SImpact of Alternate Fuel Systems on the Indian Automobile Sector

Abstract
This report focuses on alternate fuel systems and their impact on the economy in general and the automobile industry in particular. Key challenges involved in switching to alternate systems are high capital expenditure, high R&D expenditure, and higher initial price of the models and lack of proper infrastructure like refilling stations for other fuels. The various ways of getting to new systems are in house-R&D, Joint ventures with foreign companies, collaborative research, launch and test of successful products and tapping the export market. The report explores them in detail and suggests possible recommendations

The Indian Automobile Sector

The Indian Automotive Sector has been a symbol of the speed and ferocity with which India has progressed over the years. Indias automobile sector is one of the largest and fastest growing automobile sectors across the globe. The might of Indias current strength can be understood by the fact that in the motorcycle segment in India is the 2nd largest manufacturer, with sales of more than 8.5million annually (2009). India is also placed at Number 7 in the world in commercial vehicle manufacture with a production of greater than 2.6 million units annually (2009), which is a 26% increase from 2008, and a CAGR of 15.4% from 2002-2007. The same figure is expected to touch 5million by 2015, projected by a recent report by SIAM (Society of Indian Automobile Manufacturers).The contribution of the Automobile sector to Indias GDP is 4%. Following are the major hubs where car manufacturing is undertaken in India
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Chennai and suburban areas also popularly called the Detroit if India Gurgaon , NCR The Chakkan Corridor, Pune (Maharashtra) Halol , Gujarat

A Brief Sketch of the Evolution of the Automobile Sector

Early Years
*Licensed Manufacturing Era *Import had High Customs Duty *Excise Duties and sales tax were steep

1988-the 90's
*It was a Seller's Market *Long waiting periods existed

Mid 90's to early 2000

*It was a Buyer's market *Indigenization increased

*De licensing (1993)

*Auto Financing became easy *Manufacturers themselves

*Who were the major playersHindustan motors and premier automobiles Ltd

*Capacity restrictions were decreased *Customs and excise were decreased *Auto finance saw a Boom with many Foreign banks coming in, Innovative schemes not seen earlier

diversified in activities such as auto insurance, and pre-owned car markets

1975-1988
*Entry of a new player-Maruti Udyog Limited *Striving towards innovation *Strong government support *Waiting periods were Long

Current Focus
*Export Orientation *Auto component exports

Automobile Industry over the years

*Growing at 40% CAGR *Innovation *Recognition of Alternate fuel system

What c
Followi

titutes the automobile Manu acturing sector

omponent of t e automobile manufacturing sector

Mar et share of each segment

Passenger vehicles constitute 15.965 of the share in the automobile industry, the share in the industry of other types of vehicles are as follows, commercial vehicles 3.95% ,three wheelers 3.6% and two wheelers 76.49 %. Expl i g the attractiveness of the automobile sector in the Indian context Cardinal Industry Factors 1. Threat posed by substitute products 2. Bargaining power that the buyers/customers carry 3. Extent of rivalry among competitors 4. Suppliers Bargaining Power 5. Threat of new entrants

Alternate fuels
Fuel systems apart from the petroleum based traditional fuel systems to power an automobile are known as alternate fuel systems .The various kinds of fuel systems which have shown presence in India and abroad or are being tested on roads have been listed below
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CNG/LPG Dual fuel Vehicles Electric cars/Hybrid (Fuel cells and battery operated) Ethanol based Biodiesel ( Jetropha plant) Solar Power

Alternate fuel systems in India

The kick-start for Green technology in India was when CNG three-wheelers and buses in Delhi got a regulatory boost from the government. As far as other green segments are concerned, the demand has been driven by pull strategy and consumers awareness about the products and how he perceives the benefits of the product. Vehicles powered by battery especially two wheelers have been on the road for a decade.

CNG Growing concerns over emissions have prompted the government to pass a rule ordering the public buses ,auto-rickshaws and taxis to be converted to CNG. India is fifth largest in terms of Vehicles running on Natural Gas Electric/Hybrid Vehicles

With less than 1% of the share in passenger vehicles in the Indian market, Reva for many years was the sole player who has shown its considerable presence on a commercial scale in that segment. Mahindra however saw an opportunity to tap in the Electric vehicle market and has bought a large share in Reva. Also, the hybrid car Honda Civic and Wagon-R dual have been recent launches in this segment. Electric scooters are priced at less than 30,000 much less than the traditional

scooters/bikes but still the sales for two-wheelers have dropped from the figure of 26,000

(2008) to 3,000 (2009) ,this was largely due to the market being flooded by a lot of fake low quality products and also a general flux of low cost traditional vehicles.

Biodiesel/Solar owered Vehicle Cars run on Biodiesel (jetropha , vegetable oils ) and solar powered vehicles have largely been confined to tests and university research activities in India Global Efforts
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Toyota Prius (hybrid car which uses petroleum fuel with greater efficiency) has been a revelation in the Europe with its 10th year sales touching 2, 00,000 units

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Brazil has championed Ethanol based vehicles with around 3 million vehicles used. Natural Gas vehicles are used in Pakistan, Argentina and Iran as well Some countries have also given certain tax benefits for those who buy Electric vehicles as soon as they are launched (REVAi, Think city, Nissan Leaf etc).

