CNG startup signs supply deal with India’s Mahindra

Calgary, Canada-based Alternative Fuel Systems (CVE:AFX) revealed today it has been supplying engine components for the past year to Mumbai-based Mahindra & Mahindra (BOM: 500520), the largest maker of SUVs in India.

AFS manufactures natural gas engine controllers to be used in compressed natural gas vehicles, including Mahindra’s Maxx Maxi Truck. The announcement follows news of the company’s supply deal with Mumbai’s Tata Motors about two years ago, marking the small company’s foothold with two of India’s largest automakers.

AFS CEO Jim Perry declined to reveal the size of the Mahindra deal but told the Cleantech Group that the two deals are certain to help the company increase its share of the small-but-growing market for compressed natural gas (CNG) vehicles in India. The duration of the agreement depends on market demand, he said.

“CNG production volumes are not high enough to get the big boys interested, and it’s a niche market, so that’s where we shine,” Perry said. “Because we’re a small company, we don’t have the inertia that a big company would have to overcome.”

Shares of the company rose a whopping 60 percent to $0.16 cents at the close of trading today.

The engine controller works like a computer to optimize the balance of power and emissions. AFS calibrates the controllers and sends them to its partner in India, Advantek Fuel Systems. Advantek incorporates the controllers into the natural gas fuel system and sends the finished product to Mahindra.

AFS and Advantek have been working together for about four years, including the supply deal with Tata Motors for the Ace vehicle.

“You can’t be successful in India without a partner on the ground,” Perry said.

AFS has 11 employees in Canada and outsources its manufacturing. The company has supplied customers in Europe and North America, but Perry said India is unquestionably the largest market for its technology because of government mandates that ban inefficient diesel vehicles. The public transit systems in the cities of New Delhi and Ahmedabad, as well as the state of Gujarat, are required to use CNG.

“The Indian government is very serious about this solution to the point where it is banning diesel vehicles from 12 of the major cities,” Perry said.

The burning of CNG emits fewer greenhouse gases than other fuels and is safer if accidentally released because it disperses quickly. Perry said it allows greater power with less emissions, but it’s more optimal to use an engine built for CNG than one that undergoes a retrofit.

The barrier to its adoption in much of the world is sufficient distribution systems, and CNG vehicles have had several false starts in North America (see Could Obama fire up CNG cars?).

But Indian officials have said they recognize this need and are starting to lay the necessary pipelines (see India readies for shift away from oil). India had 38 trillion cubic feet of proven natural gas reserves as of January 2009, but in 2007 produced just 1.1 trillion cubic feet of natural gas.

“India has the infrastructure for natural gas refueling. Delhi alone has 180 natural gas fueling stations,” Perry said. “That has always been the challenge in North America, but in India the infrastructure is already there.”

Government officials say increased adoption of CNG could help solve its energy and fuel shortages. India imports 68 percent of its oil consumption, according to the U.S. Energy Information Administration. According to the World Bank, roughly 40 percent of residences in India are without electricity, and blackouts are common in cities with access to the electric grid.

Perry expects the deals with Mahindra and Tata to give it much broader reach within the Indian market. Mahindra & Mahindra is part of the Mahindra Group, a $6.7 billion conglomerate with nearly 100 subsidiaries in sectors including financial services, IT and farm equipment (see Indian car maker launches fuel-efficient SUVs). Tata Motors is part of the Tata Group, the largest private corporate group in India.

“We have a track record now. With any original equipment manufacturers a track record is very important because nobody wants to be the first to use your product,” Perry said. “This shows other companies over there we have the capability to do what needs to be done to work with OEMs. We’re not just a retrofit house.”

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