LAST NOVEMBER, Priti Gupta of Krishna Automobiles, Chandigarh, a BMW dealer, was busy closing a deal way into the night. The car: a 3 Series Highline. The customer: a bearings maker in his early thirties. “He had looked at Mercedes and Audi,” says Gupta, a gynaecologist-turned-BMW salesperson who has sold some 200 cars in the past four years. “We clinched the deal after a test drive.” The German automaker has been the top-seller in the premium segment for two years—sales have grown 70% annually—and the fastest to hit a turnover of $1 billion (Rs 5,305 crore) in just five years. Mercedes-Benz, BMW’s foremost competitor who’s been in India for 15 years, has slid to second position. Next in line, Audi, is just three years old here.

Mercedes-Benz had entered India as part of a joint venture with the Tatas in 1954 to build commercial vehicles. In 1994, the companies began jointly making Mercedes-Benz passenger cars—India’s first brush with luxury car manufacturing—using Tata’s Pune facilities. Mercedes-Benz set up an assembly line in 1995 and rolled out its vehicles in 1999. That was somewhat appropriate. The rich, powerful, and flamboyant were always associated with the iconic three-pointed star. Remember Qurbani from 1980 where Feroz Khan drives a W-115 Mercedes-Benz? Films consistently showed industrialists in a Mercedes, rarely a Chevy or a Ford. And, when patriarchs such as Rahul Bajaj cruised in an S-Class sedan, it reaffirmed the perception that the Mercedes-Benz was a natural for a wealthier demographic accustomed to the brand for decades. Six years later, the Tatas exited the joint venture.

In a way, Mercedes-Benz’s early start made way for BMW’s run. “BMW had a strong sense of timing its entry. Customers were jaded with Mercedes being the only choice. You already owned a Mercedes, and wanted another car. What’s the choice? Another Mercedes?” says Sumit Bali, director, Kotak Mahindra Prime, an auto financier.

The country was also seeing its nouveau riche grow. According to a Credit Suisse wealth report, India has 34,000 new millionaires in 2011, taking the total population of dollar millionaires to about 2 lakh. Prahlad Kakkar, adman and founder of Genesis Film Productions, says: “With the Mercedes, the mental space says, ‘This was my father’s car. What’s my car?’” Kakkar, who grew up in New Delhi and Mumbai, adds the Mercedes was always the symbol of success and in the India of the 1980s, when nobody made serious money before they were in their late forties or fifties. “The rich guys were all grey-haired.”

Andreas Schaaf, President, BMW India.
Andreas Schaaf, President, BMW India.

To pull off a coup, BMW deftly played its range, price, and brand. It created an image that was younger and more dynamic. With 25 showrooms in five years, (Mercedes-Benz has 22), it outsold competition in two years—considered BMW’s fastest takeover of any market. The result: While Mercedes has sold 30,000 cars in 15 years, BMW has sold 22,852 in a little over four. “Today, the BMW is the car you buy when you’ve arrived,” says Munnu Kasliwal, an eighth-generation jeweller, and director of Gem Palace, Jaipur. Kasliwal does business with the Who’s Who of Hollywood and has worked with the Metropolitan Museum of Art in New York City. He says the brand was more understated in the 1960s and 1970s. “Today, it’s evolved into something of a status symbol with a flashier profile.” A slew of James Bond movies with the legendary spy driving a BMW Z3 in Golden Eye (1995 ), a 750iL in Tomorrow Never Dies (1997), and a Z8 in The World Is Not Enough (1999) has helped push that image.

OFFICIALLY, BMW ENTERED India in 2005, investing Rs 100 crore. Two years later, it built an assembly line for completely knocked down units at Mahindra World City, a special economic zone in Chennai. BMW was hardly new to the country though. In early 1990, it had tied up with a handful of distributors who imported its cars. The experience of these distributors, combined with the learning from watching Mercedes-Benz, shaped BMW’s strategy a decade later.

Sharad Kachalia, director, Navnit Motor, was one such distributor. BMW’s take-away from him—unveil models here within a few months of their global debut. Kachalia says most BMW customers are well travelled, savvy and very up to date. “So, we suggested that the company bring in its fully-loaded models at the same time as they are launched abroad. Take the new 3 Series launch, which is happening in Spain in February 2012,” he says. “It will be in India within two or three months, as opposed to a year or two that other car makers take.” Kachalia hopes to sell 800 to 900 cars in 2011, but he remembers how in 1994, when he began importing BMWs, he sold just 50.

