Maruti Suzuki’s massive diesel gamble: Risk to its No.1 spot?

The big announcement from Maruti Suzuki to stop selling diesel vehicles from April 2020 has left many surprised. While smaller diesel cars were expected to fade off, could the end of Vitara Brezza, Ciaz diesel pose a threat to the company's leadership spot? We explain.

By: | Updated: April 26, 2019 2:12 PM

 

Maruti Suzuki made a big announcement yesterday when it said that it'll no longer make or sell diesel vehicles 1 April 2020 onwards. Yes, no diesel vehicles at all and even the Super Carry LCV will be converted to petrol/ CNG. Now, this wasn't completely unexpected as the company has stated earlier that it would do away with small diesel cars with BS 6 emission norms kicking in as they would get too expensive. That said, getting rid of cars even such as the Vitara Brezza and Ciaz diesel is a bit surprising.

Getting rid of the 1.3-litre diesel engine is logical but why not persist with the new 1.5-litre diesel engine that is owned by Maruti Suzuki? The answer, Maruti says is that the cost of upgrading the unit to meet BS6 norms will be too high.

Commenting on the matter, Deepesh Rathore, Director, EMMAAA, said “I look at Maruti's announcement in the backdrop of the 1.3 litre's origins. The engine is licensed from Fiat so they pay royalty, eventually eating into their margins. Upgrading the engine to BS-VI may be a costly proposition and again MSIL might have needed Fiat's help in the same leading to more costs. Meanwhile, the 1.5 litre is their own design and it makes sense to work on that.”

Why are the stakes high?

The Vitara Brezza despite being sold only in diesel version is a sales star in the company's product portfolio and in the month of March 2019 it sold 14,181 units and 1,38,053 in FY 2019-19. Overall, diesel sales account for about 23% of total company sales annually. The latest announcement by Maruti Suzuki to do away with diesel, hence, puts a lot of volumes at risk. One could say at this stage that the company does have a strong lineup of petrol engines but there's more to consider. Another aspect working in favour of Maruti Suzuki is that the Indian market is increasingly leaning towards petrol cars as the price difference between petrol and diesel continues to diminish. Add to it the fact that more states in India apart from Delhi/ NCR will ban registration of diesel vehicles older than 10 years and the prospects of the oil burner seem darker.

However, the time frame in which Maruti Suzuki plans to achieve this shift is quite short, less than a year to be precise. Yes, a lot of potential customers will switch to petrol vehicles, offsetting the loss but not all will. At least not all for vehicles such as the Vitara Brezza or Ciaz and even the Swift. The reason for many choosing a diesel engine in these is the fact that people find them more fun to drive.

No diesel, then what?

So what next? Electric vehicles? Not really because RC Bhargava himself admitted at the time of making the announcement that small electric cars will be too expensive to develop and of course, let's not forget that the required charging infrastructure largely resides in computer hard drives and some government files in India today. Getting it on the streets for practical uses is not going to happen in a few years. Bhargava also mentioned the possibility of exploring Hydrogen fuel cell technology but with EV technology not even being at a stage of crossing infancy in India, there's a long time to go before anything considerable will happen in the field of hydrogen.

Risk to the Crown?

So does this mean Maruti Suzuki could lose its market share and possibly its leadership position in the market? Not really because the difference between Maruti Suzuki and second largest player Hyundai is quite huge. In FY 2018-19 Maruti Suzuki sales were than three times of what Hyundai sold. Hence, even if Maruti Suzuki were to lose a considerable percentage of volumes for some time there's no way Hyundai will be able to install enough capacity to fill the gap.

According to data from IHS Markit, the production forecast for Maruti Suzuki reflects that despite slowing diesel vehicles production overall volumes for the company will continue to grow. Volumes are expected to be around two million in 2019 with a slight dip to 1.95 million in 2020. This would be followed by a considerable rise to 2.2 million in 2021 and 2.3 million in 2022.

So what could realistically happen is that Maruti Suzuki will do everything in order to enhance the competitiveness of its petrol portfolio to offset the diesel lineup loss. In addition, the company will continue working on EVs but that's something that will reach considerable volumes in a few years. The slight decline in 2020 is what will leave some space for other carmakers to fill into.

All said and done, Maruti Suzuki still has the option of pulling out an ace out of the pack and surprise all. They own the 1.5-litre diesel engine and have said that if market demand and economics mandate the inclusion of diesel in their portfolio they could consider it. This sets up the market quite nicely for the next three to four years, all of which are going to be quite interesting for onlookers but tense for other carmakers.

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