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Car makers on edge about their large diesel investments
May 28, 2016

Reforms come at their own cost. Diesel deregulation, a relief for oil marketing companies, posed a major challenge for diesel auto makers as a key incentive to own diesel vehicle was removed. And this was just the beginning.

After Delhi, the latest speed breaker for auto companies has come from the ban on diesel vehicles (above 2000 cc) in Kerala. As per an article in The Hindu Business Line, the automakers (including suppliers) were hardly prepared for the ban. Especially, having made investments to the tune of Rs 750 billion already in diesel engines.

Such regulations will go a long way in influencing buyers' decisions for other categories and in other regions. Also, they are a stern reminder how things can go wrong and the need for the companies to be nimble in face of such setbacks.

The drive against diesel vehicles could lead to a significant reshuffling in the market shares of automakers, favoring the ones with petrol cars. It will be interesting to watch how different automakers deal with the crisis.

Meanwhile, the message for investors is clear - never take a trend or growth and profitability of large profitable companies for granted. Make sure that the management is competent enough to mold the business model to overcome such risks. My colleague Tanushree Banerjee has recently written an interesting piece on what such events tell you about stocks. To read more about the same, please click here.

This Chart Of The Day was published in The 5 Minute WrapUp - How Could Warren Buffett Ever Say Something Like That?

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