Maruti's diesel pullout could help foreign car makers make rapid gains

The cause for Maruti's radical call was a combination of factors - weak growth forecasts, fuel price deregulation that has narrowed the gap between diesel and petrol, and stricter emission norms

Last week, Maruti Suzuki, the country's largest auto maker, announced it would move away from making a large section of cars equipped with diesel engines. Those include the Swift, the D'Zire, the Baleno, the Brezza, and they constitute some 400,000 cars or a quarter of their annual volumes. The cause for Maruti's radical call was a combination of factors that included weak growth forecasts, fuel price deregulation that has narrowed the gap between diesel and petrol, and stricter emission norms. 

Think of it as a Hobson's Choice when volumes are incumbent on a technology or a genre to swift changes in regulation or a technology that may become obsolete. Across the world, and especially after Volkswagen got busted in America for installing a cheat device on its diesel cars to beat emissions norms, diesel, whose best feature is fuel-efficiency, faces a pull-back worldwide partly because there are cleaner technologies available and partly because it has a negative impact on human health and the environment.

For 1.5 litre petrol engines however, NOx (nitric oxides) and PM (particulate matter) emissions are lower to start with and upgrades would cost the original equipment manufacturer between Rs 5,000 and Rs 15,000 per engine, and the car-maker would then incrementally increase car prices by Rs 10,000 to Rs 25,000. 

Most of Maruti's diesel engines, which are of the 1.3 litre spec, are made by under licence from Fiat. It does have a 1.5 litre in-house diesel engine which is used in the Ciaz sedan currently but whether it will be upgraded next year or after 2020 to fit cars hasn't been decided yet by Maruti.  

So while, Maruti is silent on how it plans to shore up the looming absence of volumes it will face, two things are crystal clear.One, in the short term that it won't have had the market leadership it did without diesel engines and second, what is poison to it may become meat for other competitors. Especially foreign ones are watching, and temporarily could make rapid market share gains with the right mix of marketing aggression and discounting. 

"The point is most manufacturers will stop their diesel options in A and B segments because prices will become unaffordable," says Suraj Ghosh, principal analyst South Asia Powertrain Forecasts, IHS Markit.  Equally, there are some who plan to push right along with their diesel offerings. Honda, for example, is one such who makes compact diesel cars that include the the Amaze, the Jazz, and the W-RV.

Though BS VI compliance, which goes into effect in April 2020, would impact everyone's cost strategies and volumes, Hyundai, Tata, Mahindra and Honda would seem to benefit given they plan to retain a number of diesel products. Hyundai Motor India, the second largest auto player, confirms that it will retain all its diesel models per market demand (its petrol-diesel mix is 60:40). And while it acknowledges the petrolisation of mobility the company will continue making small diesel cars such as the i20, the Xcent and others, a spokesperson said. 

Where will the gaps emerge?  Take the nifty-looking 1.3 litre-engined Brezza. It's a compact and trendy SUV that is available in only diesel, promises mileage of 24 km/l and retails for around Rs 8 lakh. It's also a bonafide blockbuster hit sold 200,000 units in under two years when it launched. Once gone, in its category, diesel cars that will stay in the game include Mahindra's XUV 300, Honda's WRV, Tata's Nexon, and Hyundai's Venue, that is going to be launched soon. 

While Maruti wouldn't comment on what stage of redeveloping their small diesel engines they were at before they threw in the towel, such overhauls come at a price. For BS VI compliance, diesel vehicles have to be equipped with after-treatment devices for NOx and PM control. For a diesel engine that is 1.5 litre in size, the upgrade could cost car manufacturers between Rs 65,000 and Rs 70,000 per engine that would lead to a net increase in prices per car between Rs 1 lakh and Rs 1.5 lakh. 

Sources aware of plans at Mahindra & Mahindra, whose entire fleet has diesel models, say that the SUV-maker will be ready for BSVI with all the models they aim to sell at the time, and the view inside the company is that diesel will not vanish but continue in SUVs and sedans while small cars will predominantly become petrol. 

That sort of thinking is best reflected through a peek at Skoda India's product portfolio that includes a compact sedan (68 percent of volumes come from diesel) the Octavia (35 per cent from diesel), the Superb (37 per cent from diesel) and the Kodiaq SUV which is only available in diesel. 

Like Maruti, other Indian manufacturers are also hesitant about new diesel motors. A Tata Motors spokesperson said that “new BSVI compliance will make small diesel cars expensive and that those high costs won't justify developing a new small capacity engine.” The company said it will not be upgrading diesel engines for its Tiago hatchback nor its Tigor sedan. 

Players like Honda have a portfolio whose diesel share goes like this: 55 per cent for the WR-V, 30 per cent for the Amaze, and 20 per cent for the Honda City.  Honda's overall mix was 70 per cent petrol and 30 per cent diesel, with the Amaze accounting for the highest model-wise sales among diesel models followed by WR-V.

“We believe it is a bit tough for market to accept the sudden change in one day. Therefore, we will continue to offer the diesel models in line with market demand and gradually move towards future alternatives,” says Rajesh Goel, senior vice president and director of sales and marketing for Honda Cars India.

As Kavan Mukhtyar, partner and leader Automotive, PwC India, points out, "Diesel will always be a polluting fuel, no matter how well it is treated but cars with diesel engines will be viable for the immediate future because it also offers value-for-money economics with no parallel." For example, the mileage for Honda's W-RV petrol car is 17.5 km per litre. For the diesel version it is 25.5  km per litre. That sort of advantage is impossible to ignore.