Vinay Sanghi, entrepreneur and founder of e-commerce portal Cartradeindia.com, agrees. “New launches are a broad indicator of increasing sales for luxury and premium cars. The minute there’s a new car launch, say a C-Class or an X1, we see a 50% spike in our traffic.” A lot of premium car buyers who want to spend between Rs 30 lakh and Rs 60 lakh on a car will, in addition to checking with their peer group, invest a lot of time researching features and technology on the Internet. “All [BMW] 3, 5, or 7 Series cars have multiple variants and offerings, which customers want to read up on to understand the differences in technology and price.”

Hormazd Sorabjee, Autocar India’s editor and an automotive enthusiast who owns a Mercedes-Benz and a BMW, says that having been in the business for more than 10 years, “Mercedes got complacent and when BMW entered, it was a rude wake-up call for the market leader who was taking customers for granted”. When Mercedes-Benz came to India in 1995, it sold models older than those running abroad, which were not even fully loaded (the E-Class came with manual seat controls instead of full power adjustment). Since BMW’s entry, Sorabjee says, Mercedes-Benz has been swift to bring in models with the latest technology. However, he adds that one can accuse BMW of “commoditising premium cars, and people see them for the deals and discounts”. The catch: BMW will have to work twice as hard to retain brand loyalty from customers in the future.

BMW has innovated and experimented in a tough market where Mercedes-Benz was satisfied with the status quo. “It was more complicated than other markets because of changing laws and challenging logistics,” says Ian Robertson, BMW AG group board member and global head of Rolls-Royce. (BMW acquired Rolls-Royce Motor Car in 1998.) It may be true. The star has been here longer but didn’t see far enough into the future to gauge that a young population could buy an entry-level model below the C-Class. Industry sources say that within the next 18 months Mercedes-Benz will introduce its B-Class, a compact luxury car that will be showcased at the New Delhi auto expo in 2012. That’s nearly a year after the X1 was launched.

Andreas Schaaf, BMW India president, says Mercedes-Benz had bounced back strongly between April and November 2010, and almost reclaimed its title. “It did not look like we were going to be No. 1 again,” he says. The launch of the X1 boosted sales by 204 cars in December and generated the required headwind to sail past competition by 430 units. Mercedes-Benz India today sells 13 models in 40 variants, BMW India sells 14 models in 34 variants, while Audi India sells nine models in 24 variants.

Peter Kronschnabl, President, BMW Russia.
Peter Kronschnabl, President, BMW Russia.

Mercedes-Benz argues on one point—the difference between luxury and premium. Debasish Mitra, director of sales and marketing for Mercedes-Benz India, says: “We’re luxury. The Benz brand is synonymous with wealth and has an association with luxury.” While the company has offered discounts on the C-Class since it’s being phased out to make way for the new variant, it says it has never stripped down features to compromise with luxury. Mitra also dispels the notion that small volumes mean lack of profit.

Mercedes-Benz sold 20 SLS AMG Gull Wing sports cars priced between Rs 2.5 crore and Rs 3.5 crore since they debuted in late 2010. “We also sold some 40 G-55 AMG sports SUVs priced at Rs 1.3 crore in the past nine months,” he adds. The turnover from just those two translates to about Rs 100 crore or what BMW would generate if it sold 450 X1s which, Mitra says, “Is not a luxury car; it’s premium”.

FOR BMW, BLURRING THE LINE between premium and luxury was just a part of its marketing tack. Aggressive pricing, with discounts thrown in, was an even bigger play. The X1, built on the same platform as the 3 Series, was introduced in December 2010 at a price of Rs 22.4 lakh, making it the cheapest model in the category. Smaller than the 3 Series, the X1 fits the price to size ratio. “As a four-wheel drive, we had to keep in mind India’s narrow roads and limited parking,” says Ian Robertson. The Mini Cooper, set to enter in early 2012, should serve the same purpose.

