There was an interesting news item in The Economic Times this morning which talked about Japanese carmaker Honda being in the advanced stages of developing a diesel motor. The carmaker recently forecast a massive drop in profits expected for the fiscal year ending March 2012 thanks to a rising yen and massive production issues caused by the earthquake and tsunami in Japan and the recent floods in Thailand. These caused Honda several headaches in India over the past year, production for their new small car the Brio had to halt a few weeks after the vehicle's launch because of a lack of parts coming from Thailand.
But Honda's fortunes in India in 2011 have not only been impacted of a lack of parts from Thailand. Honda's premium products had a significant price premium on their rivals for many years. But existing rivals, particularly Hyundai, have dramatically improved both drivability and looks in the new Verna. The entry of new rivals such as Volkswagen, particularly the new Vento, have hammered the best-selling City sedan.
How bad are things for Honda? During April to December 2011, Honda Siel cars India (HSCI) sales fell to 27,939 units from 43,838 units in the same period last year. Even if natural disasters elsewhere can explain a part of the 36 per cent decline, it cannot explain all of it. Look at the City, which for years on end was the best performing car in its class, it has been outsold 3:2 by the Hyundai Verna, despite the Korean car going through a generation change earlier in 2011. The Volkswagen Vento has also just about outsold the City, and maybe if Honda did not face supply-side issues, it would not have been pushed down to P3 in its segment.
And a lot of the sales of the City and the compact Jazz have come through generous price-cuts. The City which saw prices for the entry-level model cut twice this year, first by Rs 66,000 and then by another Rs 50,000 when a mid-generation facelift was recently launched. This has played havoc with the City's residual value, previously one of the best in the industry. The competition has not just eaten into Honda sales they have also made the Japanese carmaker pretty much admit that their cars were overpriced.
But sales are still not picking up and the problem lies not in prices but in the Indian car consumers' shift towards diesel powered cars. There has always been a price differential between petrol and diesel in India, but in 2011 when the price difference reached Rs 20 per litre and as diesel technology mproved considerably, consumers started to see reason in spending Rs 100,000 extra on a diesel variant of a car over the petrol model (at the same specification level). Driving just a 1000 kilometers a month, the average consumer would make his or her money back in 24-30 months depending on the car. With a large majority of the Verna and Vento's sales being to the diesel variant (Volkswagen is offering discounts on petrol-powered models).
So a diesel engine would make a massive difference for Honda. Despite the price-cuts the brand still holds immense value, and a iDTEC engine as speculated would offer excellent performance. Honda officials admitted to me that Honda is looking at a smaller diesel engine than the 1.6 litre engine which is soon going to be launched in Europe and a 1.2 litre engine will comfortably fit inside the engine bay of the Brio
and the Jazz, with the larger 1.6 litre making it onto the City, Civic and C-RV.
But it appears Honda is aware of this, they realise that introducing a diesel in India will lead to huge demand, even if the government gives in to the environmental lobby in India and imposes a Rs 80,000 'surcharge' on diesel cars, which at best would add another year to the break-even point. Maruti and Hyundai already cannot cope with demand, there is a six-eight month waiting period for the Diesel Swift and a Diesel-powered Verna involves a four to five month wait. So will Honda invest in a forging and casting plant in India to make Diesel engines? That remains to be seen.
But even if the engines are imported, Honda officials told me that no diesel powered cars will be sold in India in 2012. But with 11 months of the year remaining and the fact that things change quickly in the automotive industry, take nothing for certain.