Vehicle makers have revived their plans to invest in diesel engine manufacturing facilities in India after the Indian government decided not to implement any additional tax on diesel-powered vehicles in the Union Budget 2012‐13 that was announced earlier this year. The decision to further invest in manufacturing is being driven by the strong demand for diesel-powered vehicles, which account for nearly half of all passenger vehicles sold in India, suggests Ammar Master, senior analyst, LMC Automotive*. Excerpts from a recent perspective in partnership with J.D. Power Asia Pacific on diesels in India:
“The main reason behind the strong demand for diesel-powered vehicles is the cheaper price of diesel at the pumps. In fact, the price gap between diesel and gasoline (petrol) has widened by as much as 40% since the government deregulated gasoline in June 2010.
As a result, the unexpected surge in demand for diesel vehicles caught India’s largest vehicle maker Maruti Suzuki off guard and the company lost sales.
Maruti Suzuki Plays Catch-Up to Raise Diesel Engine Supply
“Now, Maruti Suzuki plans to invest US $333 million in a new diesel engine factory at Gurgaon. The first-phase investment will be USD $186 million to set up the unit with annual capacity of 150,000 diesel engines, and is scheduled to come online by 2013. Another USD $147 million will be poured in the second phase to increase annual capacity to 300,000 units by 2014.
“With its diesel engine plant coming online, Maruti Suzuki will have at its disposal 700,000 diesel engines by 2014. This includes its diesel engine capacity of 300,000 units, 300,000 units from Suzuki Powertrain India, and 100,000 units from Fiat India. We believe this capacity to be sufficient for the Indian automaker based on our production forecast of 1.45 million units for Maruti Suzuki by 2014.
“In order to make room for the diesel engine plant in Gurgaon, Maruti Suzuki will be shifting production of some models to a new factory being planned at Mehsana (Gujarat). This unit is likely to begin operations in 2015.
Hyundai, Fiat, Tata Motors Finalize Diesel Engine Investment Plans
“Another vehicle maker that is making investments in diesel engine manufacturing in India is Hyundai. The carmaker is finalizing plans to invest USD $76 million in its diesel engine plant, which will be capable of producing 150,000 diesel engines per year.
“At present, the diesel engines that are installed in Hyundai models like the i20 and Verna are imported from Korea. With the start of its diesel engine plant, Hyundai should begin offering diesel variants of its i10 and Eon mini cars. We believe this would significantly improve sales for the Korean automaker.
“In addition, the surge in diesel vehicle demand is also benefiting Fiat India, whose joint venture plant with Tata Motors in Ranjangaon has the capacity to build 250,000 diesel engines.
“Apart from supplying diesel engines for Fiat and Tata models, the plant will also be delivering 100,000 diesel engines per annum to Maruti Suzuki until the end of2014. Fiat is also in talks with Premier Ltd. to supply its 1.3L diesel engine for the Premier Zotye Rio SUV. These new contracts for diesel engines will help Fiat improve capacity utilization of its facility since the Italian brand’s sales in India have been below expectations.
“Certainly, the increase in the supply of diesel-powered vehicles from almost all OEMs in the market will drive up volumes during this year and over the medium term. This is in line with the government’s short‐term policy, but we believe that given rising fuel prices, the government will eventually have to bite the bullet and start increasing the price of diesel.
“Over the long term, policy makers in India will need to look at deregulating diesel in phases. The government recognizes that fuel prices in India have to be rationalized in line with rising global prices. However, deregulating diesel prices has always been a politically sensitive issue. Even today, the government faces strong opposition from its allies. Any move to push through diesel deregulation will not come easy.” —Ammar Master, senior analyst, LMC Automotive in partnership with J.D. Power Asia Pacific
Note: J.D. Power and Associates and LMC Automotive have a strategic alliance to share data and produce sales forecasts based on J.D. Power’s real-time transaction data collected by Power Information Network® (PIN), with analysis and intelligence from LMC Automotive.