July 06, 2020
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Thrown Out Of Gear

Car makers struggling out of a recession are rabbit-punched by a Supreme Court ruling

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Thrown Out Of Gear
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It's a sight one doesn't see too often... the eloquent Kapil Sibal fumbling for words, and the suave P. Chidambaram sternly admonished. And to find them on the losing side? Well, that's probably been a strict no-no ever since the two worthies joined the bar.

But these were only minor surprises at the Supreme Court hearing on April 29 before a three-judge bench headed by Chief Justice A.S. Anand. Because, since that day, utter chaos has been prevailing in the National Capital Region (ncr, encompassing Delhi and its neighbouring areas) car business. The Supreme Court order effectively shrinks the ncr car market by nearly 90 per cent, and overnight lops 25 per cent off the sales of the country's biggest car maker, Maruti Udyog Ltd! At the time of going to press, no new private vehicles were being registered in Delhi, four-wheeler or two-wheeler, in the country's by-far single largest car market.

But back to April 29. The bench was hearing a public interest litigation filed by environmentalist M.C. Mehta way back in '85. All along, the hearings had centred around the high level of pollution caused by diesel cars, and whether they should be banned in the ncr. That suited Maruti just fine, with an 80 per cent share of the car market-virtually all petrol vehicles. A ban on diesel cars would have nipped the nascent challenge from Telco's Indica, which is banking heavily on its diesel model.

If anything, Maruti Udyog executives were gloating on the morning of April 29 at what would ideally have been-as some in the industry suggest-the culmination of a campaign against Telco, in the guise of saving the environment. The Supreme Court had in January 1998 constituted the Environment Pollution (Prevention) Control Authority (epca) as a recommendatory body, which in various reports to the court had pointed out the harm caused to the environment by diesel cars. So confident was Maruti that it hired Sibal only on April 27, and not surprisingly, Sibal's arguments were not in place by the 29th. After all, diesel was the issue, pollution caused by petrol cars hadn't even been mentioned.

And that's the position that was argued for the first half of the hearing. But all that changed once Telco counsel Fali Nariman rose to speak. His argument: any restriction on the registration of vehicles and tighter emission norms should apply to petrol vehicles as well, since they constitute 93 per cent of the private vehicles registered in Delhi. Besides, benzene emissions from petrol vehicles are as carcinogenic as suspended particulate matter and nitrogen oxides in diesel.

Bang on, said the court to everyone's horror but Telco's, as it proceeded to read out its order: by May 1, all new private vehicles-diesel or petrol-registered in the ncr must conform to Euro I emission norms at the least, and only 1,500 Euro I-compliant cars-250 of them diesel-will be registered every month. Maruti itself sells 7,000 cars in the ncr every month. And by April next year, all private vehicles must conform to the even more stringent Euro II norms. That left the entire Indian automobile industry-and its battery of lawyers-speechless. Chidambaram, who was representing Fiat, was the first to recover his wits and speak. His contention: the Indian car industry was in any case going to be Euro I compliant by April next, and it would be physically impossible for car companies to change technologies overnight. The court's retort was that Fiat sells Euro II-compliant cars in Europe, so why was it that cars introduced in India didn't conform to those norms? Even as Chidambaram beat a retreat, Maruti's Sibal gathered himself and pleaded that since the issue of petrol cars hadn't been discussed earlier, it wouldn't be right for such an order to be passed without hearing Maruti's views, whose cars don't meet Euro I norms.But the court was in no mood to listen.

That was it then, the industry and car buyers in the ncr had to live with the order. But even a week down the line, no one seems to have made sense of it, as total chaos reigned. On the morning of Friday, April 30-Buddha Purnima, and a government holiday-the Delhi government took the trouble to issue orders banning automatic registration of Maruti cars, a facility it had extended to some big Maruti dealers. This was to ensure that Maruti didn't pump in cars prior to the order coming into effect. Then, when the offices of the Road Transport Authority (rto) opened after the long weekend on Monday, dealers realised that the Delhi government was playing safe and wasn't registering any cars at all. And by Thursday it stopped the registration of two-wheelers as well. Why? Because the Supreme Court order only refers to private (non-commercial) vehicles, and doesn't differentiate between two- and four-wheeled vehicles. The Delhi government was taking no chances. The end result is that as of today, no one in Delhi can buy a new vehicle for personal use. Says Raj Chopra, chairman, Competent Motors, the largest Maruti dealer in the country: "Maruti's 11 dealers in Delhi alone are stuck with Rs 20 crore worth of cars. Plus, they've collectively given advances of Rs 136 crore to Maruti. We'll all go bankrupt if the court order isn't modified."

In the meantime, transport commissioners in some areas neighbouring Delhi and which form part of the ncr continue to register vehicles. The 1,500 cars a month mark? It's probably been crossed. Contempt of court? No one seems to have given it a thought.

