Will the new emission norms slam the brakes on the auto industry?

Internal Combustion Engine (Image Credit: Pixabay)

In the next 20 days, internal combustion engine vehicles across segments are poised for a change. About 15 models (mostly diesel-driven) are getting phased out, and many others  will see a price hike of Rs 10,000-50,000.  This is primarily because Stage II of BS6 emission norms will come into effect from April 1.

“The automotive industry is set to implement the BS-VI Stage II norms, which requires vehicles to meet more stringent emission norms and are closer to global standards. The industry has to adhere to these norms.  The impact will be more on diesel cars," RC Bhargava, Chairman, Maruti Suzuki India Limited (MSIL), said, adding, “Each company needs to see what they need to do to achieve the emissions targets.”

Cost implications

While earlier BSVI-compliant models could be tested in labs, BS6 Stage II norms mandate that vehicles must meet the prescribed standards in real-world conditions (also called Real Drive Emissions).

To meet this condition, ICE engines need to be equipped with an on-board self-diagnostic device (OBD2) as a standard fitment. The electronic device also checks for any malfunction in the vehicle and monitors factors like driving behaviour and traffic conditions in real time.

Per industry observers, a bulk of the investment would be towards incorporating the on-board device, apart from investments in hardware and software upgradation. However, the investment is expected to be relatively modest compared to BS VI Stage I.

“Upwards of Rs 5,000 crore has been deployed by the domestic auto industry for overall BS-VI upgradation over the last two years," said an industry insider, requesting anonymity.

The Automotive Component Manufacturers Association (ACMA) says  vendors are well geared towards supplying components to auto manufacturers. Vinnie Mehta, Director General, ACMA stated, “The industry is prepared for this as sufficient time was given.”

Speedbreaker?

Industry experts Moneycontrol spoke to unanimously agreed that the cost of upgradation of existing petrol and diesel powertrains for BS6 Stage II is high, and will result in the escalation of the ex-showroom prices as the increased manufacturing cost will be passed on to the buyer.

With a price hike imminent across the board, industry observers reckon that BS-VI Stage II norms might lead to a slowdown in car sales for a couple of months.

“The market is very price sensitive at the moment. Entry level passenger vehicle, two wheeler, tractor, and small commercial vehicle sales may take most of the hit due to price hikes. Diesel cars make up less than 30 percent of passenger vehicle (PV) sales, so we don't expect a significant impact on diesel car sales. The only large player in that space is Maruti,” said the industry insider quoted above.

While carmakers are examining the financial impact of the implementation of the new norms and are yet to take any decision regarding price hikes, some two-wheeler manufacturers have indicated they may hike prices if they are unable to absorb the increase in costs.

In an analysts’ call, Niranjan Gupta, CFO, Hero MotoCorp, has said, “By March, we’ll be transitioning on the manufacturing front. From 1st April our manufacturing process will be incorporating the OBD. If you track our price hikes over the last three years, it’s been far less at the entry level than in the other segments. This shows how we try to cushion the impact at the bottom of the pyramid.”

Thus, the two-wheeler segment, which is already struggling, may face further headwinds in the coming weeks with the roll out of new emission norms on April 1, as manufacturers prepare to pass on the price hikes to customers.

“The new norms are likely to lead to only a marginal increase in the overall vehicle price, with the changes required relatively lower vis-à-vis the previous transition. But as OEMs have been forced to undertake price hikes to counter inflation over the past 15-18 months, any further hike in prices could moderate demand to an extent," explained Rohan Kanwar Gupta, Vice President & Sector Head, Corporate Ratings, ICRA Limited.