Electric Vehicles- Opportunities Galore

/ By

Summary

Electric Vehicles (EVs) are poised to disrupt the auto sector in India during the coming decade. An array of new EV models with novel features and applications will be launched. The way vehicles are sold, used, and owned is also being redefined. This will create enormous opportunities across the entire automotive ecosystem.

The Auto industry in India

India is home to a large and diverse auto industry having four major product segments.

  1. 2 Wheelers (2Ws): With annual sales of about 21 mn, India is the largest market for IC (Internal Combustion) 2Ws globally. In each of the last two years, about 150,000 electric two-wheelers (E2Ws) were sold, most with a maximum speed of 25 Kmph – not requiring any license or number plate registration.
  2. 3 Wheelers (3Ws): India is the world’s largest producer of 3 wheelers with sales of around 7 lakh annually. Further, around 1 lakh electric 3 wheelers (E3Ws) are sold, mostly made by the unorganized sector, often using lead-acid batteries.
  3. Passenger Vehicles (PVs): India is the 4th largest market in the world with annual sales of about 3.4 mn. Just 5,000 electric cars (E-Cars) were sold in FY 21.
  4. Commercial Vehicles (CVs): With sales of about 1 mn per year, India is the 7th largest market worldwide.

Each segment has a healthy growth trend with a market size likely to be substantially higher by 2030.

EVs- poised for take-off in India

EV penetration in 2Ws and PVs so far amounts to under 1% of total sales. The growth of EV sales is constrained by the following:

  • Price: The price of an EV is typically 50% higher than a comparable IC vehicle (ICV). For instance, a Tata Nexon EV has a price of Rs 14 lakh against a Nexon diesel at Rs 9.80 Lakh. This is a formidable barrier to sales. However, EVs are expected to achieve price parity with ICVs in the next 3 to 5 years owing to four factors.
    1. Battery Cost: Li-Ion battery cost has reduced from $1000 per KWh in 2010 to about $150 per KWh in 2020- a drop of 85%. Battery cost continues to decline and is expected to reach about $65 per KWh by 2025 and reduce further by 2030. As battery cost accounts for about 50% of the cost of an EV, this reduction will drive price parity.
    2. Dedicated EV Platform: The design of a dedicated EV platform instead of repurposing an existing ICV, along with value engineering and cost reduction, will reduce costs.
    3. Economies of Scale: Growing volumes will reduce indirect costs per vehicle and bring buying efficiencies.
    4. Partnerships: Many partnerships between EV players to share resources and costs are underway.
  • Charging Infrastructure:  Adequate charging facilities are a prerequisite for EV sales growth. Apart from overnight charging points, fast-charging stations and intercity roadside facilities will be needed in large quantities in the future.
  • Range: This is a cause for anxiety amongst EV users. As battery cost declines, and energy density increases, EV makers can optimize the range and cost of their models.

Over this decade, improvements in each of the above factors will lead to rising sales of EVs.

E-Car Charging
Electric 2 Wheeler

Government Policies

The policy environment for EVs is very supportive as summarized below.

  • FAME II (Faster Adoption & Manufacturing of EVs Phase 2): This policy, valid till March 2022, provides an incentive of Rs. 10,000 per KWh for all EVs (except buses) and Rs 20,000 per kWh for e-buses running on advanced batteries. The scheme also provides support for setting up adequate public charging infrastructure.
  • Production Linked Incentive (PLI): Announced in 2020 to boost domestic manufacturing, the incentive structure ranges between 2% and 12%  of incremental sales or exports for different sectors and periods.
    1. Advanced Batteries: The subsidy is linked to production and the achievement of 60% value addition within five years of commencement. It also covers any new technology that evolves over the next decade. India has also increased the import duty on lithium-ion cells from 5% to 10% and on assembled battery packs from 5% to 15% to promote domestic production.
    2. Automobiles & Components: The incentive is expected to be paid on incremental exports and will cover vehicle manufacturers as well as component makers.
  • Labour Laws: Twenty-nine disparate and occasionally contradictory labor laws have been replaced with four considerably more coherent codes that make labor markets far more flexible and employment friendly. The new labor codes give employers the right to terminate workers in enterprises with 300 or fewer workers (up from the previous threshold of 100 workers). More importantly, they give states full freedom to raise this threshold.
  • Income Tax: Lower rates of income tax have been announced: 25% (without incentives & exemptions) and 17% for new manufacturing units.
  • Ease of Doing Business: India’s rank has improved from 142nd in 2014 to the 63rd position among 190 countries in May 2019. This assessment factors in the Goods and Services Tax (GST) and the Insolvency and Bankruptcy Code (IBC).

Further policy changes are expected following the next round of climate change negotiations and net zero-emission targets. These are bound to give additional impetus to EVs.

Future Outlook in India

Over the next few years,  price parity with ICVs is likely, and charging infrastructure will greatly improve. Further, all EVs enjoy an overwhelming advantage in operating costs. In India, the running cost of an EV is typically about 20% of an ICV.  With the confluence of these factors, sales of EVs will reach an inflection point in the next 3 to 5 years and then grow rapidly -following a classic S curve. By 2030, the penetration of E2Ws and E-Cars can potentially cross 50% of new sales in India. Most 3W sales will shift to electric based on unit economics for the typical daily run. In comparison, China already had sales of about 10 mn E2Ws in 2020 – including 6 mn low-end e-scooters/mopeds. Norway has already achieved 54% penetration of E-Car sales in 2020.

