Shamsher Dewan in this report provides insights into the proposed BS-VI emission norms and its likely impact on technology along with vehicle pricing going forward. The report also summarises the change in technology that petrol & diesel vehicles have seen across various emission standards along with pros & cons of available technologies.
With major cities in India struggling with air quality problem, the Indian Government in February 2016 decided to leapfrog the Bharat Stage (BS)-V Emission Standards and directly move to more stringent BS-VI norms by April 2020, four years ahead of the earlier schedule. Globally, emission standards have been implemented in a phased manner with adequate time gap (typically four to five years) between two levels. We believe while availability of technology is unlikely to be a deterrent, the key challenge for OEMs will be in adapting the available solutions to Indian market conditions in a relatively short time frame, while making them cost-effective.
Further, given the experience with respect to delays in availability of BS-IV compliant fuel, the availability of even more cleaner fuel by 2020 on nationwide basis may also become a bottleneck. Our interaction with industry participants suggests that investments by OEMs are unlikely to be sizeable to meet BS-VI norms; however, OEMs with higher dependence on diesel models may accelerate their focus on petrol segment, while hybrids and other clean technologies would take centre stage in their R&D plans. Overall, the proposed emission standards will push vehicle prices upwards with diesel segment likely to witness sizeable cost increase due to introduction of additional components. This would make diesel passenger vehicles (PVs) costlier (vis-à-vis petrol variants) and consequently may deter demand for diesel PVs.
Diesel segment to witness technology upgradation
With proposed BS-VI emission standards being incrementally more stringent for diesel vehicles vis-à-vis petrol vehicles, the technology for former is likely to undergo significant upgradation both within the engine as well as the exhaust system. For instance, the sharp reduction in NOx levels can be achieved through introduction of new technologies such as lean NOx trap (for diesel PVs) and selective catalytic reduction (for M&HCVs).
In addition, diesel particulate filters (DPFs) would emerge as the most common solution to control PM emissions from diesel PVs and M&HCVs. Unlike diesel vehicles, the adherence to BS-VI norms for petrol vehicles can be achieved through improvement in air-fuel management (within the engine) and exhaust gas recirculation (within the exhaust system). Table 1 indicates evolution of emission standards in India in four wheelers segment.
Impact on Diesel Vehicles
As diesel vehicles will undergo significant technology changes, the cost differential between petrol and diesel PVs is likely to expand further. This will widen the payback period for diesel vehicles and adversely impact demand, which is already on a declining trend since FY 2015 due to narrowing price gap between the two fuels and recent ban on registration of diesel vehicles (with engine capacity of 2,000 cc and above) in the National Capital Region (NCR). These factors along with potential risk of restricting diesel-powered taxis could have significant implications on OEMs’ investments in the diesel space.
More importantly, OEMs with higher dependence on diesel models (especially in the utility vehicle segment) would look at reducing their exposure and accelerate investments in the petrol segment.
Challenges of fuel availability
We believe availability of technology to meet proposed BS-VI emission standards is unlikely to be a challenge for OEMs as most of them export vehicles to developed markets like Europe, which follow stricter emission standards. They also have access to global component manufacturers that develop these technologies. Additionally, most of global component suppliers have R&D base as well as manufacturing units in India with fair understanding of the Indian market. However, the key challenge for OEMs and their suppliers would be in adapting these technologies for Indian driving and weather conditions and making them cost-effective in a relatively short-time frame.
Table 1: Evolution of emission standards in India (four wheelers)
| Manufacturer | Reference | Date | Region |
| India 2000 | Euro 1 | 2000 | Nationwide |
| Bharat Stage-II | Euro 2 |
2001 April 2003 April 2005 |
NCR, Mumbai, Kolkata, Chennai NCR, 11 Cities Nationwide |
| Bharat Stage-III | Euro 3 |
April 2005 April 2010
|
NCR, 11 Cities Nationwide
|
| Bharat Stage-IV | Euro 4 |
April 2010 July 2015 October 2015 April 2016 April 2017 |
NCR, 13 Cities Additional 29 Cities North India (including bordering districts of Rajasthan) Western India & Parts of South and East India Nationwide |
| Bharat Stage-VI | Euro 6 | April 2020 | Nationwide |
Our interaction with industry participants suggest that lead time in migrating from one emission level to another could be around three to four years. This may get further stretched as BS-VI norms OEMs will have to test the vehicles under real driving conditions unlike the previous norms. This would be of importance for the CV segment, which in India is prone to overloading. As a result of overloading, it becomes difficult to estimate the inputs (ie CO and NOx) going into the exhaust system from an engine. Therefore, the challenge lies in terms of adapting the technology and principles known for Euro 6 to the Indian market.
