The agreement for sourcing the 1.3 litre multijet diesel engine, which powers various models of Maruti Suzuki including the Swift and Dzire, ends in April 2015, said one of the four people who all spoke on condition of anonymity. Spokespersons for both Maruti and Fiat declined to comment.
Maruti has renewed the agreement at a time when diesel car sales have been dwindling. The share of diesel cars as a percentage of total sales in the passenger vehicle market fell to 48% in first half of current fiscal from 62% a couple of years ago, prompting Maruti to halt its expansion plans for diesel engines, R.C. Bhargava, chairman of Maruti Suzuki, said in October.
He declined to comment on the agreement with Fiat.
Maruti, which also produces a 1.3 litre diesel engine at its Manesar facility under a licensing agreement from Fiat, agreed to buy 100,000 engines per year from Fiat in 2011 after a sudden spurt in demand for diesel cars, amid a widening in price differential with petrol.
The engine-making unit of Fiat, Fiat Powertrain Technologies SpA, has so far supplied close to 200,000 diesel powerplants to Maruti, said one of the four people cited above.
The new contract is “more or less on the lines of the previous one", said one of the four people cited above.
The company expects demand for diesel cars to remain robust and believes it might not be able to fulfil need on its own, said one of the four persons cited above.
Maruti produces 300,000 engines in Manesar. It has also set up a diesel engine plant in Gurgaon, which will make additional 150,000 units of Maruti’s indigenously developed 800cc diesel engine, which is likely to power the company’s latest Celerio model and a mini-truck to be introduced in early 2015, one of the four people cited above said.
“Demand for diesel cars has fallen, but if you look at the demand for Maruti’s diesel cars, it does not have its own capacity to meet that requirement," said one of the four people cited above.
Maruti sold as many 340,000 diesel cars, 33% of total sales, during year ended 31 March, this person said.
“The production at the Gurgaon plant is for a different set of engines, which are yet to hit the market," he said. “Even if one takes a very conservative growth for the industry, Maruti will require lot more diesel engines."
The sourcing from Fiat is based on the assumption that Maruti will be selling more diesel cars in future as it moves closer to the industry’s ratio of the diesel and petrol engines—48:52, he said.
“Diesel cars will continue to be in favour, given the price gap with petrol and better fuel efficiency," said Puneet Gupta, principal analyst at sales and market research firm IHS Automotive. Moreover, given the demand swings, it makes better sense for Maruti to source the engines rather than invest in creating its own capacity, Gupta added.
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