BS-VI implementation divides auto industry over new capacity addition

The implementation of Bharat Stage VI has split the automotive industry down the middle as companies differ on adding new capacity.

While some manufactures such as Hero MotoCorp and Maruti Suzuki have decided to invest in new plants, others, including Tata Motors and Honda Motorcycle and Scooter India are holding back investments, expecting a dip in demand.

The onset of Bharat Stage VI (BS-VI) on April 1, 2020 will push up costs of all vehicles by a minimum of 10 percent going up till 23 percent at the upper level. This, the companies expect, will hit retail demand hard that could render the new capacity useless if set up now.

BS-VI is aimed at bringing down emission levels of particulate matter (PM), nitrogen oxide (NOx) and sulfur in the air. Diesel BS-VI engines emit one-fourth the NOx and one-fifth the PM compared to BS-IV engines.

Honda Motorcycle and Scooter India (HMSI) and Tata Motors are refraining from setting up new facilities despite some of their production lines running full steam and others even beyond their stated capacity.

For instance, according to Tata Motors managing director Guenter Butschek, after the launch of eight new commercial vehicles over the past year and a sustained growth in retail demand, some of its production lines ‘are running even beyond 100 percent capacity’.

High capacity utilisation

Similarly HMSI, the country’s second largest two-wheeler maker, is operating at 95 percent utilisation levels across its four plants. The company only has 300,000 units of annual spare capacity this year going by sales of 6.1 million units clocked last year from the stated capacity of 6.4 million units.

Both companies are refraining from adding new capacities at least until 2020 and are instead depending on freeing up capacity by debottlenecking production lines and introducing efficient processes.

Speaking to Moneycontrol, Girish Wagh, president, commercial vehicle business unit, Tata Motors said: “The utilisation varies across plants and categories. For instance in medium and heavy commercial vehicle segment it is 100 percent, within intermediate and light commercial vehicle segment it is close to 100 percent. On a continuous basis we are enhancing capacity using Kaizen. We are neither doing green field nor brown field expansion. What we are doing is a very focused debottlenecking of production line. We won’t need new capacity for next two years”.

HMSI reported a growth of 22 percent last year in sales and the projection for this year is that of a ‘double digit growth’. Considering a minimum increase of 10 percent in volumes HMSI will end up selling 6.7 million units during the year, higher than its installed capacity.

Minoru Kato, president and CEO, HMSI, said: “We expect overall two-wheeler volumes of the industry to go down post the implementation of BS-VI. There will be a price increase because of the mandatory implementation of ABS technology from April 1, 2019 and because of the BS-VI from April 1, 2020".

Expansion lane

However, not every company is pessimistic about demand. Hero MotoCorp, Royal Enfied, VE Commercial Vehicles, Maruti Suzuki and Ashok Leyland are going ahead with their expansion plans.

Hero Motocorp is setting up a new plant in Andhra Pradesh that would start production in 2019-20 in addition to expansion of the existing Gujarat plant.

Niranjan Gupta, CFO, Hero Motocorp, said: “The initial capacity of the Andhra (Pradesh) plant will be 500,000-750,000 units per annum which will eventually be hiked to 1 million units.”