Aim to achieve 90% localisation in long term: Kodumudi of Volkswagen India

Even as luxury car makers are increasing efforts to localise their cars, foreign car makers in the low-cost segment are also increasingly sourcing their components from local players to cut down on costs. Mahesh Kodumudi, President & Managing Director, Volkswagen India, tells Dipak Mondal of Business Today about the company's localisation efforts in India.

Q. Volkswagen has recently said that it is investing Rs 1,500 crore in India for localisation. What are your localisation plans?

A. We had announced the Rs 1,500 crore investment back in 2014 for various purposes such as localisation and new projects to be executed over the next five to six years. This will be a phase-wise investment and the first part has already been done for the engine assembly plant that was inaugurated in January 2015. The investment in this assembly plant was about Rs 240 crore. We are locally assembling our 1.5-litre TDI engines which contribute towards increased localisation.

At the moment, we are operating at about 82 per cent localisation at the Pune Plant (excluding engines and gearboxes). Our long-term goal is to achieve the level of 90 per cent, which is a sustainable level of localisation.

Q. What is driving localisation and on what factors does the extent of localisation depend?

A. Localisation is necessary for a sustainable business case as it brings down the cost of production and helps the company in becoming cost competitive in the market. Additionally, a higher localisation level reduces the volatilities associated with a fluctuating currency.

When Volkswagen entered the Indian market in 2009, the localisation level stood at approximately 40 per cent and over the years it has been increased to about 82 per cent now (excluding engines & gearboxes). This increase was a result of efforts taken by the company along with local suppliers. We are still working on increasing our localisation at all levels.

Naturally, the cost of production of components and eventually the car reduces with higher volumes. Hence, the level of localisation also depends on the volume of production.

Q. What are the local components most commonly used in foreign cars?

A. Most of the parts and components that go into building the Polo, Vento and the Skoda Rapid with the exception of the petrol engines, gear boxes, electronic components, and certain components for which technology does not exist in India, are locally produced in India by Indian suppliers. Certain key components of the 1.5-litre TDI diesel engine (that is being assembled locally) such as the turbo charger, connecting rod, etc. are locally produced in India. For example the turbo charger comes from Honeywell's local production plant in Pune.

Q. In terms of cost of production and affordability, how does localisation help?

A. Localisation helps bring down the costs of components in two ways - first, the cost of production in India is lower as compared to other regions such as Europe and second, taxation on imported components increases their base value itself. This makes even more sense when you have larger volumes of production in that particular market.

How big is the high tariff on CBUs a factor for going for localised components?
A CBU attracts over 100 per cent basic import duty - this makes the cost of the product more than twice its actual price. Naturally, this makes it logical to localise the car. This could be full manufacturing of the car locally or assembling of car locally with parts and components purchased locally and from outside India.  

Q. What are the challenges that you faced in increasing the use of local contents here?

A. To produce top-class cars, the company requires top-class parts from the best suppliers available. When Volkswagen entered the Indian market in 2009, the big challenge was to identify and develop a local supplier base that could provide the right quality components to meet the stringent technical specifications of the VW Group.

Over the last few years, Volkswagen India has taken great efforts in developing the local suppliers to a level which is widely accepted in the Volkswagen world. In fact, these suppliers are not only supplying to the Volkswagen Pune Plant but are also able to export their products to our other companies around the globe.

One more challenge that we face is more related to availability of raw materials than the suppliers themselves. Certain parts require certain raw materials for construction to fulfil the Volkswagen requirements and these are not always available in India.