In early 2010, BMW announced the Executive 3 Series sedan, or the “corporate edition” priced 20% less than the regular 3 Series, for Rs 24 lakh—Rs 6 lakh cheaper than the C-Class. This was great news for consumers who had dreamt of owning a BMW but fell a few coins short, given the 60% duties slapped on models assembled here. As they celebrated, competition baulked, claiming that the model was a “stripped down” or de-contented premium car. The Executive had the same 2-litre diesel engine as the top-end version minus cup-holders, sunroof, leather seats, Bluetooth, and electronic seat controls, features taken for granted in the premium segment. Yet, the manoeuvre worked. BMW logged its biggest ever jump in sales in India in the 3 Series (entry-level) segment, with more than 100% growth to 2,415 cars in 2010, from 1,000-odd in 2009. Today, the regular 3 Series is offering a discount of about Rs 3 lakh while making way for a new version. The 7 Series sedan has a discount of about Rs 10 lakh on it.

“Aggressive prices and marketing gave them [BMW] the push and market visibility,” says an auto analyst. Schaaf dismisses the notion. “The BMW X5 SUV costs Rs 56 lakh, while its counterpart, the Mercedes-ML costs Rs 44 lakh and Audi’s Q5 costs Rs 42 lakh. Our X3 is priced at Rs 48 lakh ... and we started a price war? Nonsense.”

Robertson’s take on price wars and de-contenting is country driven. The 1 Series sales shows that globally 70% were brand new customers and, of those, 60% remained loyal and integrated into the 3 Series and the X3. “But the entry point is vastly different across the world.”

BMW has been looking at Brazil, India, and Korea as strong future markets from the mid 1990’s when, according to Robertson, the BRIKT (Brazil, Russia, India, Korea, and Turkey) was selling less than 10,000 cars. “Today,” says Robertson, “BRIKT does 100,000 collectively.” Peter Kronschnabl, the spry German who took BMW India to the top during his tenure as president between 2006 and 2010, says the focus is on all emerging markets and the board is being regularly updated on any shifts that require changes in strategy. “With emerging markets one never knows when luxury will move to the next level.”

In India, for instance, Kronschnabl says the big debate in 2005 was whether entry-level cars should come with automatic or manual transmission. “We were aware that luxury cars here are driven by chauffeurs used to manual gearshifts.” BMW went with automatics to reduce the pain vibrations of a gear shift cause the rear passenger.

At the same time, since it’s positioned as the automobile for the young affluent, BMW works hard at loading its models with cool features that will appeal to owner drivers. Stuff like the iDrive console—a computer–aided LCD front panel that controls all secondary vehicle systems. Pravash Agarwal, a 37-year-old garment exporter from Kolkata, who decided to buy his first luxury car in March, says: “Mercedes and Audi offered high discounts on the E-Class and the A6. But what got me to sign was the BMW’s response as a driver’s car. It’s the sense of control you get at the steering wheel. With other cars you forget that.” Agarwal, who travels frequently to Germany on business, checked out Audi and Mercedes-Benz internationally and in India before going to a BMW showroom. One test-drive later, he paid about Rs 40 lakh for a jet-black 520d sedan. Prahlad Kakkar says, “People in their thirties pick up BMWs because of the technology. The iDrive make it an easy car to drive oneself.”

Aziz Zaveri, president of Aurogem, a gold wholesaler and one of Kachalia’s first customers in 1995, says: “The duty was maybe twice the cost of the car,” adding that he’s kept the grey 525tds for 16 years since “it’s mechanically sound”, even though he had to do an overhaul of the suspension three or four times. “It’s the steady flow of power, the throaty engine … I can’t drive anything else.”

The way BMW reads India also indicates that it expects larger volumes, buoyed by the launch of its smaller cars such as the X1. “The capacity of the Chennai plant is around 11,000 cars a year on a double shift [Mercedes-Benz’s capacity is 10,000]. And, as BMW’s ‘market entry plant’, Chennai’s capacity is the largest in the group across countries,” says Juergen Eder, managing director of the BMW Chennai plant. Its existing line produces four different models that can be configured, depending on the demand, within two days. “We can start out on a Monday, make a batch of 24 cars that are 3 Series, shift to the 5 Series in the afternoon, the X1 in the evening, and the X5 the next morning,” Eder says. The facility is being expanded to include a second line that will be ready early 2012 and likely support the Mini, but Eder didn’t confirm it.

