Zappos model in the apparel vertical including Bonobos. They have a heavy internet presence but if you need assistance you can call them on the phone and talk to a “customer service ninja” who can guide you through the process.

As I mentioned before Zappos was looking to outsource their customer service department and of course India was at the top of the list.  If Paul in the US can help a customer at $15 an hour, then someone named “Paul” in India can do the same thing much cheaper, it’s all about labor arbitrage. So naturally you would think Indians living in India would have access to amazing customer service everywhere…WRONG.

It’s almost a given that you can expect poor customer service in India, whether it’s a store, restaurant or your mobile phone provider. I believe it’s because there is so much pent up demand that these companies are just trying to scale to meet the demand.  At some point when the market is saturated you will see companies offer true customer service.  In the meantime the companies that are providing a high level of customer service are growing exponentially such as Flipkart.  Flipkart is what happens when Zappos meets Amazon, they are an online bookstore with excellent customer service. I swear by them, I might goto Crosswords to browse books but I usually end up going online and buying them from Flipkart.  I recently order a book on a Monday night and by Tuesday evening I had it in my hands…that customer experience just blew me away.

I would love to see a company like Bonobos or J. Hilburn start in India, considering India has such a rich textile history. Imagine the customer service they could provide by sending a “tailor/ninja” to the customers house, take measurements and then show various fabrics available. Then come back a week later for a trial fitting and then deliver the final product in a couple weeks. This would also solve the issue I always hear from entrepreneurs that getting commercial space in Bombay is very expensive and throws every business model out the window.

Honestly, there is no excuse for an Indian company to provide sub par customer service today.  With all the technology that is available via forums, Facebook, Twitter, help desk software, blogs, podcast, etc…you can constantly stay in touch with your customers and find out if they are happy or have issues. By getting a customer addicted to your customer service you have locked in a customer for life. Granted you might end up targeting early adopters but these same early adopters will tell all their friends and family about their experience just like I did with Flipkart.

The above article has been syndicated on GQindia.com and VCCircle.com.