How Mercedes Benz's strategic patience made it India's largest luxury carmaker

The gamble has long paid off and today, Mercedes has emerged as India’s largest luxury automaker. In 2023, Mercedes Benz India sold over 18,000 vehicles compared to some 14,000 by BMW and around 8,000 by Audi in India. “I think with experience, we have gained a lot of insights into the market and the consumer,” Iyer says.

Last month, the company launched two models, the sedan, Mercedes-AMG S63 E Performance ‘Edition 1’ and the Mercedes-Maybach GLS 600 SUV. The AMG S63 E Performance is priced at Rs 3.3 crore, while the GLS is priced at Rs 3.35 crore, in a country where the per capita disposable income stands at Rs 2.14 lakh or about 1/15th the price. The two launches are part of 12 launches planned for the year, of which more than 50 percent will be in the top-end vehicle segment.

In that, also lies the journey of the transition underway at Mercedes, from chasing volumes in the growing luxury segment to now focusing on what it likens to tapping the top of an inverted diamond. “The growth over the last 15 years, from 3,000 units to 18,000 has come with a lot of India-specific moves and we are trying to slowly grow and cultivate the market,” says Iyer.

In all, Mercedes sells a little over 2 million cars annually, of which India only offers a minuscule fraction. The country is currently the fifth largest in the Asia Pacific region and is expected to emerge as the third largest in the region, overtaking the likes of Turkey and Australia as wealth in the world’s fastest-growing economy surges.

“Mercedes has consistently launched new models tailored to Indian preferences and market conditions,” Harshvardhan Sharma, the head of auto retail practice at Nomura Research Institute tells Forbes India. “The strategic local assembly of key models has made them more affordable. There are also their customer-centric initiatives, such as flexible financing options, buyback schemes, and robust after-sales service that have built strong customer loyalty.”

Going all out

Since it set foot in India in 1994, Mercedes has seen its fair share of ups and downs.

It dominated the luxury market in the early part of the millennium, largely because foreign luxury brands stayed away from the country, and Mercedes remained aspirational for a new generation of Indians who had begun to prosper under a new economic policy. Then, with the onslaught of BMW and Audi, Mercedes fell far behind in customer preferences. The automaker had fallen to the third spot in the luxury vehicle market in the country in the early part of the last decade. “When I joined this company, we had new rivals in the marketplace and we were slipping and then we slipped to number two and then three,” Iyer, who joined Mercedes in 2009, says.

Iyer had come to Mercedes after stints at various multinational automakers including Ford, Toyota, and Yamaha. He had also briefly dabbled in an entrepreneurial venture while in Nepal before his return to India. When he joined Mercedes, Iyer was put in charge of marketing functions, a role that he says expanded over the past decade into numerous segments such as spare parts and customer service. In 2023, he was made in charge of Mercedes Benz India, the first time that an Indian took over the reins of the fabled automaker in the country.

“I don't think I am a CEO for Mercedes Benz India because I'm an Indian,” Iyer says. “Nationality brings a lot of local knowledge, but the company believes in meritocracy. Last year more than 50 percent of my attrition was to Mercedes Benz companies, whether it is in Stuttgart, Singapore, Malaysia, or Thailand.” Mercedes Benz India operates with over 1,100 employees in India, which includes workers at the plant in Pune.

Since he joined the company, Mercedes has seen its sales grow from about 2,800 vehicles per annum to a little over 18,000 vehicles. And, at the centre of that surge is the company’s decision to focus heavily on India-centric vehicles in addition to setting up a non-banking financial company, which has played a crucial role in purchases. “So, it's a combination of the car-specific products that we have launched and a combination of unique financial service offerings, a different direct-to-consumer retailing model, and what we are doing in local manufacturing,” Iyer says. 

Diesel cars contribute 55 percent of sales

And there is still a lot to play for in the Indian market, considering how the luxury market is only anticipated to grow in the coming decade. The Indian luxury car market is expected to grow from $4.14 billion in 2022 to $7.38 billion in 2029, growing at a CAGR of 9.74 percent according to market research firm Mordor Intelligence. Much of that is led by growing urbanisation and changing preferences in the country.

“The Indian luxury car market is estimated to be around 1 percent of the total car market, but it has been growing steadily,” says Sharma of Nomura. “The market size is expected to reach around 50,000 units annually soon. With increasing disposable incomes, urbanisation, and a growing appetite for luxury goods among the younger demographic, there is significant growth potential for Mercedes.”

Also read: Bad roads, good places, great cars: Luxury SUVs go off the road

The India tweaks

Today, the company’s best retailing model is the E-class sedan, a sixth-generation version of the E-class that was first introduced in 1953 and came to India.

Launched in 2017, after some 48 months of development, India was the first country where Mercedes offered a long-wheelbase right-hand drive variant. “India has a lot of backseat dedication,” Iyer says. “A lot of consumers drive cars on weekends, but on weekdays they still have drivers because of parking issues or long commutes, and we completely recognise that. India was the first and the only market in the world to have a right-hand drive, long-wheelbase E-class.”

That car today is the largest-selling car in Mercedes Benz India’s portfolio and the success is a clear indication of product strategy influencing sales volume growth. Others, including BMW and Audi, still do not have a similar option.

