Running out of road: The death of diesel

New Delhi: When 29-year-old Arunima Bose’s family bought a car nearly five years ago, opting for diesel was a no-brainer. In the halcyon era of 2014, diesel variants were selling by the dozen, fuelled, in part, by a huge price difference between petrol and diesel. That era of diesel is about to hit a hard brake, and in such a dramatic fashion, that what happens to diesel might be the first tangible signs of the costs and pace of change associated with the world’s fastest growing economy’s push towards cleaner fuels.

Last month, Mint reported that Maruti Suzuki India Ltd, the country’s largest passenger vehicle manufacturer, is in discussions with its parent Suzuki Motor Co. of Japan on whether to stop development and production of diesel vehicles.

Automakers are, in part, being pushed by choices expressed by people like Bose. “I would want to consider an electric vehicle (EV) when I buy my next car,” she says. “But I don’t think they will be affordable. So, petrol will be the preferred choice,” adds Bose, who is a banking industry professional based in Kolkata.

As the Indian government has pushed through with stricter emission and fuel efficiency norms to deal with alarming pollution levels in most cities, vehicles with diesel engines may become a relic of the past by as early as the next decade. For automakers, the development cost of diesel powertrains or engines would almost double in the next five years, while the ever-narrowing price difference at the fuel pump will not make diesel cars a viable prospect for customers either.

India is set to embrace Bharat Stage (BS)-VI (equivalent of Euro 6) emission norms from 1 April 2020, while stricter fuel efficiency norms will kick in from 2022. Around the same time, Real Driving Emissions (RDE) tests will also be introduced, wherein greenhouse gas emission from vehicles will be tested in on-road conditions. According to industry executives and experts, these regulatory changes will sound the death knell for diesel as an engine fuel in India.

Uncertain environment

India is among the few large car markets in the world where diesel vehicles found significant traction and diesel vehicles constituted almost 60% of the total sales till about a few years ago as the price of diesel was regulated by the government and the difference in price between diesel and petrol was quite significant. Ever since diesel prices were left to be decided by market forces, customers started shifting towards petrol-driven vehicles in droves. Almost 70% of the sub-four-metre vehicles (small cars) sold at present in the domestic market run on petrol engines.

According to R.C. Bhargava, chairman of Maruti Suzuki, electrification is the only option for light commercial vehicles while heavy vehicles like buses can be electrified or might run on liquefied natural gas (LNG), depending on the development and operational costs. “When converted to BS-VI [standards], the cost of a diesel engine will increase by almost ₹1.25 lakh to ₹1.5 lakh. Overall, the difference in price of a diesel and petrol vehicle will be almost ₹2.5 lakhs. Then, what do you expect the customers to do? CNG (compressed natural gas) can be a replacement for both diesel and petrol and is already in use,” Bhargava said.

Essentially, BS-VI would upturn the cost dynamics completely. As the acceptable standard of fuel pipe emission changes, individual car users will be forced to pay a portion of the cost of keeping the air cleaner. And that simple regulatory change will alter the economics of what is “cheap”.

If diesel survives, its refuge would be in segments like the bigger sport utility vehicles (SUVs) or multi-purpose vehicles (MPVs), since customers at higher price points would not be constrained by the affordability factor.

“Diesel has been a fuel of choice because it is cheaper and the fuel economy was better. Today, to make a diesel engine BS-VI complaint is not very difficult but the cost of development is going to be much more expensive compared to a gasoline engine,” said Rajesh Goel, senior vice-president and director, sales and marketing, Honda Cars India Ltd.

“And with RDE coming in, this cost will go up even further. Hence, the attractiveness of diesel engines will further go down and I assume that will have some kind of an impact on the share of diesel because even now, the share of diesel cars has been progressively coming down in the last three years,” explained Goel.

Global impact

These anticipated changes in the Indian market will leave an inevitable ripple effect on the rest of the world. Apart from India being a major auto component manufacturer, Indians also buy an estimated three million cars every year (or about six new ones every minute). The changing cost dynamics and the Indian consumer’s shifting preferences will leave a significant global imprint, particularly on the small car market.

Nearly three-fourths of cars sold in the country are small cars and the segment is also the most price sensitive. And globally, this is the segment that is expected to be at the vanguard of the push toward petrol or CNG in the short term and to hybrid or electric technologies in the long run.