BMW is also expanding its warehouse in Mumbai to sustain projected sales of cars in 2012. “The facility keeps an inventory of parts and spares, and will be upgraded to a new site that’s four times larger, to about 7,500 square metres” says Schaaf. The current site houses 90% of parts for every vehicle, he adds, pointing out that the highest parts to car ratio is 92% in Korea. “It was about 70% in India 18 months ago.”

Mercedes-Benz isn’t going to be caught napping again. It has invested Rs 200 crore in a new paint shop in Chakan that will be ready by 2012. It will increase the choice of colours and include dual tones. It also plans to add a dozen showrooms and workshops and launch new cars under the C-Class in the next 12 to 18 months. In the interim, BMW plans to increase its number of outlets by 60% by 2012 even as Audi plans to grow its team of marketing, business development, and communications executives, adding 600 employees in 2012 and a half. Regardless of who turns out to be the market leader in fiscal 2012, the following year is wide open.

INSIDE THE INFINITY DEALERSHIP at Worli, Mumbai, the ambience is more art gallery than car showroom. A row of scaled-down “art car” replicas—miniatures of BMW models once “art-jobbed over” by Andy Warhol and Roy Lichtenstein—adorn a pristine, white wall. In the centre is an M engine—originally known as Motorsport and created to represent BMW’s sports heritage—on a white column. The only noise at the no-frills glass-and-steel gallery is of the door clicking shut on the driver’s side of a 6 Series sedan being tested by a 36-year-old customer. He stands transfixed at the sensor mechanism that activates when the door is within 6 mm of the lock to pull it from inside. A white-liveried attendant waits on the customer with a steaming cappuccino.

 Ian Robertson, Member of the Board of Management of BMW AG, Sales and Marketing 
 Ian Robertson, Member of the Board of Management of BMW AG, Sales and Marketing 

BMW has reinvented marketing to the point where customers have been invited to official dinners at workshops in Jaipur, Goa, and Delhi, just to show off how high-end even its workshops are.

Says Kronschnabl: “Showrooms in Pune and Mumbai address India’s lack of premium experience for the customer along the spectrum of after sales, service, test drives, and brand experience. Consultants told us not to invest in upmarket dealerships—‘No one will go there because they get test cars home’. But we didn’t listen”.

Mercedes-Benz has taken its cue. It has upgraded its showrooms to reflect a more luxurious environment and have started using them as venues for car launches—a trend that BMW started. Shaman Motor’s new Mercedes-Benz showroom in Bandra-Kurla Complex, for instance, houses almost half a dozen cars in a row along with accessories, leather couches, and a customer lounge. Audi’s approach is classic in its clean lines and stark architecture with innovative materials and minimal fuss.

Through a marketing lens, all of BMW’s communication is understated, almost subliminal, and focussed on the emotional experience of driving the car. Says Kakkar: “Every message they send out says the guys who sat down and engineered these cars had just one goal: creating a customer experience.”

The experience transcends the car. In 2007, Kronschnabl organised a drive for customers in Aamby Valley, near Pune, where he displayed 48 cars, including a number of imports, so that potential buyers could experience the BMW spectrum first-hand. “Every three months, across major metros, the company and dealers organise national and local events that get owners together for networking, which range from cocktails at fashion shows to golfing tournaments and art exhibitions,” says Christian Saffer, BMW India’s director of marketing. “Our customers are young at heart,” adds Robertson, explaining that the driving force behind such gatherings is to get customers to talk to each other about their experiences and build communities.

BMW may have found a sweet spot which it smartly exploited. But as Kachalia says, “Indians by nature love choices, unlike their counterparts in the West who embrace brand loyalty.” That cuts both ways. Mohan Mariwala, a Mercedes-Benz dealer in Mumbai, puts that in perspective: “When you’re the first to arrive as a premium brand, there’s a lot of spadework you end up doing that invariably benefits everyone who follows.”

BMW enjoyed that advantage when it entered. It’s challenge will now be to maintain the momentum and ward off Audi, which is catching up fast, while also keeping Mercedes-Benz at bay, which is working to regain its king of the heap status.

Follow us on Facebook, Twitter, YouTube & Instagram to never miss an update from Fortune India. To buy a copy, visit Amazon.