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Uncertainty on diesel cars leave auto makers puzzled

The extension of Supreme Court’s ban on powerful diesel vehicles, reduced price gaps between petrol and diesel and a consequent declining consumer interest in diesel vehicles is creating uncertainties for car makers. Those directly affected are re-looking at their future strategy and expansion plans for the Indian market.

 

“You are showing two levels of insecurity: at one level to our headquarters which is questioning why India is doing this and that makes our investments more difficult. Secondly, at the level of customers, there is insecurity and confusion on whether he should buy petrol or a diesel car as further direction is not known. All these factors do not make for a progressive development in any country. Have a proper direction for us and we will follow. Don’t push us into this or that extreme,” Roland Folger, managing director and chief executive officer at Mercedes-Benz India told Business Standard recently. The German car maker has invested about Rs 1,000 crore over last two decades and looks to invest an equal amount to expand capacities at its Maharashtra unit.

 

The Supreme Court last week decided to extend the ban it had imposed in December last year on sales and registration of diesel vehicles with engine capacity of 2,000cc and above in the National Capital Region. The decision impacts players like Toyota, Mercedes and Jaguar Land Rover. Though it does not impact top players like Maruti Suzuki and Hyundai, it creates an uncertainty and affects consumer purchase behaviour as far as diesel vehicles are concerned. Most car makers had invested heavily in recent years to expand diesel capacity when a controlled fuel pricing made diesel highly attractive vis a vis petrol. 

 

Toyota has seen an overall sales impact of 3% due to the ban as its two popular models- Innova and Fortuner — cannot be sold in the NCR. The company plans to introduce a petrol variant of Innova in the near future. It has stated that it will not invest any money in the Indian operations until clarity is restored with regard to future of diesel cars. 

 

The ban impacts Toyota severely since it is already operating at a low capacity due to declining sales. Against an annual capacity of 310,000 vehicles, the Japanese car maker sold just about 134,000 units in April-February period of last financial year. So, the company does not need to invest in capacity as of now but there will be investments in models and introduction of new brands like Daihatsu and Lexus.

 

Mahindra and Mahindra, which thrives on diesel utility vehicles, could have been the worst hit from the ban. The company, however, came up with a 1,990-cc diesel engine for vehicles in the NCR. The new engine launched in January has taken care of its NCR dealers who are able to sell models like Scorpio and XUV500. It is working on bringing petrol variants of popular models.

 

“It is a complex situation. Customers calculate payback period while buying diesel cars. Since price gap between diesel and petrol has narrowed, about 4% of buyers shifted to petrol last year,” said R S Kalsi, executive director (sales and marketing) at Maruti Suzuki. In mid-2015, petrol was about Rs 16 a litre more expensive than diesel. Today, the gap is down to about Rs 12 a litre.