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Diesel car boom in India puts carmakers in a fix

By Motortrend India Staff   |   08 January,2012

In a market where once-rampant growth has been stalled since mid-2011, demand for diesel-powered cars continues to surge, with buyers willing to wait months to take delivery because of a widening gap between prices of gasoline and diesel.

Even so, Maruti Suzuki and South Korea’s Hyundai Motor Co, which together sell 70 per cent of the passenger cars in Asia’s No.3 economy, are reluctant to invest to make more diesel cars, even if it means losing customers.

As with many industries in India, the plans of carmakers hinge on uncertain government policy.

The government deregulated the price of petrol (gasoline) in June 2010, and prices have shot up 30 per cent since then. Diesel, widely used by farmers and manufacturers, remains subsidised. Petrol, viewed as the rich person’s fuel in India, now costs 56 per cent more than diesel.

However, the federal government is contemplating new taxes on diesel vehicles, according to news reports, and this could disrupt the demand pattern. The taxes could be announced in the 2012/13 budget that is expected to be handed down in mid-March.

"In the absence of any clear policy, we are at a dilemma," said Mayank Pareek, head of sales and marketing of Maruti Suzuki, controlled by Japan’s Suzuki Motor Corp.

"Our engineering people tell us that if you set up a plant (for engines) with a capacity of 100,000 vehicles, it costs 1,000 crores (10 billion rupees, or $189 million). Now the call of this decision is 1,000 crores, to do or not to do?"

Diesel cars now account for about 40 per cent of total sales in India, compared with less than 20 per cent few years ago.

Sales at market-leading Maruti Suzuki, predominantly a maker of gasoline-fired cars, fell more than 16 per cent in the nine months to December as a series of interest rate increases and rise in gasoline prices hit demand.

The company was also hobbled by labour disputes. The demand slump forced Maruti to cut production of several gasoline models in August, while some of its diesel models have a waiting period that runs to months.

Maruti could have sold more cars in 2011 only if it had larger capacity to make diesel cars, Chairman R.C. Bhargava told Reuters in November, lamenting how competitors like utility-vehicle maker Mahindra & Mahindra, which only makes diesel vehicles, were enjoying strong growth.

Nissan Motor Co, which started making cars in India only in 2010, is better positioned. Its plant in Chennai can switch between diesel and gasoline engines.

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