Tuesday, October 3, 2023

EV Vision 2030: Automobile OEMs in India need Rs 3.5 lakh crore Capex


The automobile OEMs in India will have to incur an additional Capex of Rs 30,000 crore annually above current Rs 25,000-30,000 crore Capex, to meet EV Vision 2030.

Automobile OEMs in India will have to incur a Capex of around Rs 3.5 lakh crore to realise the Indian government’s EV Vision 2020 in the next 5-7 years, claims research by BWA. Currently, automobile OEMs have an annual Capex of around Rs 25,000-30,000 crore, for enhancing capacity for new model launches and upgradation of existing vehicles. As per the projection, the automobile OEMs will have to incur an additional Capex of Rs 30,000 crore every year, exclusively for EVs.

As per EV Vision 2030, the government aims to 30% penetration by the electric vehicles by the end of next decade. However, the weak business environment due to the ongoing economic crisis is likely to delay the process.

Recently, after the unlock started across the country, the auto industry is witnessing a gradual recovery, as the economic activity across the country is slowly coming back to Pre-Covid phase. However, this revival in the auto sector is largely attributed to pent up demand, which materialised particularly during the festive season.

Even though the automobile OEMs are registering sequential MoM growth and at some point YoY growth as well, investments have taken a backseat in the electric vehicle segment, as the automakers are cautious before shelling out money. Despite the Indian government’s focus on electric mobility through various policies, the auto OEMs are refraining themselves from investing in the segment.

Automobile OEM Capex
Source: CMIE, BWA

Why automobile OEMs need Rs 3.5 lakh crore Capex?

The automobile OEMs need the Capex requirement of Rs 3.5 lakh crore at the initial state to boost the adoption and manufacturing of the electric vehicles. To be precise, they need to infuse the fund to create an Ev manufacturing ecosystem that is of global scale and competitive as well.

Setting up global quality manufacturing units for the zero-emission vehicles is a significant requirement for the EV market for sustainable growth, alongside other factors like price, charging infrastructure, positive mass sentiment, global-scale technology etc.

Automobile OEM Capex
Source: SMEV, BWA

Rs 3.5 lakh crore Capex: Possible for automobile OEMs?

Due to the impact of the Covid-19 pandemic, the business activities have been suffering unprecedentedly. The country’s GDP was contracted by 23.9% in the first quarter (April-June) of FY21, due to the rigorous lockdown. The automobile sector that contributes 22% to manufacturing GDP and nearly 7% to the overall GDP, has been facing several difficulties. With around 10% of total GDP contraction projected in FY21, demand for EVs is likely to slow down significantly.

automobile sales were already at their decadal low when the pandemic hit, and the sector is one of the worst-hit during the crisis. Hence, the cash accruals of automobile OEMs were badly impacted during FY20 and FY21 and will take more time to return to pre-Covid levels.

Two years of continuous economic slowdown and the subsequent Capex already incurred to meet the BS-VI emission norms will certainly restrict the automobile OEMs from committing significant Capex towards capacity creation for EVs.

In the FY20, there was significant growth reported in the EV segment in India. EV sales in India, excluding e-rickshaws, grew by 20% to 1.56 lakh units in FY20, as compared to 1.3 lakh units of total sales in FY19.

According to SMEV, the 1.52 lakh of total EVs sold in India in FY20 include 1.52 lakh of two-wheelers, 3,400 cars and 600 buses. On the other hand, in the FY19, total EV sales included 1.26 lakh two-wheelers, 3,600 cars and around 400 buses.

Witnessing this rising customer demand for EVs in FY20, many automobile OEMs had increased their Capex to widen EV businesses. However, the ongoing Covid crisis might lead them to rethink their proposed capital expenditure for the segment.

Overall, given the current scenario, automobile OEMs incurring Rs 3.5 lakh crore Capex to meet EV Vision 2030 seems highly unlikely.

Automobile OEM plant

What’s the way forward?

While the automobile OEMs are highly expected to refrain themselves to spending Rs 30,000 crore every year to meet the Indian government’s ambitious EV Vision 2030 plan, some larger automakers are likely to take inorganic growth path and acquire smaller but specialised players in the EV segment, especially in the lower value two-wheeler space.

Two-wheelers are the largest segment in the Indian auto industry representing around 80% of total vehicle sales. It has a huge potential to promote zero-emission mobility in the country.

For example, we have seen Hero MotoCorp, the largest two-wheeler company in the world has invested in electric two-wheeler startup Ather Energy in two steps to acquire a 34.58% stake in the latter firm. Hero MotoCorp first invested in Ather in 2016 as part of its series B funding round. Later in July 2020, Hero MotoCorp announced a further investment of Rs 84 crore in the startup, taking its stake from 31.27% to nearly 35%.

Bajaj Auto, another homegrown two-wheeler giant has also invested Rs 57.27 crore in Bengaluru-based e-mobility startup Yulu. Interestingly, this trend is surging across the world, as several larger automobile OEMs are investing in small specialised startups that are working on electric vehicles, or EV batteries or technologies related to the domain.

Government handholding required

Besides the policies, tax incentives and subsidies being offered by the central and various state governments to encourage the EV adoption, there is a need for an upfront weighted deduction on capital expenditure, which can help the automobile OEMs plough back more capital into expansion and technology upgrades. The allocation of funds (capital outlay) in the Union Budget 2020-21 is negligible at around Rs 700 crore. Hence, much more government support is expected.

As the central government has introduced the Technology Upgradation Fund Scheme (TUFS) for the textile sector, a similar scheme is required to help automobile OEMs to develop and upgrade EV technology. The amended TUFS envisages interest reimbursement on the loans taken for technology upgradation and provides one-time capital investment subsidy of 10-15% on eligible machines for different segments with a subsidy cap. Such a subsidy for the auto sector will take away some burden from the automobile OEMs and help them achieve the EV Vision 2030.

Also Read: Hyundai E-GMP platform: All you need to know

Team AFT
Team AFThttps://autofintechs.com
The jack of all trades behind the Autofintechs.com


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