The past year has been a bumpy ride for India’s automobile sector. Factors such as increasing raw material costs, the transition from Bharat Stage (BS) IV to VI, and a rise in insurance costs hit market sentiment and dragged overall sales lower. The story of Tata Motors, India’s largest commercial vehicle maker and fourth on the Fortune India 500 list, is no different: Its domestic sales plunged 26% to 40,155 units in May from 54,290 units a year ago. In an interview, the company’s CEO and managing director, Guenter Butschek, 58, who was formerly with Airbus and Daimler, talks about the slowdown in the industry, the firm’s turnaround strategy, and the reason behind phasing out diesel variants. “We want to be a responsible Indian company,” says Butschek, who manages the firm’s India business and all other domestic and overseas subsidiaries and joint ventures, except its U.K. subsidiary, Jaguar Land Rover.

Edited excerpts:

The automobile industry, especially the passenger vehicle segment, has been witnessing a decline in sales for the past 12 months. What do you think has led to such de-growth?

In passenger vehicles, we are now getting at the end of the 12th month of consistent de-growth. In the past, we have seen such kind of fluctuation in demand here and there. But that was for three-four months where the industry has hardly seen the impact of having the need to adjust capacity to control stock and push for retail. During these 12 months, we at Tata Motors, at least for the longest part of the period, ensured the benefit of outperforming the market...and growing while the market was de-growing. Now, what has affected the sector in these 12 months? One is customer sentiment and the other, liquidity. As far as customer sentiment is concerned, there has been a sharp decline in urban areas and there is a somewhat better condition in the rural areas as far as the demand structure is concerned. In the festive season, there was an overstock situation in the market under the pressure of the liquidity crunch.

How much of it was pre-election uncertainty?

The problem started 12 months ago. The [2019 general] election was still far away. It was rather related to a couple of incidents which had a longer impact. First of all, in the urban areas, the younger generation is now in two minds—to share or to own...possibly not yet decided. This has had quite an impact. Also, there is always a consideration to be asset-light. Whether I need to own a vehicle? Parking is an issue, increasing cost of running a vehicle is another. There are these elements, that’s why I call it sentiment. It is not driven by one major issue, it’s a sum of little concern points which cause a sentiment. And the cautious sentiment got accelerated by the change in insurance premium.

The election has certainly created an additional impact because it was not clear what’s going to be the outcome. What’s going to be the stimulus to the economy? Is India going to get to its previous growth trajectory? What does it actually mean to me as an individual? So together it all created an impact. Meanwhile, we are close to the end of three quarters of slowdown and we are still to see a recovery.

Your new launches like Tiago, Tigor, and Nexon have done very well. What was your turnaround strategy?

We have built our future portfolio on two new architectures. First is called the ALFA (Advanced Light Flexible Agile) architecture, which we have for all our top heads from 3.7 to 4.2 metres. And 4.5 m and above is what we called the OMEGA (Optimal Modular Efficient Global Advanced) architecture, which is actually a carryover of the Range Rover discovery platform. We have 12-14 top heads in these two architectures, which will have a high degree of commonality. But products will all be significantly different. This is the whole trick because the higher my commonality is based on modality, higher my economies of scale. Altroz is a premium hatch and H2X is a small-size SUV. What if I tell you that these two vehicles have a commonality of more than 70%? We will build economies of scale delivering commonality but in order to bring differentiation, design plays a crucial role. It is all about love at first sight. The ‘love effect’ will come if it looks different and if it’s aspirational and desirable. Our products are going to be feature packed. The features provided will make our products more aspirational for our customers and won’t be there for the sake of adding a gimmick. Features for the sake of safety, convenience, and comfort—this is our strategy.

Has phase 2 of the Faster Adoption and Manufacturing of (Hybrid &) Electric Vehicles (FAME) been helpful in looking at electrification comprehensively?

FAME II has become a right focus point because it is in line with what we have always propagated; not just promoting EVs, it also promotes electric infrastructure and electrification of Indian mobility. Because you find a direct relationship between subsidising of buses to two-wheelers but it also has an element where it subsidises the localisation of the supply chain, the engine, the motors, the batteries, the cells, the battery packs,and the entire electronics. This is something where we invest today, and the return is going to come as the EV population is going to increase. Volume for such kind of investment is critical. You need to put density of charging stations, but in order to make a viable proposition for the one who has invested you need to get some subsidies at the beginning to justify the investment. While we actually build the pitch for setting positive sustainable businesses for the vehicle car population in India, it [electrification] is going to in-crease. This is the whole reason why FAME II is an important initiative. We need to leverage this opportunity to the maximum to leapfrog other nations. The first three years are decisive. The challenge is charging infrastructure... To go electric in India, we need to build an ecosystem.

