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Car makers see future in small diesel engine

Maruti Suzuki, Hyundai, Honda and even Tata Motors are placing their bets on compact diesel cars to drive growth

Sharmistha Mukherjee  |  New Delhi 

Even as sales of small cars declined 13 per cent in the last financial year, leading car makers like Maruti Suzuki, Honda, Tata Motors and Hyundai are exploring options to develop or strap on diesel engines with reduced engine capacity to power vehicle sales in the category.

Japanese auto major Honda Motor Company, which launched its first major offensive in the Indian market with the launch of its diesel-powered entry-level sedan, the Amaze, last month, is looking at developing a diesel engine with reduced capacity to power small car sales in emerging markets. The diesel engine with displacement between 1 litre and 1.2 litre, once developed, would be the smallest for Honda globally. Atsushi Arisaka, chief engineer, large project development, Honda R&D (Asia Pacific), had recently told Business Standard, "We are looking at developing a smaller diesel engine. We are looking at a diesel engine with capacity between 1 litre and 1.2 litre. Once developed, it can be used for small cars." While Arisaka declined to specify a timeline for the launch, company sources say it usually takes two or three years from the start of a project to come out with the final product.

Honda's initiative could throw a major challenge to heavyweights such as Maruti Suzuki and Hyundai, which have maintained a stranglehold on the small-car market in India for over a decade. At present, Maruti Suzuki, with over half-a-dozen models, from the M800 to the Swift, commands 48 per cent share in the compact car category. Hyundai, the Korean automobile major, has a market share of 22 per cent. While Maruti Suzuki sources its 1.3-litre diesel engine from Fiat, Hyundai's i20 is powered by a 1.4-litre diesel engine. Both are reportedly working on bringing small diesel cars in the Indian market, where 58 per cent of new car sales happen in the diesel category. Tata Motors, too, has been mulling over the launch of a diesel version to beef up Nano sales.

Hyundai is scheduled to drive in a new compact car positioned above the i10 powered by a 1.1-litre diesel engine. Maruti Suzuki, in the meantime, is reportedly working on a range of diesel engines (of 1 litre and 1.4 litre engine capacity) with parent Suzuki Motor Corporation in Japan to power its vehicles in India. Deepesh Rathore, managing director of advisory firm IHS India, says, "Diesel powertrain makes a lot of sense in the A (small car) segment. There is not much competition and whoever comes out earliest with such a product would have an advantage as consumers in the category are particularly demanding in terms of fuel efficiency."

The roadblocks

But even as the gain from introduction of diesel engines in smaller cars sounds particularly lucrative, the proposition comes with certain riders. For one, it is difficult to strap on diesel engines to existing models which are driven by petrol powertrains currently. Experts point out that since vibrations from a diesel engine are stronger when compared with petrol powertrains, existing models would require structural strengthening, which, in turn, will result in considerable development costs. It is perhaps to address this concern that both Hyundai and Honda have ruled out introducing diesel engines in existing products in their portfolio. Even as the market was abuzz with rumours of Hyundai strapping on its 1.1-litre diesel engine on to the i10, the company has chosen to develop a new compact car positioned below the i20 which is expected to hit the roads in the second half of this financial year.

SHIFTING GEAR
  • Honda Motor Company, which launched its diesel-powered entry-level sedan, the Amaze, last month, is looking at developing a diesel engine with reduced capacity to power small car sales in emerging markets
  • Hyundai is scheduled to drive in a new compact car, positioned above the i10, powered by a 1.1-litre diesel engine
  • Maruti Suzuki is reportedly working on a range of diesel engines (of 1-litre and 1.4-litre capacities) with parent Suzuki Motor Corporation in Japan to drive its vehicle sales in India

Honda too, which recently introduced the 1.5 litre i-DTEC (exclusively developed for the Indian market) engine, has no plans to strap it on existing products including its entry-levell car, the Brio. The 1.5-litre engine would be sequentially adopted on to newer products, including the new City, the Fit (Jazz) and utility vehicles. The smaller diesel engine can be used to power entry-level cars, say industry experts. Hironori Kanayama, president and chief executive officer, Honda Cars India, has additionally hinted the car maker is exploring possibilities to launch a model below the Brio compact. "With economic development, there is increased consumer preference for more expensive cars which has resulted in a demand boom for utility vehicles. But that is not the only case in India. There are a large number of people who want to own cars, and because of such first-time buyers the compact car segment would continue to generate demand. While a final decision has not been taken, we are studying the market below the Brio," Kanayama says.

Honda's moves are strategic as it aims at doubling sales in emerging markets, including India and China, to three million units by 2017. A smaller diesel engine would give Honda (market share of 2.9 per cent in the small car category) a strong advantage in boosting volumes in the dominant compact car segment in India. Honda Cars India, which till recently had an all petrol line-up in the country, has seen its market share dip over the decade due to increased competition from global players. Sales of the company had dipped 8.47 per cent in FY12 at 54,427 units, but improved substantially last fiscal to 73,483 units post the launch of the Brio hatchback, its first truly volume model.

Price versus value
The second concern among car makers regarding the introduction of diesel engines on smaller cars revolves around the price-sensitive aspects of the entry-level segment. On an average, car makers charge a premium of Rs 1-1.5 lakh on diesel variants of mid-range cars. "Engine accounts for 20 to 25 per cent of the price of a car. As there is no significant difference between the cost of a 1.2-litre and a 1.5-litre diesel engine, per say, in small cars (priced around Rs 3.3.5 lakh) the cost of a diesel powertrain as a proportion of vehicle price can shoot up considerably which may make it an unviable proposition," says V G Ramakrishnan, senior director (automotive practice), Frost & Sullivan. If car makers, however, manage to control costs and contain the premium charged on diesel vehicles to Rs 50,000 to Rs 75,000 over their petrol counterparts, the market would still be upbeat for such products, industry observers feel. In fact, in a media interaction held earlier this year, Bo Shin Seo, managing director, Hyundai Motor India, conceding the point, had explained, "In the small car space, the mileage between petrol and a diesel car is not too different, and diesel car is more expensive; so it is a challenge."

But, all said and done, for large car makers such as Maruti Suzuki and Honda that do not have much to boast in terms of in-house diesel technology, development of R&D capability is of utmost importance. "Even if they choose not to use diesel engines on smaller cars, car can use turbo chargers and equip larger vehicles with these powertrains. It is important to have the knowhow and the technical capability as the market has clearly veered in favour of diesel powertrains," adds Ramakrishnan. In the last financial year, while sales of diesel vehicles increased by 27 per cent, the demand for petrol cars declined by 17 per cent. Diesel demand has been growing rapidly since the government decontrolled petrol in June 2010.

First Published: Mon, May 06 2013. 23:00 IST
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