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Maruti signals new drive with diesel phase-out

Murali Gopalan | Updated on May 02, 2019 Published on May 02, 2019

Crude factor Maruti is taking a calculated risk on petrol, given crude pricing uncertainty   -  istock

New fuel alternatives could power the country’s largest carmaker

Maruti Suzuki has been the biggest newsmaker lately, thanks to its announcement on phasing out diesel cars from April 2020.

This is the time Bharat Stage VI emission norms become mandatory and the country’s largest carmaker clearly does not think pursuing with diesel is an economically viable option.

At one level, Maruti is spot-on with its assessment even while some of its top selling models, like the Vitara Brezza, are powered solely by diesel. After all, crude prices have been rising steadily and there is no telling if they will quickly breach the $80/barrel mark in the coming weeks.

By the end of the day, crude is a political commodity that can see wild fluctuations depending on the state of global affairs. For now, the US stance on Iraq as well as the crisis in Venezuela clearly signal a period of uncertainty, which simply means that crude could flare up.

If this results in breaching the levels of $100/bbl, as some experts fear, then things could get very uncomfortable for emerging markets like India.

It is bad enough that automakers will need to spend quite a bit on new technology for the BS VI era which, in turn, will be passed on to customers. Additionally, the prospects of paying more for fuel will be a double whammy for the end-user.

Petrol, flavour of the season

For a brand that has constantly focussed on cost-of-ownership, Maruti is clearly of the view that such a scenario will hardly help its cause. Diesel cars are more expensive in any case and if this is accompanied by a hefty rise in the fuel’s price, there is no way customers are going to queue up at showrooms to buy them.

Also, there has been a distinct drop in diesel’s consumption pattern since the time its prices were deregulated and the hefty subsidy component knocked off in the process. During the days of cheap diesel till less than four years ago, the market had virtually given petrol the cold shoulder. These were the days when the price differential between the two was over ₹20/litre.

This has since reduced to less than ₹7/litre and the effect is there for all to see. Petrol has become the flavour of the season all over again and, except in the case of SUVs in the personal mobility space, diesel has pretty much been relegated to the sidelines. Given this backdrop, there is logic in Maruti’s decision to stop producing diesel cars even while its top management has reiterated that it can revisit the option if so required.

Typically, the company would only be inclined to do this if crude prices crash mysteriously to levels of $40/barrel as was evident during a large part of the BJP regime beginning 2014.

This would mean that diesel could become affordable all over again and customers will naturally make a beeline for vehicles powered by the fuel.

Yet, there are some hardcore realities to reckon with in a country that is on its way to becoming the third largest automobile producer in the world after China and the US. It is no secret that since the Volkswagen diesel fudging scam broke out in 2015, the fuel has fallen out of favour, especially in Europe.

India, likewise, has had its issues with diesel over the years. During the years it was generously subsidised, environmentalists were furious with what they perceived as pampering fuel-guzzling SUVs. Even as manufacturers protested, these vehicles were often slapped with heavier excise duties by the government.

The reasoning was that if they operated on cheap fuel, customers had to jolly well be prepared to pay more for them. This issue has died down ever since prices were regulated but diesel vehicles continue to be seen as one of the many culprits in emissions. It was in 2015-16 when Delhi banned the use of 2000cc plus diesel-driven vehicles for nearly eight months and their manufacturers really suffered in the process, since they were denied access to an important market.

There is no telling what surprises could be in store during the BS VI regime even while automakers insist that cleaner diesel is the best way forward.

After all, it is amply evident across the world (and India) that legislation will play a big role when it comes to vehicular emissions. The industry was truly gobsmacked in March 2017 when it was directed by law to phase out all BS III stocks in less than a week. It was told only to have BS IV-compliant vehicles on the road and this was a clear message that there would be no relaxing of rules, especially when it concerned the environment.

Diesel has been the biggest casualty of all these changes in recent years even while it possibly does not deserve all this bad press. Manufacturers may cry foul but, increasingly, it is evident that the legislation axe will first fall on diesel even if this is seen as being arbitrary and unjust, as in the case of the Delhi ban.

Factors at play

Maruti may have factored all these issues before deciding to go ahead with this move. But is it taking a big chance in the process? Can it hold its own in a BS VI era against other SUVs from the stables of Mahindra & Mahindra, Hyundai and Ford, which will certainly have diesel in their fuel portfolio?

It is difficult at this point in time to indulge in crystal-ball gazing and predict what the future has in store. Yet, there are some hard truths that just cannot be wished away as detailed above. One, diesel consumption in the personal mobility space has come down dramatically since the time prices were deregulated.

Two, investments in BS VI technology will be considerable and need to be recovered from customers. Diesel vehicles, which are already dearer than petrol, will only get more expensive in the process. Three, crude prices are on the ascent, which means auto fuels will burn a larger hole in customers’ pockets. Four, diesel is rapidly falling out of favour in Europe while the green lobby in India constantly sees it as the villain of the piece when it comes to fouling up the air. Given these obvious headwinds, it was only natural for Maruti to focus on petrol even while it could be a calculated risk, especially from the viewpoint of the uncertainties in crude oil pricing movements.

Cost-of-ownership paradigm

The company, though, is more than likely to come up with other fuel options focusing on the cost-of-ownership paradigm. These could include electric, CNG, LPG, etc., where a strong ally like Toyota will extend a huge helping hand. And even if the Brezza does not have a diesel, it could still get one from Toyota in its re-badged avatar as part of the product swap agreement with Suzuki.

History will also reveal that Maruti has hardly been a proactive diesel participant in India’s automobile arena. It was only in 1998, a good 15 years after it set up shop here, that it went in for the TUD5 diesel engine from Automobiles Peugeot (the present Groupe PSA) that was fitted in the Zen.

This was perhaps in reaction to Tata Motors’ decision to have diesel as its driving force for the Indica 20 years ago. It was also evident then that customers were making a beeline for diesel cars, thanks largely to the fact that the fuel was much cheaper than petrol.

Despite this, Maruti really had no reason to step on the gas with diesel simply because its compact petrol-driven offerings were doing very well in the market. The pace of dieselisation in passenger cars rapidly increased when crude prices went out of control in 2008 and touched levels of $150/bbl.

Diesel, though, was still heavily subsidised and vehicle sales soared. The honeymoon came to an end when prices were deregulated and customers faced the harsh reality of paying more.

How the scenario will pan out in the BS VI era remains to be seen even while Maruti has already signalled its intent.

Published on May 02, 2019
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