Besides tight deadlines, the other bottleneck in implementing BS-VI norms in a timely manner would be the availability of BS-VI compliant fuels on nationwide basis. Given the experience with BS IV, the industry expects that this may emerge as a key hurdle in meeting BS VI norms by 2020.
Two wheelers and BS-VI
While in the past emission standards for two and three wheelers have been implemented with a lag of five to six years (vis-à-vis those for four-wheelers), the government has proposed that even two and three wheelers will also move to BS VI norms by April 2020. Our interaction with OEMs and component manufacturers suggest that while there won’t be significant changes in engine or aftertreatment systems to meet BS IV norms but the industry will have to adopt electronic fuel injection (EFI) system and also tweak the exhaust system to comply with BS VI norms. Collectively, these changes will increase cost of two-wheelers by approximately Rs 5,000-6,000 per vehicle (or about 10 per cent for mid-size motorcycles).
BS-VI and Auto component makers
With greater use of electronics and adoption of new technologies such as direct injection (for air-fuel management) and particulate filters (for exhaust systems), the implementation of BS-VI norms will present a sizeable opportunity for auto component manufacturers. Companies such as Bosch, Magneti Marelli, Denso and Federal Mogul which have strong presence in the powertrain segment and have already developed solutions for Euro 6 norms are likely to be the key beneficiaries. The opportunity for these players will come in the form of a) gaining market share over suppliers of conventional technologies and b) higher content per vehicle (especially in case of diesel vehicles).
In addition, we also expect some of the engine manufacturers with proven technologies such as Cummins etc to also be able to increase their share of business with select OEMs. Nevertheless, the key challenge for auto component suppliers will be to adapt existing technologies to Indian driving and weather conditions, while making them cost-effective at the same time.
Usage of airbags to go up with new safety standards
Apart from emission norms, improving vehicle safety standards has also assumed greater importance over the past few years. After many of the best selling models in India failed crash tests conducted by UK-based New Car Assessment Programme (NCAP) in 2013, the Government formulated new vehicle safety assessment programme (commonly referred as BNVSAP) for the Indian market.
Under these norms, PVs will receive star ratings based on how they perform under various crash tests and associated parameters and will come into effect from October 2017 for new models and October 2018 and 2019 for all the existing models. Although the proposed safety standards don’t make airbags mandatory but in order to achieve adequate safety ratings for frontal collision, air bags would become a necessary fitment. We believe this will also open up a sizeable market opportunity (Rs 19-23 billion by FY 2020) for airbag suppliers as its penetration in PVs could increase exponentially from 30-35 per cent (at present).
While most of the suppliers of airbags in India are foreign players (ie Takata, Autoliv, TRW, Toyoda Gosei etc), citing the strong growth prospects, some of the Indian component manufacturers have also entered this space. 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. The import content in airbags currently stands at 60 to 80 per cent as the key components ie inflator and sensors are imported. Developing these locally would require scale and technical capabilities.
ABS in 2-wheelers
The domestic 2W industry is also likely to see the mandatory implementation of anti-lock braking system (ABS) from April 2018 onwards. After making it mandatory for CVs (above 3.5t) from October 2015 onwards, the Government’s decision to implement the same in two-wheelers stems from the fact that two-wheelers are most vulnerable segment and account for largest proportion of road accidents (as per road safety studies).
With an estimated market size of two-wheelers at approximately 25 million units (in FY 2020), the market potential for new braking system stands at approximately Rs 40 billion (in FY 2020). We believe Bosch and Continental are likely to be the key beneficiaries of this development as they have developed low-cost solutions suitable for markets like India.
Shamsher Dewan is Vice President at ICRA and has been the rating agency for over 10 years now. Based out of Gurgaon, he is part of the Corporate Ratings group and covers automotive and logistics sectors. He is also part of ICRA's Credit Rating Committee and has extensive experience of evaluating performance of companies across various sectors including logistics, automobiles, pharmaceuticals and aviation. Dewan has worked on various credit assignments for leading companies rated by ICRA and has been instrumental in developing ICRA's research offerings.