Covid pandemic to delay electric vehicle penetration in India

The Covid-19 pandemic would delay the penetration of electric vehicles in the Indian auto industry, forecasts, India Ratings and Research (Ind-Ra). According to the ratings and research agency, the passenger vehicles (PV) will be worst affected due to this, as consumers will be wary of buying a costlier electric car compared to the internal combustion engine (ICE) powered car in the aftermath of the pandemic.

For example, the on-road price of Hyundai Electric is twice the price of the Hyundai Creta. This makes the Hyundai electric SUV fairly expensive for the consumers.

The automobile original equipment manufacturers (OEM) would refrain from incurring high Capex by bringing in electric vehicles in this situation. This is going to be another reason for the delay in EV penetration.

According to the research, low affordability, dampened economic activities, unavailability of a sound EV charging infrastructure across cities are likely to impact the auto industry to record a sales dip of over 20% YoY for the second consecutive year in FY21. Along with this, the government’s focus on reviving the already ailing auto industry could shift the focus away from the electric vehicles, for the time being.

Previously, electrification of commercial fleets of home-based delivers apps like Swiggy, Zomato was helping EV penetration in 2Ws, while Ola and Uber-like ride-sharing services were promoting electric vehicle penetration in PVs. Now, with the consumers shifting away from shared mobility is going to be another setback for EV penetration chance in PVs. However, increasing e-commerce should help in electrification in 2W goods carriers and light commercial vehicles, claim the researchers.

The research also predicts that the challenges like higher battery cost and reliance on imports of the EV battery would prevail in the medium term. However, the supportive government policies could become a key to the growth of electric vehicles in India.

Two-wheelers could buck the trend

While the electric vehicles in the PV and CV segment could take a hit due to the pandemic, the electric two-wheelers, especially electric scooters could see an uptick in sales, because of the lower pricing gap between the EV and ICE in the segment.

For example, the on-road price of Ather 450 is around 33% higher than Honda Activa’s. The running cost per kilometre of an electric vehicle is fairly lower at 20%-25% than that of an ICE powered vehicle, thus making economic sense for the consumers.

The wider options of electric two-wheelers in the Indian market would help in boosting e-2W market. The two-wheeler industry in India has benefitted from the rural demand after a good monsoon. The growing focus towards personal mobility along with more affordability has helped the two-wheeler segment to record an uptick despite an overall market slump in a pandemic situation.

Many households are opting for a second vehicle nowadays and in many cases, these come in form of scooters. In these cases, there are chances of higher inclination towards an electric vehicle.

Scooters, 3W and buses to see faster penetration in medium-term

Three-wheelers and buses have seen higher electric vehicle penetration in 2019. However, these are the most affected segments in FY21 and likely to see a delay in electrification. However, the research agency believes, EV penetration is expected to be faster in the scooter, bus and three-wheeler segments in the medium term (3-5 years), while PVs will take longer time.

The central and state governments have been focusing on adopting electric mobility by introducing electric buses through state transport undertakings (STU). Several STUs across India have already rolled out electric buses for city transports. However, with the state governments already grappling with a declining GDP, the strategy to adopt of electric buses could take a back seat, which would be another blow to the growth of electric vehicles in India.

As the research claims, in the mid-term, electrification is likely to be highest in buses. This is largely driven the by the 41% incentives allocated by the government under its Faster Adoption & manufacturing of Electric Vehicles (FAME) – II scheme along with the initiatives taken by state governments to electrify their bus fleets.

Government schemes play key role in EV adoption

The Indian government has laid out Rs 100 billion plan for FY20-FY22 period for faster EV adoption under the FAME-II scheme. This scheme offers direct subsidies of 86% of the total amount. Also, it encourages the development of EV charging infrastructure.

The central government has also reduced the Goods and Services Tax (GST) on EVs to 5% as compared to 28% for an ICE vehicle. Besides that, the EV consumers get an income tax deduction of Rs 1.50 lakh on interest paid on the purchase of the electric vehicle. Several state governments like Delhi too are providing additional incentives in order to boost electric mobility.

While the government aims to adopt at least 30% electrification by 2030, robust government support is imperative. For example, China that has over 50% of the global electric vehicle fleet, initiated a subsidy program of more than $60 billion during 2009-2019. In comparison, the Indian subsidy program EVs worth Rs 100 billion ($1.4 billion) is much smaller than our neighbouring country.

The Indian policy has several restrictions as well that limit EV adoption. For example, the electric two-wheelers under the FAME-II scheme have to meet strict requirements of speed, range and energy to be eligible for the subsidy. This excludes the majority of the models available in the Indian model.

