Bigger, not better

Flawed govt policy is forcing car makers to shift to SUVs

Over the next few months, Maruti Suzuki, Tata Motors, Ford, General Motors and Mahindra & Mahindra will launch new sports utility vehicles (SUVs). That’s because the market for SUVs is booming. Sales have grown 57 per cent in the first five months of this financial year (to 207,000 units), while passenger car and van sales have fallen 0.33 per cent, according to the Society of Indian Automobile Manufacturers. SUV sales were 15.6 per cent of car (and van) sales in April-August 2011-12; in April-August 2012-13, they became 24.6 per cent, or almost a quarter, of car sales. Other car makers, like Hyundai, Nissan and Toyota, are studying the market to launch low-cost mini SUVs — a clear signal that the market is ready to attain critical mass. Simultaneously, many argue SUVs should be taxed higher than cars because these are fuel guzzlers and the unintended beneficiaries of the subsidy on diesel.

The automobile market may look sedate and unexciting on the surface, but internally it is witnessing two tectonic shifts: one, diesel is becoming the preferred fuel for passenger vehicle owners, and two, SUVs are seeing rapid growth. The two are, in fact, linked; they’re both the side effects of poor government policy. SUVs are not known for their fuel efficiency, but the subsidy of Rs 11.65 per litre on diesel makes them economical to run. It is cheaper to fill the tank of an SUV with diesel than a sedan with petrol. In Delhi, for instance, refuelling a 70-litre tank of an SUV with diesel (about Rs 47 a litre) will cost Rs 3,290, while refuelling a much smaller 45-litre tank of a sedan with petrol (about Rs 68 a litre) sets you back by Rs 3,060. Recent SUVs have even increased mileage (up to 15 km to a litre), making diesel-run vehicles more popular. Meanwhile, India’s traffic remains chaotic, with under-enforced laws, so driving a big vehicle provides not just a sense of machismo but a degree of safety; and potholed roads make higher ground clearance useful. There is nothing to indicate that the recent rise of Rs 5 per litre in the price of diesel has dampened SUV buyers’ enthusiasm. But will they still queue up in front of SUV showrooms when, and if, the entire subsidy on diesel is removed?

Without that course correction, car makers’ research and development (R&D) work will be further distorted. The world over, petrol cars far outsell diesel cars. So, a large part of the research dollar goes into petrol engines. In India, the situation has been reversed: diesel cars today outsell petrol cars 4:1. So, car makers have had to disengage from their global research and work afresh on diesel technologies for India. This disrupts the economies of scale that come from research synchronised across markets. Until now, Indian R&D was driven by small cars. But, in the days to come, car makers will shift focus to SUVs because that’s the category fetching them volumes. The good thing is that, like cars, more than one SUV can be launched on a single manufacturing platform. The Toyota Fortuner and Innova share the same platform, for example, as do Mahindra & Mahindra’s Scorpio and Xylo. And, until the distortions caused by poor transport and diesel pricing policies are removed, this trend will only continue.