Maruti Suzuki has finally started work on developing a diesel engine entirely on its

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own. The country’s largest carmaker will start with a mid-sized diesel engine to power its popular SX4 sedan by the middle of next year.

“Our engineers are developing a diesel engine for mid-sized vehicles starting with SX4. I hope we will have the first diesel engine by the middle of next year,” Shinzo Nakanishi, managing director and CEO, Maruti Suzuki India, said at the sidelines of an industry conference on Tuesday. He said it is too early to share the planned engine capacities.

The in-house diesel engine will help the carmaker save costs in the long term as it currently sources 1.3 litre diesel engines from Italy’s Fiat for its mass volume models that include the Swift and Ritz hatchbaks, and entry-level sedan, Dzire.

Rival Hyundai Motor is already conducting a feasibility study to setup a diesel engine plant in the country. It imports diesel engines from South Korea. Tata Motors also sources diesel engines from Fiat, while General Motors has started a new engine plant in Talegaon earlier this month to manufacture up to 160,000 engines annually.

In the mid-sized vehicle category, the SX4 hasn’t been able to overtake segment leader Honda’s City sedan. SX4’s monthly sales of about 2,000 units are less than half of the City, which averages 4,500 units a month. The new diesel engine could also help it garnering additional sales of the sedan apart from helping the carmaker power its future mid-sized vehicles such as the RIII concept multi-purpose vehicle, scheduled for launch in 2012.

Osamu Suzuki, chairman of Suzuki Motor, who was here to attend the event jointly hosted by Japan’s Nikkei newspaper and industry chamber Assocham, said the company is looking to make India a bigger small car export hub for markets like Africa, South America and Europe. The carmaker already exports to countries in Europe and Africa apart from neighbouring markets.

When asked about implications to the Indian unit as a result of Volkswagen AG’s 19.9 per cent stake in Suzuki Motoracquired in December last year, Suzuki added, “The discussions are taking place between Suzuki of Japan and Volkswagen of Germany. Maruti Suzuki is not involved in these discussions.” Nakanishi had earlier said that he expects some synergy in the form of platform sharing between Maruti Suzuki and Volkswagen in India by the end of the present financial year.

“The agreement with Nissan Motor continues and its extension will be depending upon Nissan,” Suzuki added, when asked about VW’s stake purchase implications to its current tie-up with Nissan.

Maruti Suzuki has a contract manufacturing agreement with Japan’s Nissan Motor to market the A-Star hatchback as ‘Pixo’ in major European markets. The agreement expires in 2014.

Osamu Suzuki also spoke about the importance of the India-Japan free trade agreement (FTA) for Japanese companies. “I sincerely feel that the India-Japan FTA should be signed otherwise Japan will lose competitiveness. If it doesn’t happen, costs to Japanese companies will remain 10-15 per cent more,” Suzuki said.

Besides, Nakanishi said the company is looking to pre-pone planned capacity expansions for its two new assembly lines in Manesar to meet market demand.

“We are trying to pre-pone the second factory to November-December 2011 (instead of April 2012) and also hoping to get third factory on stream before our planned timeline of early 2013,” he added. Maruti Suzuki is investing Rs 3,625 crore to boost overall capacity to 1.75 million (from the present 1.2 million) by the end of financial year 2012-13. The company is facing competition from rivals Hyundai, Volkswagen and Toyota as the waiting period on its popular Swift hatchback goes up to two-three months on account of capacity constraints.

“Having an in-house diesel engine is definitely a step in the positive direction. Initially, it won’t be cost intensive as the company will have to spend heavily on R&D but in the long term it will favour the company for future vehicles as well,” senior research analyst Angel Broking Vaishali Jajoo said.

Maruti Suzuki will be carrying out its annual maintenance shutdown as scheduled like last year between December 25, 2010 and January 2, 2011.