Honda also has been aggressive in building its Green technology with successful launches of Honda FCX and Civic

Key Guiding principles for Alternate-fuel Systems

Having seen the various kinds of alternate fuel systems that have been developed globally, looking into the key factors aiding such developments globally suggest that they can be predominantly classified under three broad categories, Consumer power, Government funding/ regulation, Investment in Technology. Consumers in some countries who are early adopters would like to pay a premium for the cutting-edge technologies. Also, there has been an increasing environmental awareness among the consumers who are increasingly moving

towards greener technologies. Celebrity endorsements increased the faith of the consumer regarding the underlining green aspects of the newer technologies. Secondly, the Governments in countries like Brazil and US have incentivised the development of alternate fuel systems. Thirdly, Investment in technologies have developed good support industries like battery houses in China and also made capital ready for risky bets like Silicon Valley investment in Tesla Motors.

Economic Impact of the Alternate Fuel Systems

The end product of alternate fuel systems is a more fuel efficient system but with an additional cost initially. It has been observed that these systems cost 10-30% more than the traditional gasoline based systems but it creates more fuel efficiency which is going to offset almost 50 % this price difference. This can be seen from the CNG passenger cars cost around Rs 30000 to Rs.50000 more. But the dual- fuel systems offers a Rs.1.9 Km (table-1) saving in the per kilometre cost based on the current prices of petrol and CNG. Assuming that a person travels 10000 Km per year on an average, it would the total price differential would be offset with first 2-3 years of operation. Table -1

Petrol/lt Price Mileage Price/Km 55.8 13 4.3

CNG/K 29 12 2.4

But, in the two-wheeler market, electric scooter costs less ($600) as compared to a traditional scooter which costs $600 which sounds good for the low-end customers. Secondly, alternate fuel systems have a reducing effect on the emissions. It is estimated that hybrid on an average hybrid systems cause a third reduction in the emissions. Gas based hybrids more effective as compared to electric and hydrogen fuel cell vehicles because they are currently fuelled by coal-powered electricity. Pure hydrogen hybrids have significantly high fuel efficiency and a zero green house emissions.

Another major impact of adopting alternate fuels systems is that this would need a massive amount of work force which would mean more job creation.

Major Challenges
They are primarily four-fold Consumer ower
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Time frame for transformation of Indian Market from low-cost systems to the new relatively high-priced alternate systems

Alternate systems may not be that attractive because of less number of models available as compared to the traditional systems.

Go ernment/ Re ulatory olicy

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There is no existing policy for CNG/ Battery systems The pricing of bio-fuels and other alternate fuels is an uncertainty as of today Lot of discrepancies may arise during the co-ordination among various departments of the government like Petroleum Ministry, Environmental Ministry etc.

Infrastructure
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The number of CNG pumps is very low as compared to petrol/diesel pumps. There are just about 560 CNG pumps compared to around 38000 pumps for conventional fuel as of December 2010.

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Charging stations are very few and that too they are limited to big cities. No existing infrastructure for other kinds of fuel

In estments
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The companies need to do a lot of expenditure in terms of Research and Development (R&D)

Investment would also be required in terms of capital expenditure for switching to new systems

Means by which companies can go for the Alternate Fuel Technologies

In-House R&D: This involves a huge amount of investment which is also risky. So this can be undertaken only by the large players. Joint Ventures with forei n com anies: There are a lot of foreign companies who already have launched products in the global markets which can be contacted for having joint ventures. Collaborati e research: Companies can go for collaborative research and leverage upon the key strengths. This could offer an opportunity for research on a wide array of technologies. And also it would be helpful in achieving a consensus among the players so as to the specific technology they can go forward with. Launch of successful roducts: Multi-national companies like Toyota and Honda which already have successful products launches outside can think of launching them in India. Ta in the e ort market: Indian companies can leverage upon their expertise in the

small cars segment and strong engineering techniques to use it as a good export opportunity of differentiated alternate technologies. Public Pri ate Partnershi : The companies can go for PPPs with the government both for getting funds for R&D as well helping the government in the development of infrastructure like filling stations and battery stations for the alternate fuel systems. De elo ment of su er-s ecialists: This option could be seen like that of an IT industry where companies like Intel specialize in the chip manufacture. Similarly, even in the automobile sector also we could think of may be two players solely supplying equipment and they highly specialize in green systems and may be one company like Toyota specializes in providing service for such systems. But, this is higly unlikely owing to the massive competition among the various players. Vertical Inte ration: The automakers can consolidate with the suppliers and original equipment manufacturers whose engineering techniques can be used for the development of alternate systems.

Recommendations:
Large players have to increase their spend on R&D Collaboration is the key for small and medium players for the next decade Establish strong ties with the suppliers and OEMs to and leverage upon their strong engineering techniques.
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Since, India is already one of the major sources for automobile parts; suppliers and part manufacturers have to use their strong relationships to supply green systems.

Major players can form public private partnership with the government to develop relevant infrastructure like alternate fuel pumps and charging stations.

Focus on technologies which use green fuels and also get charged by electricity generated from other sources rather than by coal-fuelled electricity.

Manufacturers should quickly get into a consensus as to the kind of technology that is to be developed because currently they are thinking about a wide range of systems.

Strong ties should be developed with the support industries like battery sys tem

References
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