The Small Car Advantage

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In recent times, the passenger car industry has been agog with high-decibel launches of plug-in hybrids and electric cars. Motor shows across the globe have featured them. The collaboration between Reva Electric Car Company and General Motors for an electric version of compact car Spark has grabbed global media attention. Overall, there is heightened interest in emerging propulsion technologies. In all this hype, how will the Indian car market evolve? What will you drive in the next decade?

Reduction in greenhouse gas emission has been the cornerstone for development of new propulsion systems. The European Union (EU) has stipulated a fleet average emission of 130 gm of carbon dioxide (CO2) per km of travel from new light-duty vehicles registered from 2015 and after. This figure shrinks to 95 gm by 2020. With similar stringent norms likely to be legislated across most developed markets, sustaining a continuously decreasing fleet average emission levels is becoming imperative for car manufacturers.  

It is commonly accepted that there is a limit to which tailpipe CO2 emissions can be minimised by fine-tuning the internal combustion engine (ICE) alone. Alternative motive force is required to achieve zero tailpipe emissions. This is threatening the absolute hegemony of ICE-powered cars and the next decade may see the technology struggle to survive.

For long, major car makers remained divided in their approach to find an alternative to ICE. After having spent heavily on evaluating options such as fuel cells, compressed air, hybrid and full-electric vehicles, the industry finally seems to have arrived at a consensus that battery-powered propulsion is the way forward. Recent developments indicate that it is possible to produce high-energy density lithium ion (li-ion) batteries. With the concerns on charging infrastructure also getting addressed by new business models such as First Place, alternative propulsion system appears to be round the corner.

Does this signal the end of the road for ICE-powered cars? Will all new cars registered in EU in 2015 be battery powered to varying extent? It appears unlikely. While hybrid/electric cars will enter the market, their rate of introduction may be slow. This is because concurrent innovations in ICE and related vehicular technologies have been delivering encouraging results. Low emission levels have been achieved at substantially lower cost.

Analyses of empirical data on CO2 emission from new cars registered in the UK confirm this. In 2008, nearly 16 per cent of all new ICE-powered cars registered in the UK conformed to the 2015 emission requirements. Despite significant variations in overall emission levels among similar-sized ICE engines, certain variants had emission levels lower than 130 gm per km suggesting that it is possible to achieve much lower emission levels with the existing propulsion system. While these developments may not be enough to ensure that all cars of varying footprints meet 2015 norms, it is becoming evident that a range of cars will qualify. In fact, further successes in ongoing initiatives such as dieselisation, turbo-charging, downsizing and light weighting can make this range even compliant to 2020 norms.

Likely Rise Of Hatchbacks
Analyses show that hatchbacks are largely powered by petrol engines of up to 1.3 litres (up to 1.6 litre in diesel) and have small carbon footprints. Such cars account for around 17-18 per cent of new cars sales in Europe. Hatchbacks can continue to be powered by next-generation ICE and still meet emission requirements beyond 2015. But bigger cars will need to adopt either hybrid or fully electric-propulsion systems by 2015. Car makers will have the option to choose among next-generation ICE, hybrid or fully electric-propulsion systems. The future mix of cars with competing propulsion technologies, however, remains a topic of debate.
 
The high cost of li-ion battery may become a major hurdle to greater penetration of hybrid or electric cars. In the absence of significant government support — subsidies and tax breaks — the price of entry-level hybrid or fully electric sedans is expected to be steep in the initial years. During this period, it is probable that potential consumers switch to low-cost, emission-compliant hatchbacks. If this were to materialise, the next decade may witness the sale of hatchbacks in Europe growing at a much faster clip than ever before.

Impact On Indian Passenger Car Industry While global car makers can brace themselves for downsizing in Europe, the scenario in India can be expected to remain stable even if the latter adopts similar norms on CO2 emission. This is because unlike Europe, the Indian car market is heavily skewed in favour of hatchbacks (see ‘Steady Market’). Powered by petrol engines ranging from 0.6-1.3 litre (1.2-1.5 litre for diesel), hatchbacks occupy 77 per cent of the market. Over the past four years, this share of hatchbacks has remained steady. This is despite rapid economic growth and rising income levels.



Such buying preference can have several ramifications. Hatchbacks can easily be made compliant to emission norms by adopting next-generation ICE technologies. However, it will also mean that the smaller segment comprising mid-size, executive and premium cars will have to adopt hybrid or electric-propulsion systems. High cost li-ion batteries will force manufacturers to price cars beyond the affordable range for most Indians — Honda Civic hybrid is a case in point. This may further increase the share of hatchbacks beyond current levels.

India-based car manufacturers can see a boost in exports as and when the demand for fuel-efficient cars in Europe surges. This was witnessed during the recently concluded government-subsidised replacement programmes in Europe. High exports coupled with a robust domestic demand can catapult India to become a global hub for hatchback manufacturing. A slew of announcements by global auto majors to manufacture small cars in India is an acknowledgement of such an eventuality. This trend will be further accentuated by the advent of Nano and competing offerings from players such as Hyundai, Fiat, Nissan and Suzuki. All of them are likely to set new benchmarks in fuel efficiency and emission to comply with 2020 norms.

Does this mean India will miss the hybrid/ electric wave? The answer lies in the pace of change in domestic consumer preferences. A rapid increase in per capita income beyond a certain threshold level in the next decade may drive demand for big cars ushering hybrid/electric propulsion in India. However, mass acceptance of alternate propulsion will happen only when reliable li-ion batteries will be made available at a reasonable cost. Indian industry could then potentially leapfrog into electric vehicles using the latest and cost-effective battery technology. Till then, next-generation ICE will continue to be the predominant propulsion technology — well beyond 2020.

The new ICE technology will, however, create major challenges/opportunities for suppliers. New aggregates, equipments and services arising from modifications in propulsion technology, materials, fuels, etc., will be required. As India emerges as a global hub for low-cost, fuel-efficient cars, suppliers should gear up to ensure reliability in a cost-effective manner. In many cases, innovative solutions and radical rethink on designs may be needed. Those who respond quickly and create an early mover advantage will reap the benefits from this global transition over the next decade and beyond.
 
Arindam Chakrabarti is practice head  and Vikas Agrawal is a business analyst at Tata Strategic Management Group

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