You have recently bagged orders for 255 electric buses from six cities under FAME II. How do you look at India’s e-mobility opportunity??

If we look at it more holistically and check what percentage is actually contributing to the overall pollution—the automotive sector is generally acknowledged as 20-25% of the total CO2 footprint—buses are not high contributors.

The need of the hour is to adapt to electrification faster. Then the question is: What is the launch strategy? One is the buses because it’s largely under the control of the government—7,000 buses with subsidies provided by the FAME II incentive plan to boost the transition from internal combustion diesel engine to EV is much appreciated. This will enable the fleet in enjoying the full cost of ownership benefits on electrification [which] is significantly less expensive than the running cost of diesel and petrol engines. Buses are fully leveraging it because they accommodate a lot of miles and operate 24x7. Passenger vehicle is a slightly different play, in particular in the private sector, because range anxiety is the highest concern of the passenger. The problem is most of the passengers are not even aware of the use case. Even the Tigor EV, made to the specifications required by the world’s largest public energy service company, EESL, would take you in normal life conditions a hundred kilometres. You can actually drive this for a week—from Monday morning to Friday evening—without charging the vehicle. For a normal Indian customer who drives 10,000 km per year, it’s still a problem. Battery with high prices is a questionable proposition. Therefore, the entry into the market is not focussed on the private customer but on fleet customers.

This is also the year when most automakers are expected to make the transition from BS IV to BS VI [the new emission standard]. How has it affected Tata Motors?

We have to prepare with the transition of numerous stocks of BS IV vehicles to BS VI by the end of this year. We have an internal concept called ‘Mission Zero’ because by the end of the year, I can’t afford to have a single BS IV vehicle left. But since I don’t have the crystal ball which gives me a clear indication of how many and what kinds of BS VI vehicles are going to be in demand, and finally sold, I don’t have a clear answer for how my competition is going to behave and when are they going to switch. What is going to be the price increase for the BS VI application? Are we going to switch to petrol and diesel? For the benefit of our turnaround, we have become very agile. We have to really align our supply with demand. We have invested ₹1,200 crore until FY19 to complete our transition to BS VI and it is the single-largest investment Tata Motors has ever made.

Maruti and other carmakers have announced that they’ll be phasing out diesel variants. What’s your final word on that?

As far as the future of diesel is concerned and as others have announced, it’s a matter of fact that the technology triggers the cost in order to change to the diesel engine that BS VI requires. This means diesel becomes more expensive. Therefore, independent of whether we offer diesel [models] or not, lots of customers will actually move towards petrol solutions; whether we maintain our diesel offering or not, that’s a different issue.

Diesel, most probably, is not going to be a viable option for our customers. For sizes of above 1.5-litre, or 2-litre diesel engine as we apply it on the Harrier, there is no real alternative available as we speak. Because performance-wise as compared with petrol engine, there is significantly higher fuel consumption [under BS VI], which will impact CO2 emission—which we don’t like and can’t afford because as of 2022, we have to meet certain requirements. In the larger context, it’s not just about saying we don’t do diesel. The question is how are we going to place the different powertrain solution, including CNG, for example, and alternative fuel to get to a better overall mix and this is actually what we need to crack individually, as a company, but more so as an industry. And more so for India and its customers, you can’t take one call without having the answers to the other. We are still under consideration because we would like to meet customer expectation and requirement. We would like to be a responsible Indian company. We will respect and meet the April 1 deadline, where we switch the entire product range to BS VI for all of the applications. One big question mark remains: BS VI will only be efficient if there is BS VI-compliant fuel available at each and every fuel pump in India. If you would like to deliver the benefit, it only goes together with the BS VI-compliant fuel.

(This interview was originally published in the July 2019 issue of the magazine.)

Follow us on Facebook, Twitter & YouTube to never miss an update from Fortune India. To buy a copy, visit Amazon.