– By Girish Bhise
Come April 2023, the automobile industry will shift to implementing the new BS6-II emission norms in the country. The critical change is the implementation of Real Driving Emissions (RDE), which requires real-time monitoring of a vehicle’s emission levels. This change from BS6 stage 1 required vehicles to be tested only in laboratory conditions. Vehicles must have an Onboard diagnostics device (OBD-2) to perform emission testing in actual-world conditions. The transition would also involve changes in the hardware and software of the vehicles, including an upgrade in semiconductors.
Estimated Cost Impact
For passenger vehicles, the cost increase is expected in the range of INR 10,000 to INR 50,000, depending on the model and engine capacity. This price hike is lower compared to hikes ranging from INR 50,000 to INR 90,000 seen at the time of transition to BS6 stage 1. In the case of commercial vehicles, it is expected to increase in price by up to 5.0%. Within 2-wheelers, the entry-level segments are expected to be impacted more due to the transition-led costs.
For all sub-segments like commercial vehicles, cars, 2-wheelers and 3-wheelers, the impact of BS6-II is not expected to be as drastic as it was in the change to BS6-I. The exact increase in the cost of all the sub-segments remains to be seen.
In the face of persistent inflation, consumer discretionary spending has been stressed for the past few quarters. The auto sector has seen significant cost increases since 2020, first due to the transition to BS6 stage 1, the implementation of several safety norms, and recently a sharp rise in input costs last year. As prices of vehicles increase further, consumers may opt to delay their purchase decisions until prices stabilize.
This is especially true for entry-level segments where affordability is a key consideration for buyers. However, this impact is likely to be short-lived, as consumers are becoming increasingly aware of the benefits of using vehicles that conform to the latest emission norms, such as improved fuel efficiency and reduced emissions. Demand for premium/ high-end vehicles may be relatively low.
The transition to BS6-II will have a higher percentage cost impact on smaller cars, especially ones with diesel engines. While some higher-capacity diesel cars have already seen upgrades, the same is difficult to implement in the smaller engine capacity diesel cars due to the issue of affordability.
Several models will be discontinued from April 2023, including the Honda Amaze
Readiness of Auto OEMs
Auto OEMs have been preparing to transition to the BS6-II norms over the past few months. Most major automakers have already announced their readiness to meet the new norms and have changed their product portfolios to ensure compliance. Tata Motors completed the transition to BS6-II in February 2023. Maruti Suzuki claims that 99% of its portfolio already complies with the RDE norms. Honda Motorcycles has announced its readiness to adopt the new norms.
Maruti Suzuki has seen higher discounts in February 2023 as dealers try to reduce the inventory for older vehicles before the transition. Some pre-buying was seen in retail sales of February 2023 and could also be seen in March 2023, as customers tried to avail of lower prices before April 2023. OEMs cannot produce vehicles without RDE post 1st April 2023 but can still sell the already manufactured cars even after the deadline.
Possible impact on auto stocks
Price hikes from regulatory change may affect the entry-level segments already seeing lower demand due to macroeconomic factors. However, the premium/ higher-end models are unlikely to drastically impact demand as the price change in % terms will be small. Despite all the headwinds, these premium variants are already seeing good demand in the market. However, due to supply chain constraints, production has lagged in demand, especially for the passenger vehicles segment, leading to high waiting periods. As a result, vehicle wholesales might see some cautionary pullback before the transition, but there could be quick resumption as OEMs work on fulfilling their large pending order books. Impact on share prices due to the transition could be minimal or short-lived due to early preparedness of OEMs, relatively less cost impact vs BS 6 stage 1, and the supply catching up to demand.
(Girish Bhise, Founder & CEO, ValueAdd Research and Analytics Solutions (ValueAdd). The views are personal.)