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January 2011 Info Alert No: 56

Indian Automobile Industry: Long term (Part 1)

Green Revolution
India is home to a vibrant automobile of more than 40 million vehicles. It has been one of the few worldwide
which saw growing passenger car sales during the recession of the past two years. In fact, in 2009-10 it has
recorded its highest volumes ever. It is believed this upward trend will be sustained in the foreseeable future
due to a strong domestic market and increased thrust on exports.

The nature of the long term state of the Indian automobile industry appears fluid, given that globally
evolving phenomena such as the rise of greener, hybrid vehicles are yet to take off in India. However, the
Indian automotive industry has scripted a different story in the development of greener vehicles with the
rise of CNG as a popular option among consumers. In this context, we discuss the following trends:-

Green revolution

In July 2010, Toyota announced the sale of its 200,000th Prius1 in Europe, as well as the tenth anniversary of
its launch of the Prius . It is expected that Toyota will sell 2 million Prius cars worldwide soon. The milestone
is all the more remarkable given that Toyota sold its 100,000th Prius in Europe only about two years ago,
underscoring the growing importance of electric vehicles in the green sector. Many manufacturers and
models (GM’s Volt, Ford’s Focus RV and Nissan’s LEAF among others), despite being relative latecomers to
the green sector, have tried their best to catch up with Toyota and Honda. Not everyone has taken the plug-
in hybrid route. Even niche manufacturers such as California-based Tesla2, with offerings such as the
Roadster, have enlivened a space which saw its first prototypes emerge decades before the price of gasoline
was even a concern.

Commercial vehicles, however, have so far not seen the intensity of product development witnessed in
passenger cars. However, the commercial vehicles sector has seen vehicles developed based on alternative
fuels. From vehicles developed to handle ethanol-based fuels in Brazil, to CNG3 buses in India, several OEMs
have ridden the green bandwagon.
Drivers/Critical Success Factors for Green Vehicle Development Globally

Globally, countries which have taken the lead in developing green vehicles (US, Germany, Israel, China,
France and Brazil), have all seen significant government involvement. Furthermore, the availability of
investments in unproven technologies, as well as clusters of support industries, has ensured that the sector
has sustained innovation. In the early years of hybrid cars in the US, endorsements by celebrities are
believed to have boosted the cars’ popularity. Interestingly, in KPMG’s Global Auto Executive Survey 2010,
most industry leaders seemed to agree on hybrid technologies being the most important alternative fuel
technologies, followed by battery electric power. This consensus was almost uniform across regions, despite
regional differences in the popularity of vehicle types and segments.

Key alternative fuel technologies in the future - percent of executives who considered it important
Green Vehicles in India

As with conventional automobiles, the Indian industry has taken a path different from that of the global
industry in the development of green vehicles. The development of cleaner vehicles in India began with a
regulatory push for CNG buses and three-wheelers in New Delhi more than a decade ago. In all other
segments of the automobile market, demand has grown largely based on customer awareness and a pull for
products motivated largely by perceived economic benefits. For instance, LPG kits were available in the
market more than a year before the first entrant in the field, Maruti Suzuki, introduced factory-fitted
vehicles in 2004. In recent times, electric two wheelers have ridden on the back of customer demand for
vehicles with lower running costs, as well as some incentives to users in the form of little or no duties on
electric vehicles (and parts) in areas such as New Delhi.

This lack of technological consensus may be hindering the creation of an adequate green infrastructure,
according to Ashok Taneja, Managing Director of Shriram Pistons. “Each OEM currently seems to be pursuing
multiple technologies such as CNG, bio-fuel, hybrids, hydrogen, fuel cells, Plug-ins or EVs,” he says. It is like
hedging bets, not knowing which technology will eventually prove successful. “When there is consensus it
will have to be a public-private partnership because the government alone doesn’t have the capacity to build
the infrastructure.” He argues that the government must bring manufacturers on board and finalize a 10-20
year blueprint for the introduction of greener vehicles. Nevertheless, the Indian auto industry today seems
to be evaluating two paths in its move towards greener vehicles:

