Electric Vehicles- the Coming Storm

Summary

As Lithium-ion battery costs decline over the next few years, Electric Vehicles (EVs) with their lower operating costs will reach Total Cost of Ownership (TCO) parity with Internal Combustion Engine (ICE) vehicles, across different segments. Along with environmental regulation and awareness, this will lead to an upswing in India’s EV sales over the next decade and disrupt the Auto sector and its value chain.

Electric Vehicles (EVs)- Recent developments

After being preoccupied with the pandemic during most of the year, several developments in recent weeks brought EVs under the spotlight.

1. Tesla: The market cap crossed $ 800 Bn (on January 8, 2021) – more than that of the top 9 global auto OEMs combined. Investors were clearly expressing their view on the future of EVs even if the price of Tesla shares looked inflated.
2. Ola announced plans to set up a manufacturing facility in India for e-scooters with 2 Mn units pa capacity.  It leverages Ola’s recent acquisition of Netherlands-based Entergo- the owner of the App e-scooter brand.
3. Bajaj Auto announced the setting up of a new plant in Chakan, Maharashtra for high-end motorcycles and Electric Two-Wheelers (E2Ws) starting with Chetak.
4. Tesla incorporated a company in India (on January 8, 2021) for EV sales, R&D, and, possibly, manufacturing.

EV sales in India have exhibited steady growth over the past few years as shown in the Table below (Source- SMEV: Society of Manufacturers of Electric Vehicles). The largest sales have been in Electric Three Wheelers (E3Ws) which now account for over half the total number of three-wheelers sold in the country.

    EV Sales in India (Nos)

However, with announcements of several new EV models, and investments in new capacities and charging facilities, EVs are poised for growth in the coming years.

Electric 2 Wheelers (E2Ws) 

Major Indian 2W OEMs like Bajaj, Hero, and TVS have introduced E2Ws. But prices are higher at present than ICE equivalents. They will reduce over the next few years as battery costs decline and economies of scale and competitive pressure take effect. Operating costs are lower than ICE vehicles- Rs 0.25 per Km against Rs 1.80 for ICE.

Relative Total Cost of Ownership (TCO) based on the daily run will drive switchover to E2Ws. Use cases where daily travel is above 60 Km e.g. last-mile delivery for food, E-Commerce, grocery, and ride-hailing already have TCO lower than ICE vehicles. They are candidates for near-term adoption. More users will find the TCO attractive as the price differential reduces. Over the next decade, around 40% to 50% of annual 2W sales are likely to move to electric models. Government policy and incentives can further accelerate such a shift.

Electric Three Wheelers (E3Ws) 

Most E3Ws currently being supplied in India are made by unorganized players who import CKD kits from China and are largely based on lead-acid batteries. Around half the existing 3W fleet in India consists of such E rickshaws- their presence being largely in the East and North.

The major OEMs like Bajaj, Kinetic, Piaggio, and Mahindra have introduced Li-ion battery based E3Ws. They have better range, speed, life, and reliability but are priced higher. However, compared to ICE based 3 wheelers, their lower operating cost more than offsets the initial price differential. All 3 wheelers in India being for business purposes, the TCO drives the purchase decision. For a typical 3 wheeler with a 100 km/day average run, the operating cost for an ICE (petrol/diesel) vehicle amounts to about Rs 3 per Km while for an electric vehicle it amounts to about Rs 0.6 per Km. This is a compelling benefit for a vehicle priced around Rs 1.9 to 2.2 lakh. Hence the current shift in favor of E3W can be expected to further intensify, for both passenger carriers as well as goods carriers, as charging facilities become more widespread and the major OEMs augment their sales and service networks. Some observers feel that up to 90% of 3 wheeler sales may shift to electric options in the next few years.

Electric Passenger Cars (E-Cars)

Sales of E-Cars have been modest so far- mainly on account of high prices and inadequate charging infrastructure. Recent E-Car launches have been made at attractive price points- e.g. Mahindra e20 at Rs 7.50 Lakh, Tata Tigor EV at Rs 10-11 Lakh, and Nexon EV at Rs 14-16 lakh ex-showroom. But the EV model is about 40% to 50% costlier than the equivalent ICE model at present. This difference is typical of E-Car prices across the world and is a big hurdle in increasing sales.

The cost structure of E-Cars is likely to reduce in the next five years owing to four factors:

1. Reduction in battery pack cost from $220 per kWh at present to ~$100 per kWh along with better battery efficiency
2. Development of  dedicated platforms optimized for E-Cars with value engineering and cost reduction
3. Economies of scale reducing indirect cost per vehicle and bringing buying efficiencies.
4. Partnerships between players to share resources and costs.

Consequently, E-Cars are expected to achieve near price parity with ICE models during the next 5 to 7 years. Any incentives for EVs from the Government will accelerate this trend. Individuals who are concerned about climate change and worry that the resale value of ICE vehicles may decline in the future will be the early adopters as new EV models are launched.

