Automakers in a fix over their diesel strategy

pravin Shah, President & Chief Executive, (Automative), M&M Ltd at the launch of the  XUV500 in Mumbai (pic: Suryakant Niwate) pravin Shah, President & Chief Executive, (Automative), M&M Ltd at the launch of the XUV500 in Mumbai (pic: Suryakant Niwate) A little over a month after the Supreme Court banned sales of large diesel cars in the National Capital Region (NCR) Mahindra & Mahindra reacted with new SUV variant launches to circumvent the ban.

This move helped the Mumbai-based SUV specialist to regain its previous sales run rate in NCR, which otherwise came under severe stress following the December ban. 

Though such reengineering efforts and diversification to petrol engines helped M&M immensely, investment towards diesel technology will have to be revisited, company officials agreed.

Pravin Shah, president and chief executive (Automotive), M&M said, “For any investment, we need a stable business environment to enable it live out its life. We take long term investment plans into cognizance while developing engines and it cannot be an overnight decision to reverse it.”

Maruti Suzuki, Hyundai and Honda had invested in diesel engine capacities between FY12 and FY14 when the diesel car demand was at its peak. The deregulation in petrol prices in 2010 (even as diesel price was regulated) led to widening of price gap between the two fuels, thereby substantially influencing the car buyer preferences. 

But a reverse trend is now setting in. A look at the petrol and diesel split, vehicle demand seems to move back in favour of petrol. According to estimates prepared by research and rating agency ICRA, diesel accounted for 44% of the 2.78 million passenger vehicles (PVs) sold last year down from the peak of 58% of 2.68 million PVs recorded in 2012-13.

“On 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% to petrol variants (from diesel) in case of City during the first quarter of 2016. The situation is uncertain,” said Jnaneswar Sen, senior vice president (marketing and sales) at Honda Cars India.

The rate of swing back to petrol is less aggressive than the swing towards diesel six years ago. From a mere 15% in FY08 the share of diesel vehicles marked a near four-fold jump in just five years to 58% (FY13). But the rate of shift to petrol has been milder as diesel lost just 14% share in the last three years, according to ICRA. 

Toyota Kirloskar has thus gone ahead with its planned investment of Rs 1,100 crore for a new greenfield diesel engine facility which churn out more than 100,000 engines every year. These engines will power the Innova and Fortuner both of which are using imported engines at the moment.  

N Raja, Director & Senior Vice President – Sales & Marketing, Toyota Kirloskar Motor said, “The inauguration of our new diesel engine plant 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 auto maker, considering stringent fuel efficiency norms ( CAFÉ ) being introduced in year 2017”.

Besides increased activism against diesel for being the chief polluter, a major reason behind the demand shift back towards petrol models is the reducing gap with diesel fuel. From as high as Rs 30 in 2012 the gap narrowed to Rs 10 two months ago between the two fuels. 

With a steep premium ranging between 20-25% (Rs 100,000 and above) over equivalent petrol variants diesel models are not just expensive to buy but expensive to maintain too. Further, modern petrol hatchbacks are nearly as fuel efficient as diesel counterparts giving them the edge.  

Sensing this, Maruti Suzuki suspended plans of doubling diesel engine capacity at Gurgaon to 300,000 engines and instead decided to buy them from Fiat, which has a ready plant near Pune.  

"Share of diesel vehicles in overall domestic PV sales moderated to 44% in FY2016, and likely to further decline to 40% by FY2017. Over medium term, it is likely to stabilize around 40%  level – supported by new model launches in compact UV segment and shifting preference towards larger cars which are largely diesel driven”, ICRA added.

Guenter Butschek, managing director, Tata Motors said “The whole pollution issue requires for more global review, a more holistic approach. We are very strongly committed to fuel efficiency (and) to ecologically responsible drivetrains. We are open to all kinds of discussions, we fully support the government but let us actually address the problem”.