BS-VI: Challenges and opportunities

The transition to BS-VI is a critical milestone for the auto industry. The focus must be on partnerships with suppliers, preparing for intensifying global competition, and cost reduction

The onset of BS-VI emission norms in April 2020 will witness a major transition by the Indian automotive industry. This will result in a reduction of almost 70 per cent in nitrous oxides and hydrocarbons, and a 50 per cent reduction in particulate matter emissions, compared to BS-IV norms. Additionally, on-board diagnostic and enhanced safety and durability norms will kick in, bringing a new set of requirements to be complied with. After this, there will be three more stages of these norms (steps B and C are expected in 2022 for commercial vehicles and step D is expected by 2023), before it can be said that India’s auto emissions norms are at par with Euro 6.

 
Although this transition will ensure a much-needed reduction in vehicular emissions, it comes with a set of challenges for the industry. We explore here both key challenges as well as  areas of opportunity that auto original equipment manufacturers (OEMs) can benefit from if they take the right steps, going forward. To do so, OEMs must focus on how their peers in developed geographies responded when faced with similar challenges and opportunities.
 
Changes in engine and after-treatment systems are expected to account for a total one-time investment of around Rs 40,000-50,000 crore and an operating cost impact of Rs 30,000-40,000 crore for automotive OEMs. This increase in investment and operating costs will, in turn, result in increases in vehicle prices. Given that India has leapfrogged BS-V, the overall cost of vehicles is expected to increase by 10 per cent for two-wheelers, 5-6 per cent for petrol cars and 8-12 per cent for diesel cars, and around 15 per cent for commercial vehicles.

 

OEMs may not find it feasible to pass on the full increase in costs to customers in one go. In Europe, the transition from Euro 5 to Euro 6 saw an increase of 20 per cent in terms of cost and 7 per cent in terms of price for large trucks. Additionally, with the expected decline in demand post-transition, OEMs need to proactively ensure a strict focus on direct material cost reduction and on optimising fixed costs to protect Ebitda (earnings before interest, taxes, depreciation and amortisation) margins. This will also be critical when it comes to planning the next set of investments required for Step D, CAFE (corporate average fuel efficiency) norms and electrical vehicles.

 
OEMs will also need to make changes to manufacturing lines owing to the new BS-VI parts that would need to be installed. This is a potential opportunity to implement Industry 4.0 measures. OEMs should think of building flexible manufacturing lines, increasing productivity and quality through IoT (Internet of Things) enablement and increasing automation during this transition to prepare for the future.
 
Lastly, the transition to BS-VI is also an opportunity for OEMs to focus on building more strategic technological and manufacturing partnerships with suppliers of key emission-related components, especially with the increasing number of electronic components.
 
Post BS-VI, it is also likely that there will be an increase in competition from global OEMs, given that it will become a more level playing field. By 2025, 85 per cent of global automotive demand by volume would have moved to the Euro 6 equivalent, and the larger global OEMs will be able to leverage their economies of scale to bring ready powertrains and platforms into the growing India market.

 
Equally, this levelling of the playing field presents the Indian OEMs with an opportunity to sell more globally. With unifying powertrain norms, markets such as China, Russia, LatAm, and even Western Europe can be targeted by leveraging the frugal engineering of Indian OEMs to play in the mid-price segments. 
 
Building a loyal customer base with a focus on after-sales servicing will be critical to differentiate in the market. With the combination of new BS-VI technologies such as SCR and DPF coming in, service revenue for OEMs is likely to increase, at least in the short term. The unorganised sector will need to build up its capability for servicing BS-VI vehicles. This can help OEMs build a stronger loyalty loop, with the next set of customers buying BS-VI and improving on service revenues both for the OEM and its dealers. Developing end-to-end value propositions such as connected solutions, telematics, leasing, load-sharing and fleet management will be key in countering the entry of other global OEMs in an already competitive market.

 
A few passenger car OEMs have already announced they will discontinue diesel cars after BS-VI, primarily due to the higher investment required and higher costs of diesel powertrains. However, the advent of CAFE norms in 2021 and 2022 will be more favourable to larger diesel cars, given that they are thermodynamically more efficient. OEMs will need to think strategically about both BS-VI and CAFE norms, and how they could utilise them to be effective.
 
In sum, the transition to BS-VI is a critical milestone for the auto industry. The focus must be on partnerships with suppliers, preparing for intensifying global competition, pushing for international growth, and cost reduction. OEMs that act on this by mitigating near-term disruptions through operational efficiencies and planning for the longer term will emerge stronger from this transition.     Dhawan is senior partner and leader, advanced industries, Asia-Pacific region, McKinsey & Company. Gupta is partner, and Chaudhury is associate partner