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Sector update: Automobiles - Government’s electrification drive: right steps execution key

The government is attempting to launch the electric revolution in India with 2 recent policy decisions, which include 1) the Rs100bn Faster Adoption and Manufacture of Electric Vehicle (FAME II) and 2) the Phased Manufacturing Program (PMP). The FAME II will likely offer Rs55bn (an estimated Rs45bn could be used to set up infrastructure with a charging point every 25km) as incentives while PMP ensures a minimum degree of localisation of the vehicles. While the recent steps could provide a stimulus to electrification; however, we note that the experience with FAME I suggests that (a) the incentives alone may not lead to electrification in the absence of supporting infrastructure and (b) execution is key.

Key highlights

Focus on public transport; 3W could benefit the most

While the final notification is still awaited, reports suggest that FAME II differs from its predecessor in 2 aspects (a) The policy clearly focuses on commercial vehicles – it seems to expect that high usage vehicles, which benefit most from lower running costs could be the first users. Hence, personal PVs have been excluded and (b) The incentive has been awarded on the basis of battery size (Rs10,000 per kwh for 2W/3W and Rs20,000 for buses ). The government plans to support 1mn 2Ws, 500,000 3W, 55,000 commercial passenger vehicles (PV) and 7,000 buses.

3Ws & Buses: Compared to FAME-I, while incentives seem to have come down a bit for lower powered 3Ws (to Rs36,000 from 45,000 for M&M’s Treo Yaari), for higher powered 3Ws, the incentives seem to have increased (to Rs77,000 for M&M’s Treo from Rs61,000). Incentives for buses have been capped at Rs5m (compared with Rs10m previously). However, the scope for 3Ws has been increased significantly. We note that if the scheme achieves its targets, 3Ws (the plan target close to 26% of domestic volumes) and bus sales to STUs would be the biggest beneficiaries. Our analysis suggests that the e- Auto rickshaws might now have a lower total cost of ownership when compared to a CNG auto rickshaw. A shift to EVs could disrupt the market, potentially posing a challenge to entrenched incumbents (including Bajaj Auto).

Private vehicles: The policy is clear about leaving private PVs out of its purview, even though commercial PVs will continue to receive benefits. The lack of any incentive for private vehicles would be a negative for players with EV plans. However, this may delay electrification of the PV segment, thereby protecting the industry from potential disruption - this indirectly benefits incumbents (e.g. Maruti Suzuki).

2W: On the 2W side, while low powered E-2Ws (notably from Hero Electric under 1 kwh, range 45km, speed 40kmph) are likely to see reduced benefits compared to FAME I, the higher powered EVs (such as the upcoming Ather 450 with a battery of 2.4kwh) will likely see an increase in the benefits. This is likely to lead to calls for tweaking the policy to include compensation for range and speed.

Localisation limits get strict; PMP draws a long-term plan for battery manufacturing

Vehicle makers have to ensure minimum localisation content of 40% on ex-factory price of the vehicle in case of buses and 50% for all other categories of vehicles (e- 2W, e-3Ws, e-4Ws and e-Rickshaws) to qualify for benefits under the scheme. Further, the government has instituted that the PMP will be valid for five years until 2024 and help in localization of production across the entire EV value chain including battery manufacturing. As per the industry, Lithium-ion battery manufacturing consists of cell to battery-pack manufacturing involving a value-add of 30%-40%, cell manufacturing a value add of 25%- 30% and battery-chemicals a value of 35%- 40% of the total cost of battery pack.

Execution will be key

We believe the policy does give a starting point to the thrust on electrification with government’s priorities becoming clearer. However, execution will be critical – we note that even with FAME – I, the amount spent was only 45% of the allotted amount. Further, even beyond execution the setting up of supporting infrastructure and supply chain is critical for the success of the program.

Overall, we believe the two policies do provide a direction for the future. We broadly agree with government’s focus on the commercial vehicle, short distance, high frequency usage of vehicles as the first target of electrification. Also, the fact that PMP envisages localization and manufacturing of batteries in India is a positive. However, while the steps are positive, execution will be key in moving towards electrification.