Diesel car boom in India puts automakers in a fix

Carmakers in India face a quandary: diesel or petrol? 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 petrol and diesel.

Even so, Maruti Suzuki and South Korea's Hyundai Motor Co , which together sell 70% 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.

"We are still contemplating," Arvind Saxena, director for sales and marketing at Hyundai's Indian unit.

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

"If we invest, and in months, or years, the (diesel) price rises, we are left high and dry," Saxena said on the sidelines of the biennial India Auto Expo.

India deregulated the price of petrol in June 2010, and prices have shot up 30% since then. Diesel, widely used by farmers and manufacturers, remains subsidised.

Petrol, viewed as the rich person's fuel in India, now costs 56% more than diesel.

However, the 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 Rs 1,000 crores. Now the call of this decision is Rs 1,000 crores -- to do or not to do?"

Diesel-powered cars

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

Sales at market-leading Maruti Suzuki, predominantly a maker of petrol-fired cars, fell more than 16% 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 petrol 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 petrol engines.

"We're agnostic," Andy Palmer, an executive vice president at Nissan, said in an interview at the auto show.

"If the government dictates that the diesel price is X, we give you diesel. If it's Y, we say: here's petrol."