• CNG/ Dual Fuel4 Vehicles

• Electric/ Hybrid Vehicles

CNG/Dual Fuel Vehicles

This part of the industry has developed largely based on legislative and judicial activism and the subsequent
availability of CNG fueling outlets across major parts of the country. The government ordered the conversion
of existing diesel/petrol-based public transport vehicles (buses, taxis, and auto-rickshaws) to CNG in several
cities including New Delhi and Mumbai, in response to growing concerns over emissions. While there is
debate over the effectiveness of CNG in reducing pollutant emissions, there seems to be support for CNG-
based vehicles in New Delhi5, and sustainable urban transport in other cities (Mumbai, Ahmedabad, and
Surat) Furthermore, other theoretical studies also support the introduction of CNG buses in place of diesel
as an effective method in reducing emissions. India has the world’s fifth largest number of natural gas
vehicles amounting to a little less than a million vehicles.

It is believed that at least 5 percent of new car buyers opt for a CNG variant where available. This could grow
in the future as the demand increases for vehicles with lower running costs, although currently most
LPG/CNG variants of passenger cars cost about INR 15,000 to 50,000 more than their conventional
counterparts. The higher purchase price of dual-fuel cars is normally compensated in less than two years
based on cost per km, because dual-fuel cars offer up to 50 percent savings based on current prices of petrol
and CNG. The increasing availability of fueling stations in cities and on major highways is also encouraging
sales. The state of Gujarat is a case in point on CNG, accounting for about a fourth of all CNG vehicles in India
in 2009, while having only about a third of the 560 CNG refueling stations.

Growth of CNG Vehicles in India

Comparison of cost/km fro CNG and petrol

Electric/Hybrid Vehicles

Battery powered/plug-in hybrid electric vehicles (BEV/PHEV) have continued their steady growth worldwide,
despite accounting for only about 1percent of all vehicles sold in 2009. In India, electric vehicles have just
begun making some inroads into the market. In passenger cars, there is only one established domestic
manufacturer, Reva, whose sales account for less than 1 percent of all passenger cars sold in India. However
this could change soon with Mahindra &Mahindra’s (M&M) acquisition of a majority stake in Reva. In the
two-wheeler market, an electric scooter is available for less (about USD 600) than a conventional scooter
(about USD 900). Soon, Indian electric vehicle manufacturers are expected to launch electric motorcycles.
Given that motorcycles account for more than 80 percent of all two-wheelers sold in India, the introduction
of electric motorcycles could have a significant impact on the market for electric vehicles. However, electric
two-wheelers have seen a recent reversal of fortunes, with sales dipping from a high of more than 26,000
vehicles in 2008-09 to around 3,000 in 2009-10, attributed by industry sources to the rush of cheap, but low-
quality vehicles which flooded the market in 2008-09 but then were subsequently rejected by consumers.
Arun Pratap Singh, Senior VP of electric vehicle business Electrotherm, argues that this was partially due to a
huge influx of low cost Chinese models which had quality constraints. “A lot of fly-by-night companies had
started operating in India who sold inferior quality models at cheap prices but did not provide any service
support,” he says. “As the customers became aware, these companies had to shut up shop resulting in a
decline in numbers. As a result, the entire electric vehicle industry has earned a bad name and because of
this the industry overall witnessed fewer sales in this segment. However, things are changing now, with the
introduction of new models, Electrotherm is seeing growth in electric two wheeler sales month over month”
He is also expecting 2010 numbers to bounce back on the strength of a service support network being
developed to address any customer problems. Electric/hybrid commercial vehicles are mostly in the
experimental stage at the time of writing so it is not yet clear how this industry will shape up in India.

Daimler’s Marc Llistosella suggests the move towards greener commercial vehicles is currently limited to the
major metropolises because consumer activism is still gaining momentum. “Post hybrid, there are trials and
errors in the industry because no one knows what will happen,” he says. “There’s no blueprint, which
makes it both interesting and challenging. There are different theories but nobody has the one solution. In
discussions at the start of the century, hybrid was called a ‘bridge technology’, in other words it was never
the final destination. 5, 10, 15, 20 years, how long will the next stage take? The industry still has to define
a clear path.”

