India's automotive landscape is undergoing a transformative shift, driven by evolving consumer preferences, rising disposable incomes, and rapid technological advancements. In an insightful conversation with Fortune India, Piyush Arora, MD & CEO of Škoda Auto Volkswagen India, delves into the challenges European carmakers face in India, the importance of market-specific strategies, and how Škoda’s focus on localisation and innovation is shaping its future. With the launch of the Kylaq, a strategic entry into the rapidly growing compact SUV segment, Arora discusses how Škoda plans to expand its reach, deepen localisation, and embrace the shift toward electrification—setting the stage for the brand’s next chapter in India.

Given your experience, especially with European carmakers, what’s your understanding of India’s automotive preferences, especially when it comes to price versus design?

When I first started in the automotive industry, there were limited choices. Maruti was just setting up, and Tata Motors was the only major automotive company at the time. In the early 90s and late 80s, Maruti had just begun. If I recall correctly, on campus, companies such as L&T and Tata Motors offered the most sought-after jobs for engineering graduates. I ended up at Tata Motors, which was initially unplanned.

Within my first five years at Tata Motors, the company had a joint venture with Mercedes. That opened the door for me to work with German automotive technology. Germany, as you know, has always had a robust manufacturing backbone, so it felt like a natural progression to gain experience with Mercedes.

At that time, the automotive ecosystem was still evolving in India, especially in terms of suppliers, quality standards, and product understanding. If you look at the industry today, the progress has been incredible—Indian automotive has made leaps and bounds. The advancements are quite evident now.

Starting in the automotive space back then and moving through the industry has been a journey. Engineering and automotive technology in India have evolved significantly over time. Both Japanese and German technologies have led many innovations in safety, comfort, and overall quality. So, that’s the progression I’ve witnessed.

European carmakers have generally struggled in the Indian market, and Skoda itself has been here for two decades, facing its own challenges. In your view, what are the key learnings from this journey, and what makes this particular launch with Kylaq a potential game changer?

I think the industry itself has evolved significantly, and there have been positive periods for German companies here, including Skoda. Success in this market is highly product-driven, so if you don’t introduce the right products at the right times, the market response can be challenging. This is a critical learning for any brand here.

Additionally, with the evolving ecosystem, it’s important to leverage the global ecosystem. In the past five years, we've made significant progress in this direction by designing and engineering products specifically for India while staying true to our brand DNA. For Skoda, this means emphasising aspects like safety, driving dynamics, and comfort, which are essential for appealing to customers in India and for export.

Our approach has been to develop a product in India that also meets export demands, and we’re now exporting to 40 different countries, with 30% of our batch going abroad. This strategy has allowed us to utilise local engineering expertise, develop products with Indian suppliers, and tailor our offerings to Indian customer expectations while preserving core brand qualities.

Kylaq represents a natural progression of this strategy. While we’ve launched strong products with good starts, our market coverage has been around 30-40% of a 4-million car market. Nearly 50% of cars here are in the sub-4-meter segment, and the larger compact SUV market is one we aim to address for broader reach.

This will enable us to connect with Tier 3 and Tier 4 cities, where these products resonate with customers, providing us with scale and expanding the reach of our existing products. Ultimately, this strategy will help us gain a larger market share.

Given that Skoda’s market share has traditionally been around 2%, how much are you counting on Kylaq to increase that? And regarding product life cycles, what lessons has Skoda learned from previous models such as the Fabia, which was promising but didn’t quite deliver as expected?

When we started with our India 2.0 programme, it was very clear from the beginning that we wanted to enter the compact SUVs and also the notchback segments. The past five years have shown that preferences in India, like in global markets, are shifting toward SUVs. But at the same time, we do believe that our compact or the A0 segment, which we have started off with, has really created some amount of stability in the sedan notchback segment with models like the Virtus and Slavia. Even if you ask a child to draw a car, at least until today, it’s invariably a three-box car. Ten years down the line, it might shift to an SUV, but as of now, a three-box design remains a classic. We believe there will always be a group of sedan enthusiasts who see a car as a classic three-box structure.

While we’re pleased to be in that sedan space, the Kushaq and Taigun cater to a much larger segment. Yet, we realised there’s a limit to market share within such a competitive segment. India is a highly product-driven market, so expanding our product portfolio was essential to growing our market share. We assessed options both above and below the A0 segment to find what made the most sense for us. This move with Kylaq represents the beginning, not the end goal. To increase our market share, we also need to look at the future portfolio, including electrification and alternative powertrains, as customer preferences are evolving.

The subcompact segment accounts for around 30% of the market and is the fastest-growing space. This makes it a natural progression for us, especially since we can utilise a platform slightly above that segment, enabling us to offer a highly attractive package. Our aim is to set benchmarks in comfort, driving dynamics, and safety in this category.

We have carefully considered what features customers expect in India and have packaged Kylaq to be both competitive and valuable in that regard. Considering all these factors, we are confident that Kylaq will receive a strong response and resonate well with customers.

You mentioned growth expectations; could you elaborate on how that influences your targets?

