By Harshvardhan Sharma, Preetesh Singh, Rahul Gope, Raj Singh
Under the PLI scheme, the auto and auto component industry combined has been allocated an amount of Rs 57,042 crore, which will be disbursed through the Department of Heavy Industries.
Current xEV supply chain readiness
The auto sector is a major contributor to India’s economic growth and has been a key medium to accelerate Make in India program. Even the Indian auto components industry has been expanding with rapid strides (7.9% CAGR from FY09 to FY19) to reach $42 billion.
In spite of localization efforts by OEMs, there is still a dependency on imports for automotive manufacturing. India imported $17.7 billion (31% of total auto-component industry turnover) in FY19 with the growth rate of 14.4%. 27% of the total component import in FY19 was from China alone. According to an estimate, India imports 10X more auto components from China than it exports.
Even in the case of EVs, the current supply chain readiness levels of critical EV components indicate a strong dependency on import.
⦁ Battery- Only battery packaging capability currently exists in India.
⦁ Motor- Local manufacturing capability is limited to small motors.
⦁ Motor controller/Inverters- Completely dependent on import. Even for AC applications, 100% imported despite huge volumes.
The domestic electric vehicle manufacturing sector suffers disability on account of lack of adequate infrastructure, domestic supply chain; high cost of finance; inadequate availability of quality power; limited design capabilities and focus on R&D by the industry; and inadequacies in skill development.
There was a need for a policy that encourages and drives capabilities in the country for developing core EV components and creating an enabling environment for the EV industry to compete globally.
Aatmnirbhar Bharat: A boost to local manufacturing of EVs
On May 12, 2020, Prime Minister Modi announced his dream of ‘Aatmnirbhar Bharat’ with a vision to reduce import dependency and position India as a global manufacturing hub.
Following the announcement, a host of key policy measures have been incorporated to boost local manufacturing, promote exports and improve ease of doing business in India. Corporate tax rates have been slashed to 25% making them at par with the best in the world; MSME definition has been revised, raising investment limits upwards, enabling MSMEs to get more incentives. This is going to benefit a lot of automotive and xEV component makers.
Besides these, under Aatmnirbhar Bharat, India is also promoting local xEV manufacturing through a three-pillar strategy. The overall idea is to achieve the maximum level of localization of components for which India has or can develop the capability.
These three pillars are:
- FAME II localization criteria
- High import duty through Phased Manufacturing Program (PMP)
- Fiscal incentives for manufacturing promotion (for ex. Performance Linked Incentive i.e. PLI Scheme)
1) FAME II localization criteria: To ensure the development of EVs domestically, the FAME scheme pre-specified eligibility criteria for demand incentives in terms of battery technology, localization content and product specifications. Recently DHI announced a new deadline for localization of critical EV components to avail FAME Incentives. The key reason was the Covid-19 pandemic situation and noncompliance of localization timeline by OEMs.
FAME-I with a limited budget (Rs 895 Crores) was planned for 2 years but lasted for 4-5 years. The proposed timeline for FAME II was 2019 to 2022, but as per government notifications, only ~ 1-2% (Rs 115.43 crore) of the allocated FAME II budget (Rs 10,000 crores) has been spent till date.
As demand for EVs and shared mobility (key sector where current EV penetration is high) are likely to be hit by Covid crisis, FICCI in July 2020 has recommended continuation of FAME II till 2025. While there is no decision yet, but if FAME continues till 2025, in future, we could see stricter enforcement of localization criteria, the component which is localized across the industry may be seen moving out of the list and further focus in FAME will be on rest of the components (for which localization has not been achieved).
2) Import restrictions through PMP: To support Electric Vehicle manufacturing capability development in India, MoF has reduced import duty on SKD, CKD and critical parts used in EV assembly till April 2020.
Focus is to attract global manufacturers for model launches in India through SKD/CKD route in short term (till 2020) and critical part assembly in midterm (2021 onwards). Indian OEMs are expected to start with critical part imports and shift to develop assembly capability of critical parts (itself or through a vendor).
While the higher customs duty may help curb import dependency of components from China, especially the poor quality ones and benefit long term domestic manufacturing, in the near term these may result in higher prices of EVs sold in India.
