28 Mar 16 Diesel OEMs and ancillaries face challenging times
The diesel OEMs and auto ancillaries face challenging times ahead due to the reduced price differential between petrol and diesel, government initiatives to reduce pollution and more stringent vehicular emission norms.
Petrol cars are cheaper to manufacture than diesel cars
A diesel engine requires additional components such as turbo chargers and dedicated fuel injection systems to improve its performance and control exhaust emission. This makes it more expensive than petrol cars. The usual price difference between petrol and diesel variants is INR 1-1.5 lakhs. On average, an entry-level diesel car is ~22% costlier than its petrol version.
The difference in price between petrol and diesel has come down
Since diesel was earlier priced significantly lower than petrol, buyers of the costlier diesel cars expected to save on fuel costs in the long run. As the price gap between petrol and diesel has narrowed, diesel cars no longer make economic sense. The price gap between petrol and diesel was down to INR 15 per litre in January 2016 from INR 18 in January 2014. The gap is expected to further narrow, going forward.
Anti-pollution initiatives of the government
National Green Tribunal (NGT) proposed an order in April 2015 to ban diesel vehicles older than 10 years in Delhi-NCR. This has reduced the resale value of diesel cars and further reduced their attractiveness.
Stringent emission norms difficult to meet with diesel cars
A diesel car emits 5-10 times more particulate matter (PM) and 2-3 times more nitrogen oxide (NOx) than a petrol car. Currently, India has laid down BS IV emission norms in 14 major cities and BS III norms in the rest of the country. Even if India moves to emission norms similar to Euro 5 (implemented in 2009 in Europe), it requires a minimum cut in PM emissions of 80% for diesel cars.Diesel car manufacturers will need to invest more in R&D for diesel engines to meet the permissible emission levels, thus raising the cost of the cars to the customer.
The diesel cars share in total car sales has been steadily declining since FY13Â
Diesel car sales have declined from 47% in FY13 till 37% in FY15, and are still declining.
Under-Utilized OEM manufacturing capacity due to slow recovery in the auto sector
Despite a small recovery in the auto industry in 2015, the manufacturing capacities of most OEMs are under-utilized due to a fall in the demand for diesel cars. This has had an adverse impact on the bottom lines of auto OEMs.
So what?
OEMs are therefore finding it increasingly difficult to sell their diesel variants. Some of them are beginning to reduce or shut down their diesel lines. General Motors, for instance, has announced that it will shut down its Halol (Gujarat) plant by H2 2016.
Ancillaries manufacturing diesel car components such as turbo chargers, dedicated fuel injection system, etc. also face tough times ahead. Conversely, ancillaries manufacturing petrol variant components such as spark plugs are likely to benefit from the shift to petrol cars in the next 2-3 years.
Aditya Vajpayee
Posted at 18:17h, 29 MarchKindly correct the year in fig. 1. It should be April’16.
Rohan Shevate
Posted at 11:41h, 10 MayHi Aditya, the figures mentioned are correct. The most recent figures found were for Apr’15. SIAM is yet to publish this data for Apr’16.
Sachin Lele
Posted at 16:40h, 29 Marchgood report. I guess there are some more points to this story.
1. cost of acquisition of diesel car is expensive. for example. for every 1 lakh rupees of loan, a buyer has to pay RS. 2200 extra EMI. since diesel variants are costlier by at least 1.5 lakhs…the additional cost burden is curtailing the demand.
2. automobile sales experts are also indicating a shift in customer preferences. instead of going for lower end diesel vehicle, people are shifting towards higher end petrol versions. for example, instead of maruti suzuki swift diesel at 7.6 lakhs, ford ecosport top end petrol model is preferred, considering additional safety and comfort features offered in petrol version.
3. the emergence of rent car concept such as zoom car and effective role out of cab services such as Ola and Uber, the need for a diesel vehicle (long distance commuting) has reduced drastically. so city divers are likely to prefer petrol versions. would be interesting to know author’s views on this.
Rohan Shevate
Posted at 12:35h, 10 MayThank you for the feedback Sachin !!
Looking at all the points discussed above, we can safely conclude that the customer preference is definitely shifting towards petrol cars.
Though I am not sure if Uber and Ola cab services will result in higher sales for petrol variants. Many of these cabs and even many Mumbai taxis still continue to run on diesel. The reason for switching to petrol variants would most likely be the overall high cost of owning a diesel car rather than the distance of commuting.