That apart, the company has also been dabbling with numerous tweaks for the Indian market including options to switch off its ADAS features, a standard offering globally, considering the sensitiveness of the Indian road and traffic conditions. The automaker was also the first luxury carmaker to offer connected cars in the country, and now boasts some 80,000 connected cars on the road.

But a game-changer of sorts has been on the financing side. Forty percent of Mercedes Benz cars sold are financed by Mercedes Benz Financial Services. In all 80 percent of the cars sold by Mercedes Benz is through finance. “We have a unique financial product because the customer doesn't have to pay for the full price of the car,” Iyer says. “We take a residual value guarantee on a portion of the car and only on the balance, the customer pays an equated monthly installment for 3 years, and at the end of 3 years there are options for refinancing the car or selling it back to us.”

In the process, Mercedes has also been actively playing a role in pushing the price of its second-hand cars in the country. Take, for instance, the Mercedes Benz GLC. In 2020, ahead of Covid-19, the GLC 200 Progressive variant cost Rs 52 lakh in New Delhi with the on-road price at around Rs 60 lakh. Four years later, the new variant of the GLC now costs Rs 77 lakh, with on-road prices going up to over Rs 90 lakh. That’s a price hike of Rs 25 lakh in four years.

The rising prices have also meant that those looking to buy an older version of the Mercedes GLC today inevitably must cough up similar prices to the selling price in 2020. For the seller, the loss isn’t as heavy as it used to be in the past. For instance, on OLX Auto, a 2020 version of the GLC now averages around Rs 50 lakh while a 2021 variant now sells for over Rs 55 lakh.  

“The residual value of a product is determined by the desirability for the brand and the product,” Iyer says. “So, the fundamental responsibility for us is to keep that desirability high for the brand and for the product as well. Secondly, we are not into the discount route. This is a fundamental strategic difference compared to many other players in the market, which also means that you guard the resale value of the customer who is buying the car.”

“Higher new car prices can positively impact the residual value of used Mercedes vehicles, making them attractive in the second-hand market,” says Sharma of Nomura. “However, it could also push some potential buyers towards certified pre-owned vehicles instead of new purchases.”

Over the past few years, the German luxury automaker has also pivoted to a direct-to-consumer sale model which allows customers to buy the luxury vehicles directly from the brand rather than going through the dealer partner. This is in stark contrast to the existing system, where car manufacturers first sell their products to the dealers, which in turn retail the cars to the end consumers.

“The customer doesn't get transparency on price because two dealers in a market can operate at different pricing based on discounts on their targets or their inventory,” Iyer says. “This was affecting residual value and purchase experience. What we have done is a paradigm shift.”

“Mercedes has consistently launched new models tailored to Indian preferences and market conditions,” says Sharma. “The strategic local assembly of key models has made them more affordable. Additionally customer-centric initiatives, such as flexible financing options, buyback schemes, and robust after-sales service, have built strong customer loyalty.”

E class is the largest selling vehicle in their portfolio

Growing well

All that means, the automaker has had a few good years now. “Our average selling prices have gone up,” Iyer says. “We used to operate at an average selling price of Rs 57 lakh pre-Covid-19. Today we are at Rs 89 lakh, and I think the most critical aspect is the right mix of cars. The company’s current portfolio includes sedans across A, C, E, and S Class while its SUV range boasts the entry-level GLA to the GLS, which starts at Rs 1.3 crore. There is also the Maybach, Cabriolets, and Coupes.

“We are selling more top-end vehicles,” Iyer says. “Earlier the contribution of top-end vehicles was 15 percent. Today 1/4th of our sales are top-end vehicles pushing average selling prices higher.” SUVs today contribute 55 percent of the brand's total sales, with about 56 percent vehicles sold being diesel. Electric vehicles account for 4 percent with petrol vehicles contributing to the rest.

In the process, the Indian retail price is also inching closer to the global average selling price of a Mercedes which stands at roughly $105,000, or around Rs 89 lakh, pulling India into a mature luxury market. Much of that obviously has been due to the changing demographics with more women and young buyers in the market. “Earlier, 7-8 percent of our sales used to be women, Iyer says. “Now, it's 15 percent. When I look at salaried class, it used to be 7-8 percent and now it has gone up to 12 percent which means corporate India is earning and distributing well.” Today, the average age of a Mercedes Benz buyer stands at 38 years.

This year, the company will spend another Rs 200 crore on expanding business in India, taking its total investments in India to Rs 3,000 crore so far. The company has also decided to follow a tactically flexible approach when it comes to electric vehicles as customer preferences and market conditions are likely to determine the pace of transition. The automaker had earlier announced a pullback on its electric vehicle targets globally as rate of growth slows down. EV transition has seen something of a slowdown in India too in the past few months as charging infrastructure struggles to cope while hybrids have begun making inroads.

“From a strategic perspective, it's not the volumes but the quality of the market development that we are very positively happy about,” Iyer says. That means focusing heavily on what it calls an inverted diamond. “At the top, it is much bulkier. And as it goes down, it is much more pointed. So that's a global strategy. We are a luxury brand, and we need to behave like one and act like one. Our shareholders expect more value to our consumers with a focus on the top end of the pyramid, the core luxury than on the entry-luxury.”

From introducing luxury to upping the game, Mercedes has done it all in India in three decades. If history is anything to go by, it’s only likely to remain the gold standard in the Indian luxury automobile world for years to come.