Slippery road ahead for car makers in India

Toyota, M&M and Honda are making tough adjustments to their growth plans as uncertainty  over diesel vehicles and fuel emission norms rises, points out Ajay Modi.

When Toyota zeroed in on May 13 to launch its Innova Crysta in the capital, it was confident the ambiguity over the fate of diesel-powered vehicles would be over by then.

A final judgement in the case against the Supreme Court’s six-month ban on selling 2,000cc diesel-run vehicles in the national capital was expected on May 9. That, however, did not happen. The apex court refused to overturn the ban and decided to continue the proceedings in the case in July.

Toyota launched the Crysta in all markets outside NCR. The event is symbolic of the uncertain times in which car makers are conducting business. First, it was the advancement of emission norms. In a hurry to address pollution concerns, the government in January asked car  makers to introduce Bharat Stage or BS-VI vehicles from April 2020.

In November last year, it had advanced BS-VI norms by three years to 2021 and BS-V norms by an equal number of years to 2019. However, it altogether skipped the BS-V norms in January. As a result, manufacturers have to tweak their earlier product development plans and achieve targets in a much smaller time frame.

Next came the Supreme Court ban in NCR. The latest addition is the restriction on registration of 2,000cc diesel vehicles in Kerala, ordered by the National Green Tribunal on Monday. Incidentally, all these events happened at a time when the passenger vehicle industry was witnessing a revival in demand.

Toyota is amongst the worst hit by the ban. NCR is a key market for the company where the 2,000cc order resulted in restrictions on sales of its two top selling models, the Innova and Fortuner. The company’s India sales have not grown for a single month after the December ban.

Utility vehicle major Mahindra & Mahindra’s popular cars such as the XUV500 and Scorpio were also hit by the ban in NCR.

But, it responded with advancing the launch of 1,990 cc diesel engine (that was being developed for the global market) for vehicles in NCR. The new engine that M&M launched in January has taken care of its NCR market.

The impact of the ban, however, is not limited to companies manufacturing diesel vehicles of the specified engine capacity. It has created challenges for vehicles below 2,000cc as well, as buyers turn apprehensive about the fate of diesel vehicles across the nation.

Coming to grips with it

Companies are struggling to adjust to this rapidly changing behaviour. Take the case of Honda. It has seen a drastic shift in the petrol/diesel mix for the City in the last quarter as compared to Q4 of 2015.

While four of every ten buyers opted for the diesel variant in Q4 of last calendar year, it came down to less than three of ten new purchases in January-March. Sale of the City has declined as a result.

“On the one hand you have petrol vehicle buyers waiting and on the other, you sit on unsold diesel vehicles. We have seen a swing of 15 per cent to petrol variants (from diesel) in the case of (the) City during the first quarter of 2016. The situation is uncertain,” Jnaneswar Sen, senior vice-president (marketing and sales) at Honda Cars India, said recently.

Traditionally, petrol cars were preferred by Indian buyers. However, many of them started going for diesel cars since June 2010 when the United Progressive Alliance government deregulated petrol prices but left diesel untouched.

By 2011, as oil marketing companies continued to align petrol prices in India to the global price, the gap between the two fuels jumped to a high of Rs 25-30 a litre.

With the shift in preference, car makers pumped in money to set up diesel engine capacity. An estimated Rs 5,000 crore was invested  by the industry between 2009 and 2013. The share of diesel cars jumped from 37 per cent in FY11 to 58 per cent in FY13.

But now, the trend is reversing swiftly. It came down to 44 per cent in FY16. With the imposition of the ban in Kerala, buying patterns will undergo further changes in favour of petrol.

Even though many companies, including Honda, have the flexibility to switch between diesel and petrol models, adjusting the production and component supply chain to meet this change takes a minimum of three to four months.

Abrupt changes in demand pattern upset their production planning and results in sales loss. The challenge is not just limited to car makers - the component industry is also coming under stress, having to adjust to frequent changes in production plans by manufacturers.

Experts say the uncertain atmosphere has made India less attractive as an investment destination.

“Sudden decisions create instability and question the validity of India as far as major investment decisions are concerned. This is not in the interest of India's citizens. Also, to fight air pollution and the problems that it causes for citizens, we need to look at the problem holistically,” says Wilfried Aulbur, the managing partner of consulting firm Roland Berger, India.

Aulbur, who used to head Mercedes in India, says the automotive industry has to do its part but one also needs to look at other factors contributing to air pollution.

The diesel ban has pushed some buyers towards petrol even in luxury cars where diesel was the fuel of choice. Mercedes Benz, the largest luxury car player in the Indian market, has scaled up petrol variants for most of its models in NCR. Petrol variants for diesel-only models have been planned. In February, luxury car maker Jaguar Land Rover launched the Jaguar XE in the country with a petrol-only engine.

Unpleasant alternative

The Supreme Court has talked about a 30 per cent cess that should be levied on diesel cars above 2,000cc. Diesel cars already cost more than petrol ones.

The last Union Budget imposed a one per cent cess on petrol or CNG cars, with an engine capacity of 1,200 cc and length of four metres. For diesel cars of a similar length and engine capacity of 1,500 cc, the cess is 2.5 per cent of the price.

“We consider a 30 per cent cess the same as a diesel ban. Considering the limited financial benefit that you get due to the price differential between the two fuels, some of the cars need to run for 10 years to recover the extra investment.

If you add another 30 per cent to the price, why would anyone in the world buy (a) diesel (vehicle) anymore?” says Roland Folder, managing director and chief executive officer of Mercedes Benz India.

Irrespective of the negative publicity for diesel vehicles, car makers still believe in the relevance of diesel technology. Toyota, which currently imports diesel engines for its India-made cars, is considering investments of Rs 1,100 crore (Rs 11 billion) to set up a diesel engine plant.

N Raja, senior vice-president (sales and marketing) of the company, says the decision “demonstrates our strong belief that diesel is a good fuel when used with the latest technology. Diesel engine technology will continue to be an integral part of every automobile maker, considering the stringent fuel efficiency norms being introduced in year 2017.”