For Diesel engines, this may be the beginning of the end…
The problems at Volkswagen last year and Indian states trying to ban diesel cars this year seem to be largely unrelated. But there is a common link between the two. Both are indicative of a larger shift that the world automobile industry is making away from diesel. The big trend in the next 10 years in cars could be the shift away from diesel.
Europe could the lead the way…
Europe has a curious mix of two opposing trends at play. Carbon dioxide emission norms in Europe are much stricter than in the US and are actually used as a global benchmark. At the same time, diesel accounts for nearly 55% of all cars sold in Europe. Large European brands like Mercedes Benz, Audi and BMW derive 75-80% of their car sales in Europe from diesel engines. Auto analysts estimate that by 2030, diesel cars could account for just about 9% of all cars sold in Europe as against 55% today. This will be necessitated by the environment unfriendliness of diesel as well as global climate change.
What about investments sunk in?
While the European companies have already started preparing for life beyond diesel, the question is what about investments that have been sunk in. Let us understand this better. While automakers typically outsource most of the parts, the combustion engine is normally manufactured in-house. That is normally the differentiating factor in diesel cars and automakers prefer to keep that activity in-house. Sadly, making combustion engines is a highly capital intensive activity and guzzles a lot of capital. While Volkswagen has nearly $20 billion invested in making combustion engines, Daimler and BMW have nearly $8 billion invested. All these investments will have to be written off and the impairment could really wreck their balance sheets. More so, considering that Volkswagen plans to move its electric car sales to 25% of overall sales by 2022.
What does it mean for India?
If the shift out of diesel happens rapidly, it may seriously impact a variety of industries in India. Oil companies that produce diesel are likely to see compression in revenues as more people shift to electric cars. Secondly, automobile companies like Tata Motors and M&M that have invested heavily in diesel car plants will also be impacted negatively. Most auto companies in Europe are trading at fairly cheap valuations despite their pedigree and global appeal. The reason is the big shift out of diesel. This valuation compression is likely to hit Indian auto companies too. Most importantly, auto ancillary makers that depend on European carmakers need to rethink their current business models. The shift away from diesel is a certainty; now for the industry’s response!