Volkswagen and Toyota Motor, the world's biggest auto-makers, will not launch new models in India in the next two years after meeting with limited success in the price-sensitive market that is also facing a slump for the first time in a decade.

The two firms were known as makers of premium cars till Toyota entered the competitive mass car market in 2011 with the Etios sedan and Liva hatchback and Volkswagen with its Vento sedan and Polo hatchback in 2010.

A few years later, these cars have failed to dent the share of incumbents Maruti Suzuki and Hyundai.

Also, a shift in consumer preference towards smaller, compact sports utility vehicles and sedans, coupled with a volatile rupee and slowing local demand, have forced these auto makers to hold back on new launches and instead revisit their cost structure and improve sales and after-sales quality.

"We realised that we can't transplant the European cost structure here," says Mahesh Kodumudi, president and managing director at Volkswagen India, adding, "India is one of the most challenging markets in the VW (Volkswagen) world."

Annual car sales in India, Asia's second-fastest expanding market, dropped for the first time in 11 years in 2013, amid a slowing economy and weak demand.

India's economic growth fell to a decade's low of 4.5% in the fiscal year 2012-13 which is estimated to improve only marginally, official data show.

The rupee, which depreciated against the euro by 21.35% between January to August 2013, hitting at low of 91.48 on August 28th, added to the cost of imported components.

While the currency has since re-bounded, the volatility has forced Volkswagen India to further localise sourcing of components.

The company has increased local content in the Vento and Polo to 70% from 30 to 40%.

Local assembly of engines and gearboxes, the next logical step, currently under way, will help the firm further reduce imported content, said Kodumudi.

"We need to reduce the retail prices by 10 to 15%," he said.

Toyota has also announced plans set up a diesel engine factory to pare-down its import bill.

Sandeep Singh, deputy managing director, commercial, sales and customer service, at Toyota Kirloskar Motor India, agrees that unlike the pricier Qualis, Innova or Altis, the models introduced in the mass-segment haven't clicked with Indian buyers.

"In the existing scenario, we feel that models like Etios and Liva need a sharper focus of the company in terms of establishing a closer connect with the target consumers," said Singh.

In the next two years, Toyota will be working to improve the acceptability and market share of existing models rather than launching newer ones, he said.

In the first 10 months of the current fiscal year, Liva's sales have dropped 9.6% to 19,877 units and Etios sales have contracted 16.5% to 25,955 units compared with a year ago.

Similarly, the Polo's sales dropped 12% to 26,592 units and the Vento's sales shrunk 15% to 16,595 units, according to lobby group Society of Indian Automobile Manufacturers Association (SIAM).

Some experts say the decision to hold model launches is pragmatic but others say not having a new model when the market revives could hurt the auto-makers further.

"It's a logical step," said the managing director and global sector head at an investment bank.

The high cost of production and low growth has really hit these firms hard. "Everything is so uncertain.

Launching new models when the market is flat should be the last thing they should do," he said. It makes sense for them to wait for a pick-up in demand and re-work the cost structure in the interim, he added.

"The strategy adopted by these firms will pay off if the market remains the same for two years," said a principal analyst at an automotive market research firm.

However the analyst expects sales to bounce back within the next one year and fears that VW, in particular, might miss the opportunity to capture the up-tick in demand if they hold back on new launches.

Typically, a new model props up overall sales by 10 to 20% while a face-lift helps in retaining market share, he said.

While both auto-makers have adopted the go-slow strategy against the backdrop of weak domestic demand, experts say their struggles in the domestic market are not entirely driven by the poor market conditions.

While for VW its below average quality of sales and after-sales, what has hurt sales for Toyota is the mismatch in expectations, said an executive director at a global market research firm.

Toyota's offerings in the mass market, according to the director, are not in sync with the image and quality perception created by their other offerings like the Innova, Altis, Camry and Fortuner.

According to him, the Etios and Liva also score poorly in fit and finish compared with the other models in their line-up.

"They seem to have taken the Indian customers for granted," he said.

Volkswagen India's Kodumudi concedes that in the eagerness to enhance reach, the company ramped up the distribution network from zero to hundred in a short span, compromising quality. However the company has spruced up sales and service quality, he said.

Toyota's Singh accepts the company has not been able to address changing consumer preferences with their Etios and Liva models.