Why petrol cars may win race against diesel vehicles

A diesel price hike of Rs 5 in September has seen demand for passenger cars perk up in favour of petrol versions. Going forward, it will decisively tilt the scales in favour of petrol when the proposed hike of Rs10 in diesel will be implemented. 

The industry expects the momentum for petrol cars to gather speed. In 2010-11, the price differential between petrol and diesel stretched to almost Rs 25 a litre forcing many customers to opt for diesel cars.

Since then, analysts say, thanks to a hardsell by auto companies to its dealers, the customer is now more informed about which fuel powered car to choose depending on the usage.

Why petrol small cars are more economical than diesel, if a user doesn't drive for more than 50 kms a day?

According to an ET analysis, assuming a user is driving the vehicle for a minimum of 50 kilometres a day, the time taken to recover the premium paid (the extra money paid for the diesel car) for a diesel car like Chevrolet Beat as against its petrol-fuelled counterpart is two years and five months or 44,000 kilometres.

The period to recover the premium paid for a diesel car will extend to three years and two months or 58,000 kilometres, if the proposed diesel price hike is implemented.

In case of best sellers such as Maruti Suzuki Swift, which comes with a premium of Rs 1.08 lakh on the diesel top-end variant, the time taken to recover will increase from three years seven months or 66,000 kilometers currently to four years 11 months or 89,000 kilometers.

The diesel cars already command a premium of 15-23% over its petrol variants (Rs 75,000 to Rs 1.25 lakh) and are twice as expensive to maintain, service and repair. However, the diesel cars do offer 15-20% more mileage than petrol cars and are better in terms of emission control.

Many of the companies are now making the case for a diesel car if the person uses the car for more than 50 kilometers a day. Considering that the lifecycle of a car is only 4-5 years, a customer may not benefit much by owning a diesel car, if he or she does not drive long distances.

When did the switch happen?

The share of petrol cars, which constituted 81% of the overall market in FY08, has been slipping consistently year-on-year due to the introduction of quality diesel hatchbacks and sedans in the market.

The drop, however, has been dramatic in the past couple of years, with petrol prices getting deregulated and diesel prices still controlled. The price gap between petrol and diesel fuel which was around Rs 9.80 in May 2010 widened to Rs 25 in a short span of a year. This resulted in a major shift in demand for diesel cars.

The share of petrol cars, which stood at 75% in FY10, slipped to 69% in FY11 and further to 58% at the end of FY12. It went further down to 47% in July 2012 before it gradually recovered. The share of cars has seen a gradual increase month-on-month to 54% by October of 2012, before closing out the month of November at 53%.

After a knee-jerk reaction from many customers towards diesel cars, many automotive companies imparted intensive training to their sales personnel and dealers. Carmakers such as Maruti Suzuki, Hyundai India and Toyota Kirloskar developed tools to define the cost of ownership at the dealership.

Toyota Kirloskar even reached out to professionals like teachers, doctors, lawyers and employees of the PSU sector who by virtue of their vocation need not travel a lot and, hence, are not likely to run their vehicles beyond 1,500 kms a month. However, if the usage is higher than that, despite the diesel price increase, the diesel cars will still be more economical.

With a proposed increase in diesel prices, a return to petrol cars is a given, say experts. Already, Toyota Kirloskar has seen a 5% shift towards petrol cars post the diesel hike and ditto is the case for General Motors. The Chevrolet Beat petrol contributed 15% of the overall model's sales before September. As on December it contributed 20%.

Sandeep Singh, DMD & COO (sales, marketing, customer service and commercial divisions) Toyota Kirloskar says the industry has seen a shift in demand from diesel to petrol cars in the entry level segment after the diesel price hike in September.

"An array of factors are responsible: The customer's realisation of the advantages of owning a petrol car over a diesel one, the government's prior announcement of its plans to increase diesel prices and, finally, carmakers like Toyota, who have maintained a steady price gap between their petrol and diesel vehicles."

Singh expects the petrol contribution in Etios Reva and Corolla Altis to move up to 25% in the next quarter and the company is already planning its production accordingly.

Hyundai India, which saw its petrol car share fall to 64% in June, has seen a revival in demand for petrol cars, with 82% of its overall sales coming from them. However, Maruti Suzuki's petrol car sales remained at 60% for the most part of the year due to a diesel engine capacity constraint.

"Hyundai had a differential resurgence in petrol variants while holding on to diesel models. While overall sales of Hyundai have grown, the contribution of petrol cars has increased from 70% in September 2012 to 77% in November 2012. This strong sales was led by Eon and i10," said Rakesh Srivastava (VP, sales and marketing), HMIL.

Given the government's intention to discourage diesel usage for non-commercial purposes, a duty hike for diesel cars can't be ruled out. In the event of such a duty hike and also with the proposed rise in the price of diesel being approved, the cost of owning a diesel vehicle will shoot up significantly vis-a-vis the petrol one, making the petrol variant more cost-effective in the coming months.

However, the entry of new compact diesel cars like Hyundai i10, Honda Amaze and Nano could further increase the share of diesel cars in the overall market. Sumit Bali, director, Kotak Mahindra Prime, one of the leading passenger car financers says, the artificial economy which was created for diesel vehicles will disappear if the proposed Rs 10 hike in diesel is implemented.

"Over the last few months, we have seen a pick-up in petrol car sales and, in some cases, there is a waiting period for petrol cars. If there is an increase in diesel prices, I expect the petrol-diesel ratio to be about 35-40% of petrol to 60-65% of diesel." An executive with a leading car maker said, "There is hardly an impulse-buying for diesel car happening in the market. Right now, only those who can gain from the economics of driving diesel cars have remained in the market."

Why diesel price hike is imminent?

While the hike will be tough to implement politically, the pressure is mounting on the government to manage its fiscal deficit.

Even as the Rs 10 hike in diesel has yet to see the light of day, the kind of pressure oil subsidies have had on the fiscal health of the country is hard to ignore.

The under recovery or loss on account of sale of diesel at subsidised or government-mandated price has shot up from Rs 12,600 crore in FY06 to Rs 81,000 crore FY12 and is expected to be over Rs 1 lakh crore for FY13.

As a percentage to GDP, the under-recovery of the petroleum industry has increased from 0.71% in FY10 to 1.55% in FY12 and is expected to be even higher at 1.64% for FY13.

While there has been a gradual return to petrol cars, petrol car sales have, however, declined 15% this fiscal (April-November) as against a 29% growth in diesel cars.

Also read: Auto industry welcomes move to hike diesel price