Costlier diesel to change car market dynamics

Written by Shweta Bhanot Mehrotra | Viraj Nair | Mumbai | Updated: Mar 31 2013, 06:45am hrs
With diesel prices likely to go up steadily now that oil retailers plan to up the price of the fuel by R50 paise a litre every month till they no longer incur losses the dynamics of the auto industry could see a big change. The share of diesel vehicles is tipped to fall to levels of 30-40% from around 60-70% currently. While car makers recognise that life could be different, theyre not exactly panicking.

Already, the diesel vehicle market has de-grown 5% in February and is expected to further decelerate by 15% next year, driven down by fewer takers for utility vehicles (UVs).

Auto analysts believe higher prices of diesel will be the big factor impacting sales in this segment while the general sluggishness in the economy will keep consumer confidence low.

Of late, diesel vehicles have accounted for 60-70% of the total passenger vehicle market. With prices likely to go up, we expect the share of diesel vehicles to settle at levels of 30-40% which was where it was two to three years back, says Abdul Majeed, partner national automotive leader, PricewaterhouseCoppers (PwC).

Producers of diesel models, however, are taking the situation in their stride. Pravin Shah, chief executive officer automotive division, Mahindra & Mahindra (M&M) believes that sales wont suffer till such time as diesel prices rise by R5 per litre but agrees that any further increase would have an impact. Were looking at what needs to be done, he says.

Shahs immediate concern is the additional 3% tax on SUVs announced by the government in the the union budget for 2013-14.

This 3% is discriminatory and will dampen demand in the low- cost SUV market, especially at a time when the industry is going through a rough patch, he says.

Honda Cars India (HCIL), readying to launch its first diesel vehicle in the country this April 11, too isnt feeling the heat. Jnaneswar Sen, senior VPsales and marketing, Honda Cars India points out that the Honda Amaze, the first diesel offering, will have a petrol variant as well. We will let our customers decide which one they want. The correction being brought about in the auto market, as a result of higher diesel prices was due and will rationalise the industry, Sen says.

The team at Tata Motors believes the movement in diesel prices will have an impact because it is a change and any change has an impact. But, eventually consumers will choose a model on the basis of their needs of maintenance economy, performance and comfort, says a spokesperson for the firm. Tata Motors offers 43 diesel and 22 petrol models.

Meanwhile, Maruti Suzuki doesnt seem overly concerned. Indias biggest car manufacturer is moving ahead on the additional capacity for diesel vehicles at Manesar and has plans to increase it by 16% in 2013-14. Diesel-driven vehicles make up around 38% of the companys total sales;the management hopes to increase this to 43% by 2015.

Mayank Pareek, COO (sales and marketing), Maruti Suzuki India, is taking things one step at a time. We will evaluate what steps to take after the order backlog for models like the Swift, Ertiga and Dzire is cleared. Right now we are busy working to clear the backlog, Pareek says. Most of the cars that customers are waiting forestimated at 74,000 unitsare diesel variants and they will need to be patient for another six to eight weeks.

Analysts reckon the size of the diesel passenger vehicle market will moderate to levels seen in 2009-10; the price difference between petrol and diesel vehicles then was in the range of R10-12 per litre. Since then though the price difference diesel has widened with diesel cheaper by anywhere between R30-40 per litre. In Delhi, for instance, diesel costs R48.67 per litre following the R50 paise per litre increase last week while petrol costs R70.74 per litre, after a R1.68 hike earlier this month.

Majeed feels the next six months will be crucial for car producers especially if demand remains subdued. then they will be left with two optionssignificant inventory correction, or, stock clearance with heavy discounting. Mahantesh Sabarad, senior analyst, Fortune Financial Services is convinced the higher prices of diesel will hurt the segment. Sports utility vehicles (SUVs), that make a large chunk of the diesel vehicle have benefited but with the de-regulation in diesel prices the trend could change, he says, adding that following a 50% growth in 2012-13, the SUV segment could de-grow 10% next year.

Vishnu Mathur, director general, Society of Indian Automobile Manufacturers (SIAM) feels it may be too early to call a trend. Mathur, however, says demand for diesel vehicles, which may have been rising because of the subsidy given on the fuel, could retrace somewhat. Nonetheless, he points out that better mileage, as also some price advantage would keep demand for diesel vehicles at a certain level.

Maintenance costs for diesel cars have also come down, a factor that has resulted in higher sales, he observes.