Also, the majority of electric 2Ws and 3Ws in India come powered by lead-acid battery, which is not covered under the subsidy scheme, as FAME cover lithium-ion battery-powered EVs.

So far, the Indian government needs to lay down more comprehensive policies, increase incentives and ensure a robust implementation of existing policies to increase the EV adoption.

OEMs refraining to incur material Capex

Despite having robust balance-sheets, the two-years of economic crisis and sales slowdown have forced them to reduce the capital expenditure requirements, around 8%-9% over FY15-FY20 revenue. In the last few years, auto OEMs have incurred higher Capex in order to meet the regulatory requirements like BS-VI emission norms alongside new product launches. However, amid the current slowdown, the OEMs are unlikely to incur aggressive Capex over the electric vehicles.

In the last few years, conventional auto OEMs have launched electric vehicles in PV, 2W and CV segments. But, in the FY21-FY22, we are unlikely to see significant progress in from them. In the 2W, 3W and bus segments, new and smaller players like Ampere, Okinawa, Ather Energy, Olectra Greentech, JBM Solaris etc have emerged as first movers. Lately, the 2W majors like Bajaj Auto, TVS Motors have introduced their electric scooters, while Hero MotoCorp has invested in Ather Energy to acquire 35% stake.

Local manufacturing of EV batteries is going to play a significant role in reducing the pricing of electric vehicles, resulting in promoting the e-mobility in India. For that, a significant amount of capital expenditure is required, especially for the manufacturing facilities, R&D etc. At the current scenario, this is difficult and can only be justified with a larger scale.

As Ind-Ra predicts, the large and conventional auto OEMs and auto component manufacturers won’t incur material Capex unless the government intervenes with an expansion strategy, but they would continue investing in the small companies or collaborate with foreign partners to sustain their journey ion the EV segment.

Battery cost remains critical issue for EV adoption

Battery is certainly the most critical component for electric vehicles, due to the technical expertise required and the cost viability as well. The battery is accounted for 30%-40% of the total cost of any electric vehicle. Globally, the EV battery prices have declined by around 85% over the period FY10-FY20. Experts believe the pricing will drop further in the coming days.

In the Indian market, the pricing of electric vehicle batteries is higher as compared to the global average. This is because of the lower sales volumes. The Indian market concentrates largely towards small batteries ranging between 1-30 kWh, which power the electric two and three-wheelers. On the other hand, the global average is 60 kWh. Also, the smaller batteries come with higher per kWh price, largely because of the complex development process along with other reasons.

In the last couple of years, electric vehicle adoption in India has increased significantly, especially in the 2W and 3W segments. Tata Motors and Mahindra & Mahindra (M&M) have bagged large chunk of electric vehicle orders from Energy Efficiency Services Limited (EESL) for the government offices and agencies.

India’s largest carmaker Maruti Suzuki is working on its first electric car, based on the WagonR hatchback. Hyundai and MG Motor have launched Kona EV and ZS EV respectively. American EV major Tesla too has announced its entry in India by FY22. With these OEMs focusing more on electric vehicles, the battery pricing is likely to drop in the near future.

Manufacturing localisation to play key role in reducing battery and EV price

Reliance on battery imports and manufacturing localisation of the EV batteries will play key roles in reducing the price of electric vehicles in India. Not only the batteries but several other EV components are largely imported from overseas, especially from China. These include electronic throttles, motors and compressors. The import duty impacts the pricing of electric vehicles.

The Indian government has laid out a phased manufacturing program to promote localisation of the EV components. Under the FAME-II scheme, the locally manufactured EV components will be incentivised. The government earlier set the deadline for the localised manufacturing of the abovementioned components between April-October 2020, but later extended the timeframe to 1st April 2021, due to the Covid-19 pandemic.

However, the local manufacturing would take time as India lacks the key resources required for an EV battery. These include lithium and cobalt, two key raw materials needed for lithium-ion battery. The majority of the lithium mining assets are owned by Chinese companies and in the global lithium-ion battery manufacturing sector too China holds the lion’s share. With the current geopolitical tensions with China, the supply-side risks are higher.

As per research, the battery pack assembling in near to mid-term could be limited, but manufacturing of batteries may take longer. The other components could be localised in India as the overall sales volumes go up. Some Indian auto component manufacturers have already partnered with various companies to enter into the EV space. Some of them are already supplying components to global EV OEMs as well, in a small number albeit.

Also Read: Are electric vehicles in India going to be cheaper?

Infographs: Ind-Ra