“What happens post BS-VI is a question that everybody asks,” said Pawan Goenka, managing director (MD) of Mahindra and Mahindra, in an interview to Mint in February. “Where the line is drawn between mid and large, we do not know. A 1.2-litre engine will certainly become more petrol. A 2-litre engine will certainly be diesel still. The 1.5-1.6 litre is on the edge and where it goes we don’t know,” he added.

According to a senior engineer with one of the automobile companies, after the introduction of new regulations, the total demand for diesel vehicles may come down to just 15-17% of the new vehicle sales. “Diesel will not be dead though it will be marginalized. In Europe as well, after the implementation of the Euro 6 emission norms, diesel demand nosedived in the hatchback and entry-level SUV segment and the same will happen in India. Diesel engines complying with BS-VI norms though will be as environment-friendly as petrol,” he added, requesting not to be identified.

Premium carmakers like Mercedes Benz, AB Volvo, BMW—the ones with a heavy diesel portfolio—have also committed a substantial percentage of their sales in the next decade from electrified cars as customers in the higher echelon have become extremely sensitive to investing in technology that is considered environment-friendly.

Apart from automakers and customers, certain hedge funds and foreign portfolio investors have also become wary of buying stocks of companies which will have too much exposure to diesel in its portfolio in the years to come, since it is considered a pollutant.

Pressure to go clean

A recent Greenpeace and AirVisual analysis of air pollution readings from 3,000 cities around the world found that 22 of the world’s 30 worst cities are in India. “This has an impact not only on citizens’ health but also on the country’s economy,” said Suvranil Majumdar, project lead, electric vehicles, International Finance Corporation, an arm of the World Bank Group. The push to reduce the number of polluting internal combustion engines is understandable, he said.

Diesel vehicle demand and sales hit a major roadblock when the Supreme Court banned the registrations of vehicles with diesel engine size of 2 litres and above in the National Capital Region, taking into consideration the alarming levels of pollution. The National Green Tribunal also restricted the use of diesel vehicles to ten years.

The union government is also trying to promote CNG-driven vehicles as an alternative to diesel in the short term until an ecosystem for EVs develops. By 2030, the union government will install 10,000 CNG pumps across the country to reduce the shortage of retail outlets. Through its public sector units like Gas Authority of India Ltd, the government also wants to promote the usage of LNG-based commercial vehicles.

On the back of such a hostile regulatory environment against diesel vehicles, automakers have justifiably taken a very cautious approach towards investing in the development or procurement of diesel engines of varying sizes in their future product portfolio.

The global demonization of diesel technology amplified when diesel vehicles manufactured by the German auto giant, Volkswagen AG, were caught flouting emission norms by using a cheat device in leading markets across the world in 2015. The Wolfsburg-based carmaker was caught cheating in India as well but the local emission norms were not as stringent as the developed markets of the US and Europe.

The checks on polluting diesel have only heightened since the scandal. Given the limited room to manoeuvre, it is hard to see a future for diesel in India, said Sumit Sawhney, former MD, Renault India Ltd.

The Electric Future

According to a recent Bloomberg New Energy Finance (BNEF) report on EVs sales outlook, sales of internal combustion engine-driven vehicles will start declining across markets from 2020, as EVs will gradually start getting more affordable. The upfront cost of developing EVs will become competitive on an unsubsidized basis starting 2024.

“Our latest forecast shows the sale of EVs increasing from a record 1.1 million worldwide in 2017 to 11 million in 2025 and then surging to 30 million in 2030, as they become cheaper to make than internal combustion engine cars. China will lead the transition, with sales accounting for almost 50% of the global EV market in 2025,” the report said.

The year 2020 will be a landmark one in India’s nascent push towards cleaner fuels. In all likelihood, BS-VI will mark the beginning of the end of diesel vehicles in India. And caught up in an uncertain world environment where the Donald Trump administration in the US is hell-bent on rolling back stringent Obama-era fuel emission norms, a European Union which seems to be willing to pay any cost for cleaner air, and a China that wants to become the global leader in EVs, India’s industry as well as government will be forced to make several hard calls. Hidden amidst those calculations will hopefully be the most essential question of all: how can India move while keeping its air clean at the cheapest possible cost.