Download Free PDF
Automotive Product Finder Magazine | Ways to prevent that crash
Ways to prevent that crash
Auto industry revving up the efficiency meter
Altair acquires Ellexus
Apart from emission norms, improving vehicle safety standards has also assumed greater importance over the past few years. One of the key outcomes of the new safety norms will be the mandatory introduction of airbags in passenger vehicles in India. According to Subrata Ray, every new regulation towards improvement in emission and safety standard will result in increased content per vehicle, providing revenue growth potential for auto component suppliers.
With government’s increasing focus on introducing advance emission norms and safety standards, the Indian automobile industry is likely to undergo significant technology upgradation over the next one year. From directly introducing Bharat Stage (BS-VI) emission standards by April 2020 to implementing advance safety norms in vehicles, the regulatory changes are also likely to present sizeable opportunity for select auto component segments besides altering the demand dynamics (i.e petrol-diesel mix) and pushing vehicle prices upwards.
Overall, our interaction with industry participants suggest that cost of petrol PVs may increase by Rs 20,000-30,000/vehicle, while the increase for diesel PVs could be in the range of Rs 75,000-100,000/vehicle. For M&HCVs, the cost differential is expected to be even higher (~Rs. 100,000-150,000 or ~10 per cent of current vehicle cost) due to almost compulsory introduction of the Selective Catalytic Reduction system along with improvements in exhaust gas recirculation. While we expect OEMs (along with their suppliers) to find solutions that are adaptable to Indian conditions and cost-effective, the industry is likely to pass on the increase in cost to a large extent. However, all new regulations may not be positive for the industry’s profitability indicators as complying with new norms require incremental investment without commensurate increase in pricing in certain cases.
Impact of the BS VI transition
The impact of BS IV to BS VI transition is likely to be felt the most on diesel vehicles and especially PVs where the price differential with petrol variants will further increase. This will increase the payback period for diesel vehicles and deter demand, which has already been on a declining trend (refer Figure 1) over the past couple of years due to narrowing price gap between the two fuels. ICRA expects diesel share to decline to 35-36 per cent by Q4 FY2019 and will eventually go below 25 per cent post implementation of BS VI norms. Incremental investments towards diesel engine capacity are limited with focus primarily on complying/upgrading existing powertrain with BS6 norms. OEMs are also sensing increasing shift towards petrol vehicle, even in UV segment, which till now is largely diesel driven. Consequently, the majority of incremental investments in engine line is towards flexible capacity to manufacture petrol as well as diesel engines, on the same assembly line.
Apart from emission norms, improving vehicle safety standards has also assumed greater importance over the past few years. After many of the bestselling models in India failed crash test conducted by UK-based New Car Assessment Programme (NCAP) in 2013, the Government formulated Bharat New Vehicle Safety Assessment Programme (commonly referred as BNVSAP) for the Indian market, which has been implemented in phased manner. The new crash test norms for full frontal impact, off-set frontal impact and side impact are already applicable on passenger vehicles launched in India since October 2017. From October 2019 onwards, these norms will be extended to all PVs sold in Indian market.
One of the key outcomes of the new safety norms will be the mandatory introduction of airbags in passenger vehicles in India. Although almost all auto makers have started offering airbags (as a standard feature) in newly launched vehicles, its usage in entry segment cars is still low, especially in the lower variants. Moreover, entry level car generally comes with single airbags as compared to 6-9 airbags presented in the premium vehicles. With crash norms becoming mandatory for new cars from October 2017 onwards, penetration of airbags has already increased from 30-35 per cent in FY2016 to about 75 per cent at present, and it will reach almost 100 per cent post October 2019.
Although the market opportunity will be sizeable, the value addition for domestic suppliers would be low in the near-term due to limited scope for backward integration and lack of technological capabilities. Our discussion with industry participants suggest that import content in airbags stands at 60-80 per cent at present. It is unlikely to decline significantly in the near to medium term as localisation of key components (especially inflators) would require sizeable investments.
Nevertheless, even as the margins in airbags would be low (in line with assembly type of operations), the RoCE will still be comparable to other auto component segments due to limited capital expenditure requirements.
The domestic 2W industry (above 125 cc segment) has also seen the mandatory implementation of Anti-Lock Braking System (ABS) from April 2018 onwards for new models and April 2019 onwards for all existing models. 2Ws below 125cc have an option to adopt either combined breaking system or ABS system. After making it mandatory for CVs (above 3.5t) from October 2015 onwards, the government’s decision to implement the same in 2Ws stems from the fact that 2Ws account for largest proportion of road accidents. Given the price sensitive nature of Indian 2W buyers, OEMs have primarily deployed CBS in sub 125cc segment where price increase is about Rs 500 per vehicle. However, ABS system will result in price hike by 5-8 per cent (Rs 4,000 to 6,000) for 125+cc segment.
CVs open an avenue
The domestic CV industry has also witnessed several regulations driven technology related advancements. These included: a) the implementation of ABS across all segments, b) introduction of speed limiting devices and c) Uniform Bus Body Code. Together these changes led to an increase of ~Rs 80,000 (or 6-7 per cent of vehicle cost) in case of HCVs. According to industry estimates, the cost of ABS itself ranges between Rs 15,000 to Rs 40,000 per vehicle (depending on the tonnage).
In recent times, revision in truck axle load norms during July 2018 has emerged as the gamechanger for the commercial vehicle industry, wherein the government increased the permissible gross vehicle weight of over 16 tonne heavy trucks by about 12-25 per cent. The revised norms allow truck owners to increase load on the vehicle up to the new limit as prescribed by the government. The higher limit has in a way legalised overloading and given fleet owners the opportunity to sweat their existing assets more instead of purchasing new trucks. While demand momentum is expected to remain muted in the near term, M&HCV industry is expected to witness pre-buying activity during H2 FY2020, ahead of BS VI implementation, which should support growth in the next fiscal.
Indian automotive industry is slowly catching up with the developed market in terms of emission and safety norms which is positive for consumers. However, rapidly evolving changes pose challenges to the OEMs as well as their vendors to adapt with changing regulatory landscape and consumer preferences. We believe that vendor consolidation will gain further pace over the medium term with emergence of mega-supplies in Indian auto component industry, who will have technological capability and financial flexibility to invest and grow.
Subrata Ray is Senior Group Vice President, Corporate sector ratings at ICRA Limited and member of the rating committee of the company. He has an aggregate work experience of 30 years, out of which he has been associated with ICRA for a period of over 20 years. Ray holds a B.E degree in Electronics and Tele-Communication Engineering from Jadavpur University, Kolkata and is a Fellow of the Indian Institute of Management, Bangalore. He is also a CFA charter holder from the CFA Institute.
Indian Automobile Industry
Selective Catalytic Reduction System
BS VI Transition
New Car Assessment Programme
Anti Lock Braking System
Electronics And Tele Communication Engineering From Jadavpur Universitysubrata Ray
Advertise Here [600 W x 90 H pixels]