And how have car companies reacted to it? While Maruti-the one most affected-has in an official statement agreed with the Supreme Court order, the reality is quite different. A good 27 per cent of its total sales (roughly 83,000 cars) were in the ncr last year. That was based on sales of 309,000 cars, and this year Maruti planned to up production by another 50,000 vehicles or so. And if it can't sell in the ncr, its bottomline will be roadkill. A 25 per cent drop in sales for Maruti translates into a whopping Rs 2,000 crore!

As of now, though, it has a contingency plan. "Most of our models have a waiting list. Since we can't sell in the ncr, we'll clear the waiting lists in other parts of the country," says a Maruti official. But that's only a temporary measure. At best the company can achieve Euro I norms in another four months, by making some changes in the current engine, though there are some in the industry who claim it can be done earlier. And that's when it can begin selling within the cap of 1,500 cars a month. But that's going to add about Rs 25,000 to Rs 30,000 to the cost of your Maruti car. Clearly, some of it will have to be passed on to the customer, and that is going to hit Maruti's price warrior status.

And Euro II? For that, the company would need to introduce a multi-point fuel injection (mpfi) system in place of the carburettor its cars currently use, change the cylinder heads, and modify some electrical components. Besides, Denso of Japan is currently constructing a plant to supply mpfi systems to Maruti, which were to be fitted in Maruti cars by April 2000. The best case scenario for Maruti is to better this deadline by a month or two. But all this is going to cost Maruti and its vendors Rs 600 crore.

One gainer from all this is Hyundai Motors. Already, its Santro is extremely popular in north India, and till the Supreme Court order, 1,600 Santros were being sold every month in the ncr. While the court order may have put a temporary brake on Delhi sales, Hyundai's Euro II-compliant Santro will be on the roads-and out of the ambit of the Supreme Court order-by the end of this month."We are already Euro I-compliant. We'll have to reprogramme our engine control module chip, and install a specially imported catalytic converter, which will add a maximum of Rs 25,000 to the cost of the car," says marketing director B.V.R. Subbu.

While the other players in the industry aren't in a position to either reap the benefits or suffer serious harm due to the court order by virtue of being niche players in the luxury segment, Telco's Indica has a lot at stake. "Currently, the Indica is Euro I-compliant, and we will be Euro II-compliant very soon. The estimated cost will be between Rs 30,000 and Rs 50,000, depending on whether you install the add-ons and whether it is indigenous or imported. But we can't say what the eventual price will be to the customer," says V.M. Raval, executive director, Telco.

That may be Telco's official reaction to the court order. But it was hard to miss those huge smiles company executives had on their faces when the order was read out, and still do, a week later. In fact, most in the industry claim this entire courtroom drama about the "state of Delhi's environment" is actually all about car wars. Consider. The epca, which in its report to the Supreme Court has indicated that diesel vehicles in the ncr be banned, has Maruti joint managing director Jagdish Khattar as a member. And rival car Indica uses its diesel platform as its usp.

Clearly, it wasn't something Telco was going to take lying down. On April 13, industry association Society of Indian Automobile Manufacturers (siam) decided to hold a meeting the next day to ensure that the industry has a common viewpoint on the diesel issue. But most in the industry could not attend due to the short notice. Maruti and Hyundai definitely did not. But Maruti did ensure that its views were sent to siam on paper for the meeting. Which ended with siam deciding that both diesel and petrol vehicles were equally polluting, and whatever restrictions were put on diesel vehicles should also be applicable to petrol cars. How did the issue of petrol cars get discussed, when it wasn't on the agenda? Telco's Raval is siam president.

This was a move bound to hit Maruti, whose vehicles are primarily petrol-driven. Eventually, the note did not reach the court, but that was only after a lot of pressure was put on the siam secretariat. And it may truly be Telco counsel Nariman's convincing arguments in court that eventually resulted in the court order. But clearly, the activities of both Telco and Maruti don't appear to have been above board.

But what now? Euro I norms were coming into effect by April 2000 anyhow, and Euro II by 2005. Is the Supreme Court being realistic when it expects auto firms to immediately comply by Euro II, a full six years ahead of schedule? Is it practically possible? Not for market leader Maruti at least.

Then, there's the issue of the fuel. Both the petrol and the diesel available today don't comply with the requirements of Euro II, and it would take investments of over Rs 15,000 crore to make the fuel available. Besides, Delhi government officials have been quoted as saying that the registration order is unimplementable, since who decides who came first to which rto to register? And wouldn't this artificial scarcity lead to huge premia being paid to dealers and brokers?

These are all questions which the Supreme Court needs to answer, but that'll happen only when the government-which has been give the right to approach the court for a modification-seeks these answers. But the government hasn't done so yet. "No wing of the government wants to bell the cat. The environment and petroleum ministries and the Delhi government are passing the buck among themselves.They haven't even decided on what grounds to approach the court," says a senior industry executive. Till then, chaos reigns.

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