3) Other fiscal incentives: The development of the battery industry, charging infrastructure and local supply chains is critical in building local xEV manufacturing ecosystem. On November 11, 2020, India announced the PLI scheme of Rs 2,00,000 crore to boost domestic manufacturing and attract large investments. According to Niti Aayog, on an average, 5% of the production value is provided as an incentive. This implies that the minimum production in the country as a result of the PLI schemes would be around $520 billion in 5 years.
At Rs 57,042 crore outlay over the next 5 years, the auto and component industry will be the biggest beneficiary. Additional Rs 18,000 crores and Rs 46,000 crores have been allocated for Advanced Chemistry Batteries and electronics manufacturing respectively. The government wants to promote the manufacturing of EVs in India with plans to build Tesla style giga-factories and develop a homegrown battery manufacturing ecosystem.
Currently, as per industry reports, about ~75-80% of xEV components imports are from China. The key reason for import from China is cost-benefit (not technology). Cost disadvantages often arise due to lack of scale and size. This is where the Indian automotive and xEV industry has been held back. The PLI scheme will play a key role here.
By incentivizing production with a high weightage on 1) Local value addition, 2) Scale, 3) Quality; this scheme will spur higher investments which will, in turn, drive efficiency, productivity and quality upgradation thus boosting industry’s competitiveness.
The benefits of PLI scheme extends not only to the OEMs selected under the scheme but for all firms & MSMEs across the value chain. For example, an xEV battery cell manufacturer will have many MSME suppliers under Tier-1, 2, 3 categories. As the battery manufacturer benefits from PLI scheme, naturally the orders of its suppliers will also increase.
Thus the PLI scheme will have spillover benefits of increased investments across the value chain and is likely to be significant in developing tier 2/3 level capability development of Indian players over 2020-2025, especially in the field of electric vehicles (EVs) and the associated supply chains.
Key challenges and way forward
Through Aatmnirbhar Bharat and PLI scheme, while the government is looking at big-ticket investments into xEV battery manufacturing, the market is still in early stages and is experimenting with multiple options of cell chemistry and form factor.
Currently, LiB cell production hubs are primarily in North America, China, Western Europe, Japan and South Korea. As India doesn’t have reserves of key raw materials like lithium, cobalt etc., there could be limitations of indigenous raw material sourcing and alternative methods have to be adopted for maximizing the use of raw materials/parts imported.
The PLI scheme for battery makers also has eligibility criteria of minimum 5GWh capacity, with local value addition commitment of 60% in 5 years. If the bidder slips on the commitments to value-addition and capacity, it will be penalized with lower subsidies. Thus for an industry where demand is uncertain, this policy might further increase the uncertainty as subsidies are key considerations in ROI calculations.
As more EVs enter the market, there is a need to consider transitioning from a linear economy to a circular economy. Clear policy needs to be defined for recycling, end of life and disposable practices for batteries, xEV vehicles.
India has strong potential in xEV component manufacturing. With policies like PLI scheme, India can emerge as a hub for manufacturing as well as exports for key components like wiring harness, BLDC motors, AC induction motors, thermal management systems, electronics (other than semi-conductor), plastics and LiB. Auto-component makers are increasingly seeking to develop the requisite technological capabilities and capacities in these areas.
(Harshvardhan Sharma is Head, Automotive Retail Practice, Nomura Research Institute. Preetesh Singh is Senior Consultant, Automotive, Nomura Research Institute. Rahul Gope is Deputy Senior Consultant, Automotive, Nomura Research Institute. Raj Singh is Consultant, Automotive, Nomura Research Institute.)
(The reports include projections, forecasts and other predictive statements which represent NRI’s assumptions and expectations in the light of currently available information. These projections and forecasts are based on industry trends, news articles estimate shared by global agencies, an estimation model including probabilities, regression, correlations, etc., circumstances and factors which involve risks, variables and uncertainties. The actual performance of the parameters represented in the report may vary from those projected.)
(Disclaimer: The views expressed in the article above are those of the authors’ and do not necessarily represent or reflect the views of Autofintechs.com. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.)