VW to BMW brace for tough India market even after India-EU trade deal

European carmakers, squeezed by US tariffs and price wars in China, will get a welcome boost from an India-EU trade deal that sharply drops import duty on cars, but face a tough market dominated by homegrown firms and compact Japanese cars.

The Volkswagen Golf GTI, which recently went on sales in India as an import. (Handout)

India and the European Union are set to sign a trade deal today, which includes a clause to cuty import duty on European cars to 40% from as high as 110%. The move is seen as the biggest opening yet of the world's third largest car market for the likes of Volkswagen to Renault and BMW.

The move, however, only edges the door open, analysts said, with local car brands and Asian rivals from Japan and South Korea dominating the market.

“It's a start. When we talk about exports from Europe, it's only about premium cars. For the volume sector it is difficult,” said Stefan Bratzel of German auto research group CAM, who said Suzuki and Hyundai had understood the Indian market better. “In India it's about cheap, reliable, stable cars. The Volkswagen Group cars have been too expensive. Suzuki has benefited from the kei cars which are highly popular in Japan.”

The likes of Volkswagen to Renault and BMW hold less than 3% share of India's car market, according to industry data. The South Asian country's car market is dominated by Maruti Suzuki India Ltd. and homegrown brands Mahindra and Mahindra Ltd. and Tata Motors PV Ltd., which together hold two-thirds.

India has the world's third-largest car industry after the US and China, but its 4.4 million cars/year market has been one of the most protected, with current levies of 70% and 110% on imported cars.

“India is a dynamically growing market and of considerable strategic importance to the Volkswagen Group,” a spokesperson for the carmaker which controls Audi, Porsche and Skoda said, adding it would look at the business impact from the trade deal.

Mercedes-Benz said reduced tariffs should boost carmakers from both regions. BMW declined to comment.

Warburg Research analyst Fabio Hoelscher said a cut to 40% would make luxury European carmakers more competitive.

“The biggest winners versus before are brands like Porsche who import their entire portfolio as completely built units,” he said, though he cautioned the move would take time to boost profits, while ongoing US uncertainty would temper shares. “After that, in the medium term, there is potential to expand local manufacturing.”

Prime Minister Narendra Modi's government has agreed to cut the tariff rate on a limited number of cars from the 27-nation bloc with an import price of more than €15,000 (~ ₹16.5 lakh), two sources briefed on the talks told Reuters. This will be further lowered to 10% over time, they said.

ING Research analyst Rico Luman was bullish, saying that an India-EU trade deal “could turn into a significant opportunity for European carmakers” in the medium run.

“The Indian car market is still in the early stages of maturing, which means there is substantial growth potential,” Luman said.