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Fuelling a diesel era

Surajeet Das Gupta | March 29, 2003

Did you think diesel cars were noisy and not smooth to drive? Think again. Or just take a look at Hyundai's new ad blitzkrieg to sell its recently launched Accent CRDi.

The "stupid diesel" ad makes a startling claim: the new diesel car, it says, is more comfortable and less noisy than petrol-engine cars.

Could that be true? Has a silent automobile revolution taken place under our eyes? Hyundai is convinced it can transform customer perceptions about diesel-engine cars. And it is expecting hot results. The company believes that 50 per cent of its Accent sales will come from the new model. It plans to sell around 1,000 diesel-engine Accents every month.

The early signs are promising. There are already long waiting lines for the Accent diesel. Says a bullish B V R Subbu, president, Hyundai. "The response has been overwhelming. We already have a backlog of six weeks in delivery of the car."

Hyundai isn't the only company that is pinning its hopes on a diesel revolution. A clutch of Indian car-makers are counting on new diesel-engine models to put them on the highway to profits. With petrol prices still 33 per cent higher than diesel, they are convinced that diesel will bring incremental volumes and new customers.

Take European carmaker Fiat. Last fortnight Fiat threw down the gauntlet to Telco's Indica by introducing the Palio diesel. The Indica has steered to the front of the auto industry's B segment (which includes cars like the Zen, Alto, Santro etc) because customers have fallen in love with its diesel version. Now Fiat is hoping that around 20 to 24 per cent of its Palio sales (including diesel and petrol) will come from this new model.

Says Anand Mohan Gupta, marketing director, Fiat India, "In 2001, we sold 32,111 Palios. This year, we have a target to sell 42,000 units, of which around 8,000-10,000 units will be the Palio diesel."

But the Tatas aren't about to be left behind in the diesel-powered race. Telco is storming the C segment market (Esteem, Ikon, Accent, Corsa etc) with a new offer: the Indigo. The company is hoping to pull the same trick that it did with the Indica and expects that about 80 per cent of the Indigo's sales will be the diesel model.

What about the market leader Maruti? The giant of the Indian car industry is already finding it tough to meet the demand for Zen diesels. This month it could produce only 800 compared to a demand for 1,200. What's more, the company is looking for ways to produce cheaper diesel cars. It is planning to indigenise the diesel engine, which is currently imported.

Says Jagdish Khattar, managing director, Maruti Udyog, "Our diesel Zen has done very well and we are working on a long-term strategy in diesel irrespective of whether the fuel price differentiation remains or not."

The result of all these moves is that the Indian car industry is increasingly running on diesel. Diesel models account for about 15 per cent of total car sales currently. But that's slated to move upwards steeply with the new launches that are taking place.

Subbu says that in the C segment diesel sales will go up from 15 per cent to as much as 25 per cent of total cars sales over the next 12 months. Says Vikas Bali, an expert on passenger cars in AT Kearney, "We expect the share of diesel cars in total sales to go up by 2 to 3 per cent."

So, what's prompting car companies to put their faith in diesel? One reason has been the upgradation in diesel technology which makes it possible for diesel cars to combine the advantages of a petrol car--smoothness in driving and lower noise levels--with the power and mileage of a diesel car.

Says Rajiv Dube, GM, Commercial, Passenger Car Business Unit, Telco, "The impression consumers had, regarding diesel engines being noisier and vibrating, is changing now as better technology is replacing the older engines and is making the new diesel models just as comfortable and with as many features as a petrol car."

For instance, the new CRDi engines (which power the Accent,) provide numerous advantages: they offer around 30 to 35 per cent more mileage (around 24 km a litre). That isn't all. They also offer around 25 per cent more power than a normal direct injection engine. Also the pick-up and acceleration are far superior (they offer 70 per cent more torque than a normal diesel engine).

If that isn't enough, the CRDi isn't noisy and the driving comfort more than matches that of a petrol-engine car. Says a Hyundai executive, "It is the latest technology in diesel which is being used by Mercedes cars."

Fiat on the other hand is using a naturally aspirated engine, which is far superior to existing diesel engines but is at a category lower than the CRDi. The reason: Fiat says maintenance costs are lower and putting in a CRDi engine would have made the car too expensive. But the company is planning to use the CRDi for the diesel version of the Siena, which is scheduled for launch later this year.

Secondly, companies are increasingly realising that there are niche markets where diesel can score. The Indica, for instance, has been extremely successful in the tourist car segment. The Palio is hoping to tap buyers who travel long distances.

Says Gupta, "The idea behind launching the Palio diesel was to target customers who not only drive within the city limits but also venture into long highway driving from one city to another. These people are extremely cost conscious and want running costs to be low."

Do companies like Fiat run the risk of cannibalising sales from their own petrol models? Fiat doesn't think so because it believes that the customers who buy petrol-driven vehicles and diesel-driven cars are different. In fact, they expect diesel to offer incremental sales volumes.

That's been the experience at Ford. About 15 per cent to 20 per cent of the Ikons it sells are powered by diesel and the company says sales have been extremely steady.

What's adding to the attractiveness of the diesel cars is the aggressive pricing strategies which companies are following. For instance, the Palio diesel costs about Rs 43,000 more than a petrol model.

And the gap between the Accent CRDi and a similar petrol version has come down by around Rs 10,000 (the difference now is around Rs 60,000).

Says a Mumbai-based analyst, "A clear attempt has been made by carmakers to reduce the gap between diesel car and petrol car prices. That will surely attract more customers." 

Of course, many companies see entry into diesel as a tactical weapon to take on competition. Maruti, for instance, has used the Zen diesel primarily to offer its customers an option so that they do not shift to the Telco Indica.

Admits Khattar, "Our presence in the diesel market has been tactical. We also entered the Esteem diesel segment and made our presence there."

Inevitably, the diesel movement has its detractors. Most importantly, diesel won't be cheaper than petrol for very long.

The 33 per cent difference between petrol and diesel should vanish over the next two or three years. Once that goes there are fears that diesel sales will plummet.

Analysts also point out that diesel cars have a lower resale value because of higher depreciation levels. AT Kearney says that a diesel car depreciates by around 50 per cent (compared to 40 per cent for petrol cars) after a four-year period.

Thirdly, according to another study, it costs almost the same to run petrol and diesel cars over a three-year period. That's because maintenance costs are far higher for diesel cars.

But, as Bali points out, "We still see a three-to-five-year window when there will be a price differential between petrol and diesel. So it is a door of opportunity for car makers." And the car companies are racing to get through that door of opportunity while it is still open.

Additional reporting: Partha Ghosh and Arti Sharma.



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Sub: Fuelling a diesel era

I think the prediction that diesel will stop being attractive once prices of petrol and diesel become equal is only partly true. In continental europe, ...


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