Other Fuels

As in Brazil, where more than 90 percent of new vehicles sold can run on either ethanol or gasoline, India
has been exploring the prospect of reducing its dependence on crude oil. There are mandatory blending
requirements for ethanol and the government has announced a policy for biofuels (such as
biodiesel/biopetrol) from various sources. However, none of these have taken off in a sustainable manner.
As with any developing market trend, greener vehicles face several challenges to their growth in India
Addressing them would help expand the market multifold.
Challenges for green vehicles……

Customer Power:
• Fuel economy is the primary driver in the Indian market
• Range anxiety for customers of both electric and CNG vehicles

Government/Regulatory Support:

• There is no national policy for electric vehicles/CNG vehicles (the state of Delhi has incentives)
• Biofuel/ethanol pricing
• Coordination among various government agencies, such as the ministries of petroleum, forests and
environment, agriculture, etc.

Fuelling/Charging Infrastructure:

• Low number of CNG pumps (about 560) vs. about 38,000 conventional fuel (petrol/diesel)
pumps – as of April 2010
• Inadequate number of charging stations and that too limited to select cities

Some industry players believe that the automotive industry will make most headway in addressing green
concerns not by adopting radical new technologies but by optimizing the performance of conventional
engines. Ford India’s Michael Boneham says alternative fuel-based cars will happen eventually, but the
process will be gradual because fuel cells and solar cells are unavailable within the pricing parameters of
most cars sold in India. “From a Ford perspective we’re looking at technologies for improving the
performance of internal combustion, such as EcoBoost.We could perhaps see manufacturers bringing in
small and interesting niche segmentation at high cost for hybrid vehicles initially, and you’ll see other niche
alternative-fuel based cars such as electric. But the issue isn’t just auto manufacturers investing in this
market – where do people with electric cars recharge their batteries in countries where power shortages are
so prevalent?” he says. This does not deter Electrotherm’s Arun Pratap Singh, who says that his company is
currently focusing on demographic groups with lower mobility needs, such as women, young people and the
elderly. “Once the company has technology to enhance the speeds of the vehicle it would like to target
other customer segments also,” he says. “We are currently working on Powertrain development which could
achieve a speed enhancement of the vehicle.” Honing the technology of engine management system is the
primary focus concern for many manufacturers. Unlike in the European markets, in India, focus on
environment is less pronounced and is not a purchasing consideration for many buyers.

This is a stance echoed by Bajaj Auto’s S Ravi Kumar, who stresses that India’s two wheelers already produce
less emission than similar vehicles elsewhere in the world. “We’ll keep improving fuel efficiency on regular
internal combustion engines,” he says, “Beyond that, switching to alternate technologies will happen only
when battery cost is slashed to 0.5 to 0.25 (times) of current levels. Only then will it come within the grasp
of millions rather than just a few people.” Ashok Leyland’s K Sridharan, citing his company as an early
pioneer of CNG and battery-powered vehicles, is more confident of manufacturers’ readiness for green
technologies. “The level of preparedness on the part of OEMs for greener vehicles is very high,” he says. “It
just needs government support. For example, in the case of the Commonwealth Games, when the
government mandated special low-floor CNG buses, the OEMs were able to deliver.” Despite what seem like
significant challenges to the Indian automobile industry’s green future, there are several potential
opportunities not just for automobile manufacturers but also for supplier bases to ride the green revolution
as detailed in the box below.

Opportunities for Indian Automotive Industry in Green Vehicles

Green Vehicle Export Hub

• Leverage expertise with small cars (especially dual fuel cars)

• Make significant investments

Research and Development Hub

• Extend experience for leading OEMs and engineering companies to the area of green technologies
• Global alternative energy companies (for ex., Suzlon) could become new leaders

Sourcing Hub for Parts for Green Vehicles

• India is already one of the world’s leading sources for parts for conventional automobiles
• Vendors could leverage their existing relationships, to supply parts for green vehicles.

(Reference: KPMG Study, 2010)

Expect Part 2 as next Info Alert…………………….