Electric CVs (ECVs) will take longer to be introduced. But in-city applications for goods and people – small, light, and medium CVs, and city buses- will shift to electric during this decade, driven by a lower total cost of ownership.

With mass volumes (in millions) likely by 2030, India has the potential of becoming the global hub for E2Ws and small EVs- cars and CVs.

Opportunities in the EV revolution

The shift towards EVs will disrupt the auto industry as we know it today- creating a fertile ground for innumerable innovations and business opportunities as outlined below.

  • Vehicles: Attracted by large potential volumes by 2030, new EV ventures will challenge the incumbents with a fresh approach to product design, key components, and customer care- unimpeded by legacy IC assets. This will accelerate the introduction of EV models & features, including the launch of EVs by existing automakers, and drive market penetration. Some recent developments:
    • Several Indian car producers have already launched E-cars (e.g.  Mahindra e20, Tata Nexon EV, Tata Tigor EV, and Hyundai Kona). More EV models e.g. from Maruti, are expected in the future.
    • Tesla has announced its entry into India and is likely to start sales and delivery of Model 3 in 2021. It is also setting up a development center.
    • Ola is entering the E2W market with an ambitious plan to invest Rs 2400 Cr in a manufacturing facility with an automated assembly line having 3000 robots. The ultimate capacity will be 10 mn p.a. . About 90% of the components will be localized and colocated. This will be the world’s largest E2W factory and will address the domestic as well as export markets. Ola intends to achieve price parity with ICVs from the beginning with its economies of scale and vertical integration.
    • Bajaj Auto is setting up a new plant to make 500K e-scooters p.a. Bookings for the e-scooter Chetak reopened online on April 13. But had to be stopped in two days. The consumer response was overwhelming- much more than planned supply. Remarkably, all bookings were made online – effectively bypassing the dealer network at this stage.
    • Hero Moto is pushing into E2Ws through two ventures: Ather Energy with a capacity of 110K pa and Hero Electric with 400K pa.
  • Components: EVs have fewer components than ICE vehicles. The major items e.g. batteries, motors, and electricals/electronics are highly specialized.  This creates opportunities for new ventures to make these components. Valeo has already announced a 48V electric power train for E2Ws and E3Ws. A joint venture for Li-Ion batteries has been announced by Suzuki, Toshiba, and Denso.
  • Charging Infrastructure: Being a critical prerequisite for the mass adoption of EVs, it is a major new opportunity.  Several firms e.g. Tata Power are entering this field. There is a wide spectrum of requirements: fast charging, overnight, public facilities, highway centers, private units, and charging solutions for multi-apartment buildings. As the population of EVs grows over the decade, the charging infrastructure will have to keep pace. Ola has announced a $2 Bn plan to set up a network of 100,000 charging points exclusively for Ola E2Ws across 400 Indian cities over 5 years.
  • Sales Network: EVs are amenable to online engagement with customers as shown by the Bajaj Chetak e-scooter booking case. New entrants like Ola or Tesla are likely to explore omnichannel retailing, optimize their physical & online presence, and redefine the customer experience. This creates an opening for new players who can create a relationship with digitally literate consumers.
  • Service Network: With fewer components in EVs and greater reliability of electric motors, the entire service & spare part experience will be redefined creating new opportunities.
  • Connectivity: Using electronic features and connectivity built into EVs, there is great potential for additional smartphone applications and location-based services.
  • Mobility: A shift from vehicle ownership to usership is being driven by shared mobility firms like Ola and Uber in India. Customers are being offered a bouquet of different services. Subscription services e.g. Zipcar, offer access to a vehicle when needed- by the hour. Further, there are aggregator apps and journey planning apps that cover multiple travel modes. These innovations are redefining how vehicles are owned, used, and sold. In a diverse country like India, with relatively low per capita ownership, this opens up huge opportunities.
  • Intelligent/Autonomous vehicles: An increasing number of software-driven features are being added to vehicles making them more intelligent- capable of assisting the driver in a variety of functions. The ultimate goal is a self-driving or autonomous car. Numerous software giants like Apple, Google, Huawei, and Baidu are pursuing this dream in partnership with carmakers. Several carmakers e.g. VW too are attempting to develop autonomous cars.
Electric Bike
E-Car Charging Station

Conclusions

EV penetration will accelerate once price parity with ICVs is achieved and charging infrastructure is established during the current decade. E2Ws and E3Ws will be the first to take off as their usage is typically within city limits. Next will be E-cars and ECVs for intracity use. This growth in EVs, potentially reaching 50% of annual sales by 2030, will disrupt the auto sector as we know it. Even as numerous EV models with novel features are launched, customers will redefine how they are owned, used, sold, and serviced. This will create enormous opportunities for new and innovative products and services across the entire automotive ecosystem.