Diesel cars are no longer a hit

Diesel cars are no longer a craze. With the price differential of petrol and diesel narrowing, car manufacturers are busy revising strategies.

While some are putting capacity addition plans of diesel cars on hold, others are mulling over reducing prices of diesel variants.

Market leader Maruti Suzuki has already shelved its diesel engine capacity expansion plan. However, the company is on track to introduce its small 800 cc diesel engine, which is expected to power Celerio and Wagon R and its light commercial vehicle thereafter.

"The craze for diesel cars is almost ending. However, certain section of customers will continue to prefer diesel cars with fuel efficiency being the biggest driving factor," said Puneet Gupta, associate director, IHS Automotive Sales Forecasting.

In fiscal 2015, petrol cars are back in action again. According to industry players, sales of diesel cars declined for the first time in the last three years, while those of petrol cars have grown 13-14%.

At present, a diesel car charges a premium of Rs 1-1.5 lakh over a petrol variant. "Maruti Suzuki is looking at bringing this down to around Rs 50,000 or so. The company is designing the engine from scratch and the pricing would be aggressive," said a person familiar with the development.

This would mean high localisation and cost efficiencies. "As a policy, we would not comment on future models and business strategy," said a Maruti Suzuki spokesperson.

Experts believe other OEMs (original equipment manufacturers) are likely to follow the market leader.

"Companies have made commitments for diesel engine manufacturing. Going ahead, manufacturers will have to work towards reducing costs and making diesel vehicles more viable for customers," said an official of another auto manufacturer.

The situation is in complete contrast to that of 2011, when almost every car maker was looking at catering to the sudden increase in demand of diesel cars.

Deregulation of petrol and the increasing price gap between petrol and diesel have also led to production constraints and increase in the waiting periods for popular diesel models. Companies were gearing up to launch more diesel variants, while manufacturers who were not operating in the segment rushed to have their presence.

To put things in perspective, almost five years ago, diesel cars accounted for almost 40% of overall sales. As the price gap between the two fuels continued to increase, the share of diesel cars also went up. According to industry estimates, in fiscal 2013, the share of diesel cars went up to 58%.

This was the year when demand reached its peak to 62% in favour of diesel in November, when the price difference between the two fuels reached Rs 32.

In January 2013, the government allowed oil marketing companies to increase prices of diesel by 50 paise a month. The diesel segment, which was the only saving grace for automakers in a slowing market, started seeing a decline to 53% (of the overall car sales) by the end of fiscal 2014.

A decision on deregulation of diesel is expected this month or anytime soon.

"If the current direction continues, it is more likely that, going forward, the demand would be in favour of petrol," said Mayank Pareek, chief operating officer (sales & marketing), Maruti Suzuki.

With uncertainty growing over fuel prices, manufacturers are forced to tweak their plans. However, efforts are in the pipeline to make diesel cars an attractive proposition for customers.

According to Deepesh Rathore, director of Emerging Markets Automotive Advisors, a Delhi-based research firm, "It is going to be difficult for OEMs to guess future demand. The attractiveness of diesel can only be maintained if companies narrow the price gap between petrol and diesel."

"The manufacturers will have to delay or rewrite their plans," he added.

Some of the manufacturers dna spoke to did not elaborate much on any tweaking of plans. "There isn't much effect on the demand for diesel cars, despite the increase in diesel prices. We are watching the trend on how the demand will be and how these products will be taxed," said Shekar Viswanathan, vice-chairman, Toyota Kirloskar Motor (TKM).

A late entrant into the segment, Honda Cars India introduced its diesel engine in April last year. Jnaneswar Sen, Sr vice president (marketing & sales), Honda Cars India said, "Earlier the demand was more subsidy-driven, now it will be more need-driven. There are certain segments like City, which are still diesel-driven. In April last year, 80% of Amaze sales came from diesel, which has come down to 55% today."

Hyundai Motor India said that the company has a flexible engine manufacturing plant, which gives them an advantage to make changes as per demand.

"In Q1, FY15, the share of diesel cars has dropped to 50% in overall industry sales. However, this correction in diesel penetration is a result of steep dieselisation in the last 2-3 years. With entry-level cars picking up and first time buyers coming back, this is likely to stabilise around 45-50% for the overall industry. However, diesel is still the preferred fuel in the utility vehicles segment and has a high share in premium compact and sedans," said a Maruti Suzuki spokesperson.