Further, E-Cars have a much lower operating cost – about Rs 1.5 to 2.0 per Km against about Rs 8 to 10 per Km for an ICE vehicle in city driving. The TCO for use cases requiring a daily run of over 100 Km per day is lower than ICE vehicles even at current E-Car prices.  Fleet taxis, carpools, and households having long daily commutes are likely to find it attractive to switch over in the near term. As the price differential between EVs and ICE vehicles reduces, more users will find the TCO of E-Cars becoming lower than ICE vehicles leading to increasing preference for E cars.

 

 

 

Electric Trucks (ET) and Buses

The first announcement of an Indian ET – the Tata ULTRA T.7 Electric was made in early 2020. More introductions will follow in the future.

Being commercial vehicles, purchase decisions will be driven by the TCO compared to ICE. The most likely scenario for different end uses based on global experience is summarised below.

1. Urban use- Small and Light Commercial Vehicles– This covers urban last-mile distribution, hub and spoke delivery, and other intracity movements. Such use cases with over 100 Km a day travel will be the first to reach TCO parity.
2. City Buses– Covers city or school bus applications with multiple stops. These cases can achieve early TCO parity as the battery pack can be optimized for periodic recharge or swapping at the parking area or depot.
3. Regional use- Light and Medium CVs– Includes hub and spoke delivery and movement from logistics centers to destinations. This is likely to be the next segment to reach TCO parity.
4. Long haul Heavy and Medium CVs and Buses-They need higher energy storage along with charging stations located along highways.  ETs are still under development and, apart from batteries, alternatives like Fuel Cells are being evaluated. Availability of such vehicles and their TCO parity is expected by the end of this decade.

Over the next few years, as new ET models are developed for specific end uses, achieving TCO parity will determine customer adoption in each of the segments.

Implications for the Auto industry and Supply Chain

Over the next decade, as demand shifts to EVs driven by TCO parity and environmental concerns, every segment of India’s auto industry will experience widespread changes as summarised below.

• Auto OEMs: Existing auto players will have to define their EV strategy balancing their existing market presence, ICE facilities, and product range. Allocating resources between ICE vehicles and new EVs will be critical for future growth. Indian firms like Mahindra, Tata Motors, Bajaj Auto, and Hero have launched EVs and intend to introduce more in the future. Globally around 100 new EV models are likely to be launched in each of the next few years. Some OEMs have decided to stop further development of diesel vehicles to meet fleet emission norms and to focus on EVs.
• New Entrants: New EV ventures are challenging the incumbents with a fresh approach to product design, key components, and customer care- unimpeded by legacy ICE assets. They will force the pace in terms of EV models & features and create competitive pressure. Tesla, along with its Gigafactory investments is a prime example at a global level. In India, Tesla has announced its entry and is likely to start sales and delivery of Model 3 in early 2021. Ola is entering the E2W market.
• Auto Components: EVs have fewer components than ICE vehicles. Many of them e.g. batteries, motors, and electronics are highly specialized.  All component firms have to review their product range and identify what role they can play in the EV supply chain. They also need to find new end users for their products.  Valeo has already announced a 48V electric power train for E2Ws and E3Ws.
• Charging Infrastructure: This is a critical pre-requisite for the mass adoption of EVs and a major new opportunity.  Several firms e.g. Tata Power are entering this field.

• Fuel stations and Oil Companies: As sales of EVs rise, the growth in demand for ICE fuels (petrol. diesel, CNG) will taper off.  End-uses with more daily travel will reach TCO parity earlier than less intensive personal transport. The effect on fuel consumption will be disproportionately more than EV sales or penetration numbers. In addition, the retirement or scrappage of old ICE vehicles will reduce fuel consumption.  The result will be a peaking of fuel demand towards the end of the decade followed by a gradual decline. Oil companies and fuel station operators need to explore alternatives for future growth.  Oil cos can focus on petrochemicals or look at investing in Renewable Energy (RE). Fuel stations can consider installing EV charging points- completing the chain from RE generation to charging EVs.
• Sales Network: Personal EVs are more akin to electrical/electronic durables and amenable to digital means of engaging with the customer. New entrants like Ola or Tesla are likely to explore omnichannel retailing, optimize their physical & online presence, and redefine the customer experience. Existing dealerships will have to rethink how to engage with EV customers.
• Service Network: With fewer components in EVs and greater reliability of electric motors, the entire service & spare part experience will have to be redefined. While new entrants will do so from the beginning, existing players will have to reinvent their EV customer care processes.
• Banks and Financiers:  Financiers will have to adjust to funding higher-priced EVs keeping the TCO in view. Also, they will have to cater to omnichannel retailing including customers making online decisions.

The Coming Storm

The auto industry and its value chain in India face an impending storm. EVs will create a technological disruption that will impact all existing players and also draw in new entrants having novel business models and innovative business processes. The winners and losers will be known over the course of the next decade. All firms need to evaluate their strategic options and take timely decisions. Concurrently, other stakeholders like employees, investors, and customers need to monitor the unfolding scenario and protect their interests.