Foreign Luxury Cars: Picking Up Speed in India

Ankit Mehra stops in front of a Tata Nano and waits for the crowd to clear. When it thins, the 22-year-old M.B.A. student aims his camera phone at a neon green model of the world's cheapest car and takes a photo. Mehra sees the appeal of the small, sleek car that has gained almost celebrity status in India, but his heart is set on something a bit grander in the New Delhi Auto Expo showroom — the upmarket Audi Q7. (Watch a video on owning a Nano.)

Not long ago, the only time luxury-car brands like Audi or BMW made an appearance in India was in movies or at auto shows like this one. Not anymore. As the economy has grown, so has India's appetite for luxury automobiles, making it an important target for foreign automakers looking away from Western markets mired in global recession and whose streets are already bumper to bumper with cars. "India is one of the markets of the future," says Paul Blokland, managing director of Segment Y Automotive Intelligence, an automotive-consulting firm based in Goa, India. "Manufacturers are looking for new growth markets. They're not going to find that in Europe, the U.S. or Japan." (See the 50 worst cars of all time.)

What automakers have found in India is a country just entering the age of motorization, where still only 1% of the 1 billion–plus population owns a car. Although India trails the world's largest emerging car market — China — its sheer size gives it untapped potential that carmakers can't ignore. A decade ago, Mercedes-Benz was the only luxury-car brand in India. In 2006, BMW opened up shop, and it was soon joined by Audi. Though high-end business still only constitutes 0.5% of the overall Indian car market, the brands are already selling more cars than in smaller countries like Malaysia and Thailand, where Mercedes and BMW have been active for 50 years. (See pictures of the best-selling cars in China.)

The numbers in absolute terms remain small: only 9,000 of the 1.8 million cars sold in India last year were luxury vehicles, but so far the slow and steady approach is paying off. "For all of these companies like Rolls-Royce and Lamborghini, sales have exceeded expectations," says Blokland. "They're all very happy with the sales they've done here."

Tapping into India's car market has always been a challenge for foreign automakers. Despite India's blistering economy, manufacturers have discovered a historic preference for cars that are small, fuel-efficient and cheap. The sensation that is the Nano is well-known; its unveiling two years ago at the New Delhi Auto Expo by Indian automaker Tata captured the world's imagination and further focused attention on India's growing role in the global car market. To be successful in India, small-car manufacturers have had to tailor their product to Indian tastes and conditions. When General Motors launched a new small car called the Chevy Beat in New Delhi last week, the company "Indianized it," says Karl Slym, president and managing director of General Motors India. That meant toughening the car's suspension to deal with erratic road conditions. It also meant accommodating a slightly different driving style. "People like to drive away quick [from traffic lights]," says Slym. "They don't like anyone to get in front of them so your transmission has to allow you to move away from the lights quickly, but also has to allow you to drive in traffic in second gear." (See GM's great hopes for 2010.)

Foreign luxury-car manufacturers, however, have vowed not to change their product and have faced unique challenges trying to get a foothold in the market. With few open roads to hit, but plenty of traffic jams to navigate, Indian consumers, unlike their Chinese counterparts, often opt for function over form. Those who want a stylish ride pay for it dearly: import duties of more than 100% essentially double the sticker price of all foreign cars. To get around that, BMW and Mercedes assemble some of their models locally, cutting the taxes in half. When BMW first arrived in India, it discovered that the customers who could afford a luxury car were not used to going out of their way to buy it, says Peter Kronschnabl, president of BMW India. In the past, a car would be sent to the home of a prospective buyer, who would decide by the look of it in the driveway whether to purchase it or not. So the company began investing in a larger network of dealerships, opening 18 showrooms around the country to woo potential buyers.

Because having a hired driver is also common practice among India's socioeconomic élite, BMW also had to change its sales pitch to suit a buyer who might never even sit in the driver's seat. "When we get in contact with a customer, we show the backseat as well," says Kronschnabl. "We don't only focus on the driving experience because the [hired] driver experiences the driving; the owner experiences the backseat." Because the backseat rather than the driver's seat is a big selling point, unlike in most markets, bigger and more expensive BMW 5 Series sedans outsell the more affordable, smaller 3 Series models. This flexible approach has paid off for BMW, which finished the year as the top seller of luxury cars in the country. The competition, however, is good for everyone, says Kronschnabl, who expects the luxury market will more than double in size by 2015. "There's still pent-up demand," he says. "Everyone's growing, nobody's losing."

See the top 10 everything of 2009.