 "Honda braces for fallout from diesel focus")
It's not usual for Honda to play the pricing game to make you believe its cars are a good deal. But that is what it has done with the BR-V (diesel), an all-new sports utility vehicle launched early this month. At Rs 9.8 lakhs, the SUV is cheaper than all other cars in its category.
While Honda's recent efforts to purchase parts from manufacturers within the country have helped it reduce costs substantially, the aggressive pricing marks a shift in the strategy of the Japanese company which has been struggling to break the jinx around its new car launches.
A look at how Honda's products have fared over the past few years produces a mixed picture. Brio (hatchback) and Mobilio (multi-utility vehicle) have failed to click with buyers and the Amaze (compact sedan) has started to lose its grip on the market.
Barring the City (mid-size sedan), which makes up half of its domestic sales, Honda has struggled to reach leadership position in any of the other segments it is present in.
The Jazz, the most aggressively-styled product from Honda to date, witnessed its sales nosedive to just 869 units in April, the lowest since its launch in July last year. Its average sales last financial year stood at nearly 5,200 units a month.
The shift in consumer preference back to petrol-run cars has hit the company harder than others. Although the Jazz comes in both petrol and diesel variants, the company believes it has got the short end of the stick in the current debate over vehicle pollution in India.
Hiroyuki Shimizu, senior vice-president & director (marketing & sales), Honda Cars India, says, "Today we have diesel demand hitting the roof and tomorrow there is a clampdown on diesel, diverting demand back towards petrol when the industry has already made investments for creating capacity (for diesel)."
Going slow
Five years ago, when consumers were taking advantage of low diesel prices to buy diesel-run vehicles, many players, including Maruti Suzuki and Hyundai, started to invest heavily in setting up capacities to make diesel engines in order to cater to the rush in demand.
However, Honda delayed investing, even as the demand for diesel cars soared with customers willing to wait up to six months for delivery. From just 15 per cent in FY08, the share of diesel vehicles within the passenger vehicle segment jumped four-fold to 58 per cent in FY13, according to rating and research agency ICRA.
Honda took the plunge only in 2013 with the launch of the Amaze and an investment commitment of Rs 2,500 crore to build a new assembly line at its Rajasthan plant, a forging plant and a diesel engine component production line. A 1.5-litre diesel engine developed specifically for the Indian market was also showcased by the company around the same time.
Its entry, however, coincided with the beginning of the slide in the popularity of diesel cars. According to the ICRA report, the share of diesel in the passenger vehicle segment fell from 58 per cent in 2013 to 44 per cent by the end of last year.
In addition to the growing backlash against the fuel because of its links to air pollution, consumers have started to shy away from diesel cars because of their many disadvantages over the long run.
Diesel cars have higher upfront cost. They are priced 20 to 25 per cent (Rs 100,000) over equivalent petrol variants and have a higher maintenance cost in the long turn. Further, new petrol hatchbacks in the market are nearly as fuel-efficient as their diesel counterparts, lending them an edge.
What has also taken the sheen off diesel cars is that the pricing gap between diesel and petrol has shrunk to a third from its peak of Rs 30 in 2013 to just Rs 10 a litre today. Diesel prices remained substantially cheaper than petrol until 2014 when it was deregulated.
Back to petrol
Companies, which built businesses on diesel engines, have now started to invest in petrol and hybrid solutions once again. Both Mahindra & Mahindra and Tata Motors have come up with petrol engines for the KUV100 and Tiago, respectively.
Honda, meanwhile, has put its expansion plans on hold. The company was in talks with the Gujarat government to invest Rs 3,500 crore to set up a greenfield plant that would have taken its production capacity up by 40 per cent or 100,000 units per annum.
Given the current environment, the company needs to grow its sales by 50 per cent to fully utilise its current capacity. This is going to be a big ask for Honda. Last financial year, Honda's domestic sales grew by a mere 1.6 per cent, the slowest in four years at 192,059 units. In contrast, the industry grew at an average 7.2 per cent.
While Honda recently increased capacity of its Tapukara (Rajasthan) plant by an additional 60,000 units per annum to 300,000 per annum, it is moving cautiously on making new investments in India. "We have expanded capacity at Tapukara by 60,000 units, which will take our total capacity to 300,000 (120,000 at Greater Noida and 180,000 at Tapukara). This should be good enough for us to last for a few years," says Shimizu.
"But we cannot say how long can this capacity serve us because, honestly, we are finding it difficult to assess the Indian market. India is a very dynamic and extremely challenging market. It is very hard to predict how the demand will move," he adds.
In its attempt to crack the Indian market, Honda installed a new chief executive, Yoichiro Ueno, for India early this year.
Honda hopes to benefit from Ueno's rich experience which involves work in Malaysia and the US, among other nations. Ueno is also expected to bring quick-footedness to Honda, which has been accused of being slow in responding to market changes.
During his maiden press meet in Mumbai at the launch of the BR-V, Ueno said, "I am very fast in making decisions, I like to understand the details of a problem before solving it. I hope Honda can make use of these qualities."
