India’s car market has shifted down a gear on the back of higher interest rates and fuel prices. In June 2010, the Government of India decided to deregulate fuel prices, linking them to the global crude oil market. Petrol prices have since been revised three times, experiencing a hike of almost 67%.
The Indian government’s decision to raise interest rates to cool the economy is expected to dampen the automotive market as well. In June, Suzuki Motor’s President, Osamu Suzuki, said that Suzuki expects to see profits from its Indian operations fall this fiscal year due to modest sales growth partly due to the higher interest rates.
But there is a bright spot in the situation when we take a closer look at the market segment. Sales of diesel cars seem to be holding up, making up about one-third of overall car sales. In fact, demand for diesel cars in India has risen gone up to 60% from about 20% previously as a result of the drastic rise in gasoline prices, according to Head of Research Care Ratings, Revathi Kasture. With the difference between gasoline and diesel prices, drivers who travel more than 30km everyday would benefit from buying a diesel car even though such cars cost on average about Rs100,000 more than gasoline cars.
Demand for diesel cars in India has risen to 60% from about 20% previously as a result of the drastic rise in gasoline prices
The rising popularity of diesel cars in India prompted Nissan Motor India to bring forward the launch of the diesel variant of its Sunny sedan in the country to before the end of this fiscal year. Announcing the plans, Gilles Normand, corporate vice-president at Nissan for Africa, Middle East and India, pointed out that the ratio of gasoline to diesel models in India has narrowed to 45:55 from 20:80 previously.
Until a few years ago, the Indian car market was a mostly gasoline car driven market. However, diesel cars are increasingly popular. Most of the vehicle manufacturers focused on gasoline cars are now slowly increasing the ratio of diesel cars in their offering. Major OEMs are investing heavily in diesel platforms and technologies, says Leader Automotive Practice, PwC India, Abdul Majeed.
All the major OEMs in India have launched diesel variants since early 2010. Ford launched the diesel variant of the Figo in April 2010, followed by a diesel version of the new Fiesta in July 2011; Volkswagen launched diesel versions of the Polo and Vento in June 2010, and a diesel Jetta in August 2011. Toyota launched the diesel Corolla Altis in July 2010, followed by the Etios and Liva in September 2011.
India’s largest vehicle manufacturer by sales, Maruti Suzuki, launched the SX4 and Kizashi in February 2011, and more recently the new Swift. Its diesel variants contribute about 85% of sales for some of its models. To cope with this surging demand, it agreed to buy diesel engines from Fiat.
Other OEMs, like Tata Motors, Mahindra & Mahindra, General Motors, Hyundai and Renault have launched the New Indica Vista, Verito, Beat, New Verna and Fluence, respectively, in 2011.
While diesel cars are the current flavour, there are uncertainties in government policies, which may remove the advantage diesel cars currently enjoy over gasoline cars. India’s finance minister recently signalled that authorities would no longer extend the subsidy on diesel to passenger cars in future. At present, passenger cars contribute 15% of the total consumption of diesel in the country.
India’s finance minister recently signalled that authorities would no longer extend the subsidy on diesel to passenger cars in future.
As no concrete plans have been laid out, when and if the diesel subsidy is removed remains to be seen. One thing for certain is that the longer-term demand for cars in India still looks good. The automotive market in India is still underserved, with scope for players to penetrate further. “Currently India has 10 cars for every 1,000 people, versus 60 cars for every 1,000 people in Malaysia, and 750 cars for 1,000 people in Germany”, said Executive Director of SIAM, Sugato Sen.
Alliances and joint ventures are likely to continue as vehicle manufacturers look to grab more of the untapped market in India, the second largest automotive market in Asia. Such relationships may have rocky patches, as demonstrated by the crumbling Suzuki/Volkswagen capital and business alliance sparked by Maruti Suzuki’s aforementioned decision to buy diesel engines from Fiat. However, OEMs are likely to continue seeking tie-ups to draw on each others’ expertise to cope with the extremely competitive and challenging car manufacturing industry.
Even as Suzuki’s chief executive a ‘divorce’ from Volkswagen, there are signs that Suzuki would not be single for long. Fiat looks ready to step in, saying that Suzuki would be an interesting partner in Asia. However, any form of partnership is not likely to be the VW-Suzuki style tie-up; Fiat chief executive Sergio Marchionne said recently that he does not believe in share cross-holding.
The opinions expressed here are those of the author and do not necessarily reflect the positions of Automotive World Ltd.
Riddhima Saxena and Yu Cher Jou are correspondants at Mergermarket. www.ft.com/mergermarket
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