Pune/Mumbai: Following a spat with its international partner Suzuki Motor Corp., German car maker Volkswagen AG wants to introduce more small cars in India on its own to increase market share.

The Volkswagen Group India, which sells the premium Volkswagen, Audi and Skoda cars in the country, wants to more than double market share to 11% in four to five years, said John Chacko, the group’s chief representative in the country.

Volkswagen AG Polo car model. Photo: Bloomberg

India’s 2.5 million unit passenger car market expanded by more than 25% in the past two fiscal years but is expected to slow down to single digits in the year to March 2012 due to an economic slowdown.

Two years after launching its compact car, the Polo, Volkswagen plans to introduce another compact car, Volkswagen Up, next year that will be priced below the Polo. It is also considering bringing the Skoda Citigo to India.

“The way things are being played out in the volume segment, is very interesting," Chacko said.

“But we are not even present there. So any step into the future means we have to enter this segment, otherwise there’s not much scope of being further competitive," he said.

The re-think of Volkswagen’s India strategy has been prompted by its tie-up with Suzuki, which owns Indian market leader Maruti Suzuki India Ltd, going astray, an analyst said.

“The tie-up would have offered Volkswagen an automatic advantage as they would have got a strong local partner in Maruti Suzuki," said Colin Couchman, a European automotive analyst at IHS Automotive, a sales forecast and market research firm, in a phone interview from Germany.

“The Indian market is skewed towards low-cost cars while Volkswagen’s expertise lie in the premium cars. The (market share) target looks ambitious," said Couchman.

Volkswagen and Suzuki formed a tie-up in December 2009 to bolster Volkswagen’s presence in India for small cars and give Suzuki access to latest hybrid and diesel technology. But Suzuki now wants to end the partnership.

Chacko admitted Volkswagen is a late entrant in India’s intensely competitive small car segment. A number of auto makers have been launching low-priced small cars that account for 70% of total car sales.

Car companies have been slicing the segment by launching models at varied price points. Hyundai Motor India Ltd launched the Eon this month to take on Maruti Suzuki’s largest selling model, the Alto. Honda Siel Cars India Pvt. Ltd launched the Brio in September at a higher price, its first bet in the entry level compact car segment.

Competitiveness will depend on localization, which brings down costs, Chacko said. The company hasn’t localized the engines and gearbox, the most expensive units.

“The right thing to do is to make further investment into the segment and we then have the chance of solving some of the cost issues we have at the moment," he said.

However, investments in Maharashtra, where the group is based, will depend on the state government’s policy on value-added tax (VAT).

“We shopped around before setting up a base here. While we have held our promises in terms of investment and employment generation, they (govt) are not," Chacko said. The Chakan factory was set up with an investment of Rs3,800 crore and employs 2,500 people.

Maharashtra may soon withdraw a notification that restricts the benefits of VAT refunds to consumers in the state and excludes those sold to the distribution and sales arms of car makers, Mint reported on 10 August. The state government is yet to take a decision on the matter.

An executive at a rival firm said Volkswagen has been more market savvy and flexible in its approach to the Indian market than some rivals.

“They have also managed to expand sales and distribution network at a much faster pace. We consider them a very strong competitor, " the executive said on condition that neither he nor his firm be named.