Low fuel prices may help auto sector drive up sales

December 06, 2014 11:38 pm | Updated November 16, 2021 05:49 pm IST

Plunging international crude oil prices and the subsequent lowering of fuel prices come as a morale-booster for the auto industry, particularly the passenger vehicle segment.

Cheaper or stable fuel prices are expected to help the auto industry come back from one of its most challenging periods.

While stagnant salaries, increased expenses and higher interest rates continue to haunt prospective buyers, falling fuel prices are expected to boost consumer sentiment as owning cars may be more affordable.

The drop in fuel prices is expected to bring down the total cost of ownership of passenger vehicle. Fuel price is one of the major components of the cost of ownership and accounts for 35-40 per cent of the annual expenses towards owning a car. With the latest revision in fuel prices, fuel expense per year for a petrol car is expected to come down by about 10 per cent compared with that in the financial year 2012-13, reducing the annual expenditure towards owning a car by about five per cent.

“Cheaper fuel brings down running costs. Lower running costs imply low cost of ownership. Lower cost of ownership drives sales. Cars become more affordable to run. Also, cheaper fuel implies other commodities are cheaper and disposable income increases. All these build a positive sentiment,” says R.S. Kalsi, executive director, marketing & sales, Maruti Suzuki India Ltd.

Lower fuel price means a lot particularly for the entry segment. While new launches in other categories of car segment helped maintain some momentum, it was not the same story in entry-level cars. The first-time buyers were not coming to car showrooms in good numbers despite heavy discounts and other benefits.

Now, the trend seems to reversing in favour of first-time buyers. For many months in the financial year 2012-13 and early 2013-14, high cost of running had dissuaded them. Their share fell to 32 per cent from a high of 50 per cent at one point for Maruti. However, the proportion of first-time buyers has improved from 37 per cent in the financial year 2012-13 to 42 per cent in during first half of this fiscal.

Mayank Pareek, president, passenger vehicle business unit, Tata Motors, says that changes in the fuel industry after the deregulation of diesel prices are changing the industry in a fundamental way. “The new fuel price dynamics are impacting the first-time buyers as petrol begins to be a significant part of the consideration set for these buyers,” he adds.

As he points out, the changing economics of oil — narrowing price gap between diesel and petrol — has resulted in a shift again towards petrol cars. The industry had moved from what was originally just a petrol industry to being a diesel-dominated one from around November 2012 and now, with the deregulation of diesel pricing, it seems to be moving back towards a more balanced mix of petrol and diesel cars.

For the industry, the share of diesel vehicles as a percentage of all new vehicles has fallen below 50 per cent during the first half of this fiscal. For Maruti, the share of diesel in total sales stood at about 32 per cent.

“Rising diesel prices have increased the time required to recover the higher capital cost paid for diesel variants, making them less attractive. The share of diesel car sales continues to be on a declining trend in recent quarters and is expected to account for 45 per cent of total sales in the current fiscal, down from a peak of 58 per cent in 2012-13,” says Ajay Srinivasan, director, CRISIL Research.

Jnaneswar Sen, senior vice-president, marketing and sales, Honda Cars India, points out that there has been a renewed interest for the petrol variants in the market. “In April 2013, when we launched Honda Amaze, the diesel variants accounted for 80 per cent of its monthly sales. Now the demand has levelled and slightly over 50 per cent of the sales come from petrol variants,” he says.

The demand-shift towards petrol has prompted several players to launch UV (utility vehicle) and sedan models with a petrol option as well. In 2013-14, the share of diesel sales for sedan and UVs was around 70-75 per cent, while that for small cars was about 34 per cent.

Anticipating the changing dynamics of the fuel market, Tata has come out with a new Revotron series of petrol engines. Its new compact car, Zest, is powered by this engine. Tata is seeing a mix of customers buying the Zest; the petrol-to-diesel ratio is 60:40.

Mr. Srinivasan of CRISIL feels although enquiries from first-time buyers, who typically opt for a small car, has increased, this is yet to translate into actual purchase decisions. The agency expects domestic sales of small cars to grow by 5-7 per cent year-on-year in 2014-15, in line with the total passenger vehicle sales growth.

As economic growth continues to remain subdued and consumer sentiments are yet to see considerable improvements, the declining cost of ownership may definitely help in improving sales in the immediate term.

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