The subcompact segment accounts for around 30% of the market and that makes it over a million car market and the automotive market is growing, with a projected compound annual growth rate (CAGR) that could push it to around 5.5 million by the end of the decade, and possibly over 6 million within the next 10 years. This segment we’re targeting is growing even faster than the overall market, which presents a substantial opportunity for us.

We’re looking to enhance our capacity by roughly 30%, which is where we currently stand. Our manufacturing and supply chain have a relatively high degree of flexibility, allowing us to adjust as needed based on market response. This flexibility, while not unlimited, will enable us to adapt production between our existing models and the new launch to maximise our market share gains.

To capture a larger market share, an extensive network of touchpoints, both for dealerships and service, is essential. There’s feedback from the community suggesting that while Skoda excels in engineering, there’s room for improvement in network reach, especially for service. How are you addressing this aspect to ensure easier access and service for customers?

Expanding our network is integral to our India strategy, and it’s something we’ve prioritised within the 2.0 programme. Gaining market share must go hand-in-hand with reaching more customers, which means both product expansion and network growth.

We’ve already expanded our network to over 250 touchpoints this year, and by early next year, as the Kylaq launch ramps up, we expect to reach around 350 touchpoints. These touchpoints include both sales and service, covering all aspects to ensure a comprehensive customer experience for all segments — from our A0 models to premium offerings such as the Kodiaq and other global products we plan to introduce.

Additionally, we’re modernising the network’s appearance with new Corporate Identity (CI) elements that will be launched across our touchpoints this year and into early next year. Dealers play a crucial role in connecting with customers, and enhancing our network is a key part of our strategy.

The automotive industry, despite being promising, is experiencing significant flux, particularly with electrification. Globally, we see varying adoption rates, with some markets moving cautiously. In India, even major players like Maruti have hesitated with EVs, favouring hybrids. Moreover, the second-hand market has long supported the success of internal combustion engine (ICE) vehicles, but it’s unclear if EVs will have the same appeal. Given this, what do you see as the middle ground for India?

The shift in the automotive industry is undoubtedly moving forward, though, like any transformative journey, there will be ups and downs. The pace of technological advancements in alternative propulsion vehicles, particularly EVs, is high, and it’s an evolving space. Customer choices are influenced by how fast these advancements occur. Early adopters of EVs need sustained innovation, and we are seeing significant work in battery technology, including higher energy density and alternative chemistries, which aims to reduce costs and reliance on specific geographies.

Our group firmly believes that electrification is the path forward for decarbonisation, so we are fully committed to this direction. Transformation speed will vary by region; for instance, China is moving more quickly than other markets, and Europe has regulatory mandates driving the shift.

When government incentives are removed, as we’ve seen, demand adjusts temporarily, but we expect a natural demand to emerge as the market stabilises.

To address net-zero goals, the technology ultimately must be zero-emission. While hybrids can serve as an interim solution, the end goal remains full electrification. Customer preferences will guide this transitional phase, and we are prepared to adapt our technology to meet these demands in India.

Currently, our focus is on moving towards electrification. However, if there is clear demand for alternative options during this transition, we’re open to offering choices that align with customer needs.

What’s your strategy for electrification? How are you prioritising segments, and which areas do you see as most beneficial for investment?

To gain market share, it’s essential to address multiple segments. We’ve already introduced some of our global EV models like the Audi E-Tron and Porsche Taycan and Macan, and we’re continuing to explore how we can bring more global products from Skoda and Volkswagen to India.

However, to meet our market share aspirations, we’ll also need locally developed or engineered vehicles. We have multiple global platforms available, and we’re currently identifying the most suitable one for industrialisation in India. Our approach involves addressing the higher end of the market with our global products while developing a locally-produced model to serve broader demand within India.

Localisation and indigenisation provide a critical edge for any company. What has Skoda Auto’s experience been in this area? Is there a "chicken and egg" situation, where volumes are needed to justify full localisation?

It is indeed a "chicken and egg" situation. But we’re fully committed to localisation, as it aligns with our strategy. Under the India 2.0 programme, we’ve achieved close to 90% localisation across our models, including the Skoda Kushaq, Slavia, and Volkswagen Taigun.

The 90% localisation pertains specifically to the India 2.0 programme, covering the Kushaq, Slavia, Taigun, and the upcoming Kylaq.

When we launched the India 2.0 programme, we encountered challenges due to COVID-19, which restricted travel and forced us to find solutions locally. Since then, we’ve strengthened our approach. For Kylaq, we’ve designed the entire hatch in India, using local expertise from the product development phase onward. This includes working closely with suppliers, increasing tooling development in India, and adding another 10% to our already robust supplier base from the 2.0 programme.

We’ve also implemented Industry 4.0 automation and efficiency enhancements within our manufacturing process. Our efforts to expand the dealer network are aimed at ensuring the complete value chain supports a highly competitive product. Kylaq is built on the same platform as our other models, so it shares this high level of localisation.

There’s been considerable talk about strategic initiatives and partnerships, and even the chairman has mentioned looking into potential collaborations.

