The EV story in post-Covid India

Despite the environmental benefits of promoting electric vehicles (EV) in a country home to 15 of the 20 most polluted cities globally, the Covid-19 slowdown may force us to take a counterview of going slow on this sector after we take stock of the current economic realities.

Looking at the economics on the supply-side, India’s traditional automobile sector comprises an estimated 49% of its manufacturing (or 7% of India’s gross domestic product), with close to 8 million directly employed and 40 million with indirect beneficiaries included. Indian auto sales were already faltering in recent quarters due to sluggish economic growth, leading to job losses. The Covid-led slowdown adds a further blow to balance sheets. 

Given the sheer scale of this sector to India’s manufacturing and employment pie, its survival is imperative to minimize the social cost of job retrenchment in this stressed time. 

Second, India boasts a well-developed auto components segment, which employs 5 million and which recently invested Rs 300 billion to upgrade to the new Bharat Stage-VI norms (compliance from April 2020). These investments are yet to be recouped. 

Next, disruptions to the supply chain may impact EVs more as the supply chain for traditional vehicles is still well-established. 

Large-scale migration by automakers to EV technologies would also imply upskilling and reskilling the existent workers so that they could be absorbed—a cost that may be low-priority for firms in this stressed time.

The economics on the demand-side looks none better. In a largely middle class (and price-conscious) consumer market, people are cutting discretionary expenses as salaries and jobs are at risk. Those spending on personal mobility may prefer affordable options. 

This connects with the existent issue of an upfront price differential between EVs and traditional vehicles, which kept the appetite for EVs weak even before Covid-19. 

The downward trend in oil prices only adds a tailwind for consumers to prefer traditional vehicles. 

As a demand-channel, public transport and government contracts are low-hanging fruit. But social distancing norms may dissuade users from using public transport unless essential, which would impact the demand from MaaS (Mobility as a Service) providers. The uptick from government agencies was anyway found wanting, as the 2017 tender of 10,000 EVs by Energy Efficiency Services Ltd (tasked with replacing state-run vehicles with EVs) found takers for only 1,000 EVs.

One should also look at the support ecosystem, say, battery storage, charging infrastructure, vehicle finance and subsidies. These issues were already in discourse even before Covid-19 became a household name. 

The lithium-ion battery is a key reason for the price difference between EVs and traditional vehicles in India. Technologies based on nickel-manganese-cobalt alloys may be an option, since nickel is cheaper than cobalt and its lower energy density allows more lithium ions to the cathode, thus improving battery performance and the km-range travelled per charge. 

Next, fast-charging and battery-swap stations still need significant scaling up so that Indian drivers are not constrained by sporadic charging-points. 2018 data of Bloomberg NEF showed India had 650 stations against China’s 456,000. Even Norway, with a far less population, had 10,000 charging stations. The recent news of the Indian government’s award to set up 2,600 stations in 62 cities is a positive step, but still woefully short. 

Third, vehicle sales in India are mostly lender-funded. Unless a secondary market for EVs develops, lenders would remain reluctant to fund EVs. 

Lastly, the second phase of Faster Adoption and Manufacturing of (Hybrid &) Electric Vehicles in India (FAME II) subsidy scheme, which commenced from 2019, faced criticism on certain provisions, leading to some EV makers shelving investment plans. Two-wheelers, which hold the largest share in the Indian EV market, saw a 94% year-on-year decline in the sales of FAME-II qualified two-wheelers during April-December 2019, as certain variants popular under the FAME-I scheme were excluded from FAME-II. Thus, subsidies were not in line with demand trends even prior to the Covid crisis.

With corporate purse-strings expected to tighten following the Covid-19 slowdown, the chances of the investment and risk-appetite required to scale up this support ecosystem look bleak. 

Given the supply and demand headwinds coupled with the expectation of sluggish investment to scale up the support ecosystem, it may be safe to surmise that the EV story might go slow and exit, at least in the near term – a counterview as it may seem! 

The Federation of Indian Chambers of Commerce and Industry (FICCI) has also recommended extending the FAME-II scheme till 2023, indicating a turnaround in consumer behaviour and industry activity towards EVs is still some time away.

But the story will continue to hold steady in the long-term, especially if India has to stem its slide in climate vulnerability (it fell from 14th to 5th in the Climate Risk Index). 

Two- and three-wheelers would be the low-hanging fruit. Mahindra is already refocusing on the latter. Unwillingness to use public transport owing to social distancing norms should normalise in due course, which bodes well for MaaS. Interlinking of charging infrastructures with renewable energy sources could offer an added impetus. And the government must practise what it preaches by migrating its fleet to EVs.