Despite the compelling case for adoption, the success of EVs so far has been constrained by weak customer appetite and infrastructure roadblocks, among other factors. While EVs represent less than 1 per cent of the overall market, the silver lining is that there is considerable headroom for growth.
The Electric Vehicle (EV) opportunity has long been seen as a game changer for the automotive sector in India. A desire to reduce pollution levels and dependence on oil imports has bolstered the case for EV adoption.
Despite the compelling case for adoption, the success of EVs so far has been constrained by weak customer appetite and infrastructure roadblocks, among other factors. While, EVs represent less than 1 per cent of the overall market, the silver lining is that there is considerable headroom for growth.
Light electric mobility is likely to lead the EV growth story in India, with the pace of adoption for two wheelers (2Ws) and three wheelers (3Ws) expected to pick up in the coming years. In India, 2Ws dominate EV sales, given their economic viability, both in terms of price and fuel economy. Parallels can be drawn between India's electric light mobility story and the emergence of China’s EV market, where electric bikes and scooters laid the foundation for growth.
Intracity transport buses are also ripe for EV adoption. These segments are likely to be followed by fleet cabs and then others.
Currently, several gaps exist in the four-wheeler (4W) EV market such as a limited number of products, high prices, insufficient battery promise, low performance and an underdeveloped charging ecosystem. Given these impediments, the growth of EV 4Ws is expected to lag other segments, with sales picking up once the existing gaps have been plugged.
Segment wise propensity to transition to EVs based on key parameters
Policy Framework for EV Adoption
A combination of central and state-level initiatives is driving the growth for EVs in India. The Central Government rolled out the Faster Adoption and Manufacturing of Hybrid and Electric Vehicles (FAME-II) policy in April 2019. With a total outlay of INR100 billion spread over FY20-22, the scheme provides demand incentives for electric 2Ws, 3Ws (including e-rickshaws), 4Ws and buses and establishment of charging infrastructure.
FAME II Incentives – Investment rollout plan (FY20 to FY22)
Several state governments have introduced EV-specific policies focused on supply-side incentives to attract investment and generate employment in their respective states. They offer incentives such as capital interest subsidy, stamp duty reimbursements, tax exemptions, SGST reimbursement and provision of interest free loans to incentivize EV manufacturers.
Although, a few state governments have offered demand-side incentives in the form of monetary incentives, road tax and registration fee exemption etc., the primary focus of these policies have been supply-side incentives.
An EV policy recently introduced by a State Government in August 2020 has a greater focus on demand-side incentives and offers purchase incentives for EVs as well as scrappage incentives for internal combustion engine (ICE) vehicles. The combination of demand incentives from the central FAME-II subsidy and state measures should help bring down the upfront cost differential substantially for EVs.
Other key measures to promote EVs and local manufacturing include reduction of GST on EVs and EV chargers to 5 per cent and hike of custom duties on import of EVs and components.
Transition to EVs
Directionally several factors, including availability of charging infrastructure, robust financing ecosystem, reduced battery prices and increased customer awareness, are paving the way for a new era of EV adoption.
EV is, thus, emerging as a disruptive force, with several players experimenting with and discovering new innovative business models and use cases. Some of the models introduced in the Indian market include vehicle subscription/ leasing model, battery subscription/ leasing model and battery swapping. These models help in addressing challenges that inhibit wide-spread adoption of EVs i.e. range anxiety, upfront cost differential, reliability of battery, and time required for battery charging.
Since, the running cost of EVs is much lower than ICE vehicles (one-tenth for 2W and 3W) , a strong case emerges for a shift to EVs in B2B. Many large B2B players in e-commerce, grocery, food, courier delivery have been piloting EVs and some have moved into advanced stages of deployment.
Ecosystem creation is the first and most important step in addressing the issue of range anxiety. While, a host of players have set up energy operator-cum-battery swapping operations, these have so far been mostly limited to captive needs of a particular use case. A widespread network of charging stations is vital for ensuring the fast adoption of EVs.
Moreover, in order for EVs to take off, the local component ecosystem needs to be established. With a burgeoning crude oil bill pushing the country’s fiscal deficits to alarming levels and creating uncertainties around the currency’s stability, policy makers and OEMs need to work together to create a conducive environment for EVs. To this end, the government has launched a Phased Manufacturing Programme (PMP) under FAME-II, through which it is pushing the indigenisation of parts like HVAC (Heating, Ventilation, and Air Cooling), wheel rims integrated with hub motors, electronic throttle, vehicle control unit, and electric compressor.
The level of localization is low primarily due to insignificant volumes of EV sales in the last few years. The government has outlined plans to set up a battery manufacturing plant in India and is expected to court industry giants by offering several crores of Capex and Opex-led incentives. The government is also expected to tender a 50 GWh end-to-end battery cell manufacturing facility.
Other than batteries, there are other EV components in which India has the potential to emerge as a hub for manufacturing as well as exports. These include wire harnesses, BLDC motors, AC induction motors, thermal and cooling management systems, electronics (other than semi-conductors), plastics, etc.
In summary, there is great promise in India’s EV story, as a host of factors such as policy measures, infrastructure development, TCO parity, and a market buzz, come together to drive long-term growth.
(With Inputs from Gaurav Arora, Director – M&A Consulting, KPMG in India and Ronak Chawla, Assistant Manager – M&A Consulting, KPMG in India).
1State EV polices and report of India Smart Grid Forum Study Report Electric Vehicle Policies and Electricity Tariff for EV Charging in India – July 2019, accessed on 29 September 2020 2 KPMG in India’s Analysis, 2020 of Total Cost of Ownership between ICE vehicles and Electric vehicles.
- Rohan Rao, Partner – Industrials and Automotive, KPMG in India
- Jeffry Jacob, Partner – Industrials and Automotive, KPMG in India
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