Globally, the Volkswagen Group has consistently partnered with various companies, whether through channel partnerships, technology sharing, or other forms of collaboration. We evaluate each opportunity based on how it aligns with our strategic goals and whether it enables us to deliver a compelling product or grow our market share. For instance, Volkswagen recently partnered in the U.S. on software development for electric vehicles. This approach of assessing and embracing strategic partnerships isn’t new; we look at what best serves our customers and business in every region.

In India, Skoda sees this as a vital market. It’s actually the country where Skoda produces the most cars outside the Czech Republic, and India is also our largest market outside of Europe. Given the growth potential in the Indian automotive space, we are keen to participate fully by diversifying our product portfolio and keeping up with shifting market demands. We’re open to opportunities that allow us to invest in and transition our technology to stay relevant, especially as customer expectations evolve rapidly. This includes everything from rolling out new features to making incremental updates like facelifts or upgraded models, all while keeping our products contemporary.

We also see the need to invest in new technologies, such as hybrids and EVs, which require capital and the right strategic partners. A partnership could help us in these areas, optimising resources and potentially helping us develop new products more efficiently. So, while we’re actively exploring different collaboration options, our approach aligns with what Volkswagen Group does in other markets—India will be no different in that sense. But our ultimate goal remains to expand our ICE and EV product lines here in a way that aligns with our global standards and objectives.

Given Volkswagen’s history of partnerships, what specifically would Skoda be looking for in a local partner in India? Technology is an area of strength for you globally, but is capital the primary focus in these discussions?

Our global technological expertise is something we rely on and can leverage independently. However, bringing more products to the Indian market requires more than just technology—it requires diverse platforms and, often, additional capital. So, partnerships could be beneficial in numerous areas, from shared technology development to capital investments that support local production.

While it’s too early to pinpoint exact areas of cooperation, we are open to all potential collaborations that help us reach our goals in India. We’re considering various opportunities, but a partnership is not the only way forward. We can still develop and expand our business independently if needed. That said, we are carefully evaluating all options to understand what approach would allow us to bring more products to market effectively and sustainably in India.

The Volkswagen Group has already invested around Rs 15,000–16,000 crore in India since 2001. This encompasses a broad spectrum of investments across Skoda Auto Volkswagen India’s facilities and projects. For Skoda specifically, I would need to confirm the exact number, but this is the overall investment level by the Group.

India is a unique market with a range of powertrain options such as CNG, diesel, and hybrid. Does the absence of these options in your lineup affect your growth prospects?

India’s diversity in powertrains—CNG, diesel, hybrids—is notable, and within the Volkswagen Group, we have the technology to support these segments. However, each market requires

prioritisation. Right now, our focus in India is on gasoline-powered vehicles, with an eye on transitioning to electric vehicles. If demand for hybrids picks up, we would consider bringing them to the market, but at this time, we’re concentrating on gasoline and EVs.

The segments we’re active in represent a significant share of the market. There’s ample room for growth within these segments, so while we could expand to other powertrains, our current strategy is to remain focused on the gasoline-to-EV transition.

We’ve seen a pattern where some foreign carmakers struggle to find stability in India, such as Ford, which has exited and re-entered the market several times. What according to you are the factors behind the churn?

For a multinational group, whether it’s European or American, alignment between the group’s global strategy and the local market’s strategy is essential. If the global and local visions to grow in a particular market are aligned, then the operations work more smoothly. However, when the global headquarters prioritises other markets due to limited resources or different growth potential, it can lead to challenges.

India is a highly competitive, small-car market, which traditionally hasn’t offered the same returns as larger segments in other regions. So, some companies may have decided to allocate their resources to other markets where they see higher returns. But from my perspective, and from our Group’s perspective, India’s long-term growth story is one that we’re committed to. Even though it remains a low-margin, competitive market, there’s still significant potential for brands with the right product offerings.

Indian consumers continue to value European automotive engineering, and I believe that demand for such quality will persist. As long as we keep understanding this evolving market and bring the right products, there is a real opportunity for growth here.

In India, we often discuss the rise in per capita income and the evolution of consumer expectations. Do you see India’s automotive market shifting away from small cars as the aspirations of Indian consumers evolve? Does this trend align with your go to market strategy?

I think this shift is a natural progression for any developing market. India is moving toward higher expectations for product features and quality, driven by regulatory requirements like safety and emissions. This progression impacts product costs and pricing, which we’ve observed in India as well.

Today’s young generation, combined with increasing disposable income, has made vehicles an aspirational purchase in India. As the middle class grows and disposable incomes increase, we see more people opting for feature-rich cars in higher segments. This aligns well with our DNA, which emphasises safety and driving comfort, and we’re seeing a positive shift in customer preferences toward these aspects.

One telling data point is the average transaction price for vehicles, which has risen above Rs 1 million—a significant increase from pre-COVID times. Consumers are now more interested in individual mobility and are gravitating toward more premium vehicles in the upper segments. This shift aligns with our portfolio, and as customer expectations evolve, we’re well-positioned to meet those demands.

Škoda Auto Volkswagen India

Success in Indian auto market is highly product-driven: Piyush Arora of Škoda Auto