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EV Revolution: Lessons for India to learn from US and China!

TIOL - COB( WEB) - 913
MARCH 28, 2024

By Shailendra Kumar, Founder Editor

TAILPIPE pollution is a deadly killer! Such emissions in billions of tonnes account for a chunky size of overall carbon emissions - a key driver of climate change. Vehicular pollution accounts for over one-fifth of CO2 in the US. It is, thankfully, only 12% in India but will double by 2047, with a rapid rise in the population of passenger vehicles. Given India's zero-carbon goal to be achieved by 2070, the Central Government last week unveiled an impressive scheme to promote manufacture of electric vehicles (EVs) and localise the manufacture of vital auto components. Besides the sweetener of investment-linked subsidy, the scheme also offers liberal leeway to import new EVs in CKD format at a concessional import tariff. Production with the minimum investment of USD 500 mn is required to go online within 3 years and 50% domestic value-addition to be attained within 5 years. Concessional duty of 15% on import of new EVs costing above USD 35000 has come under a volley of pillories by the trade critics who say that there was no need for India to reverse the 'Make-in-India' policy skeletons, assiduously arranged for the smartphone sector - high tariff wall on finished goods and lower tariff on components.

My hunch is that the policy-makers who have, many years, been wooing global EV players sans a degree of success, did so in order to smack a powerful nudge which may be found irresistible. India is undoubtedly a large market for automobiles and would be much larger in the coming years. The total annual sales in 2023 were over 41 lakh (4.1 million). It is projected to grow by over 9.7% to 10 million sales by 2030. Going by a skinny number of barely 3.4 mn EVs thus far in India, the prospects to grab a good market size are equally mouth-watering for all auto players. Some of the existing auto giants have grabbed the first movers' advantage but the key to success is going to be the cutting-edge technology and also the MRP in India's highly price-finicky market. First, automobile itself is a capital-guzzling sector. On top of it, EVs warrant huge capital investments not only in the main plant but also key components like lithium-ion batteries and recharging infrastructure. Though India has, unlike the US and the EU, not set a timeline for the share of EVs in the total sales of passenger vehicles but the present price range of EVs is a serious kill joy! Ergo, Indian policy-makers had, perhaps, no choice but to invite global players with advanced technology and also offer them liberal space to water-test the market with their high-end variants. And mind it, Indian auto sector is not an easy push-over as many existing 'bettors' have already injected billions of dollars into new plants and also tied up with local battery manufacturers. From USD 17 billion in 2023, the EV market is projected to leapfrog to USD 28 billion by 2028. Therefore, it would not be presumptuous to say that the auto sector is heading for a major upheaval with some of the existing assembly lines probably turning into zombie car factories! Many auto players would certainly get parked in cul-de-sac!

Will such a future unfold so fast, really? Though it would depend on the subsidy regime of the government for both the manufacturers as well as consumers but it has happened in China and the US. EU consumers appear to be driving on the same track. Japan, a market leader for many years, is another player in the global arena to be confronting hazy and vague future! Let me share a whale of a tale. A leading South Korean auto major, Hyundai, pumped in USD 1.15 bn in a new factory in China in 2017. It had set its eyeballs on annual output of 3 lakh internal combustion engine (ICE) cars. But in less than six years, the swift change in the choice of Chinese consumers for EVs turned its investment into ashes. Voila! What do you do when the market gives you only 'lemons'? - you end up making 'lemonade', perhaps! Having been parked in a twilight zone by a tide of rapid shifts in the market, Hyundai last December sold the plant at one-fourth of its value. Experts say that with China emerging into a major EV market, hulky producer and also ruthless exporter from last year, dozens of ICE factories are going to turn into zombie plants. From a peak in 2017, ICE cars market witnessed an erosion of 37% in 2023 at 17.7 mn car sales. Over 50% of installed capacity - 25 mn out of 50 mn units' annual capacity - has fallen in disuse. Aha! A time for repurposing such factories for plug-in hybrids or pure EVs! Since foreign car-makers like GM, Volkswagen and Toyota have been a bit lethargic in introducing low-cost EVs, they are fast losing market share to Tesla and BYD. As per one report, out of 16 JVs between the Chinese and foreign groups, only 5 have reported capacity utilisation of over 50% and close to 9 are below 30%. Though Russia continues to offer a lucrative market for petrol cars but many EU and American auto majors have quit the market in the wake of Ukrainian invasion. Interestingly, these foreign car-makers have, of late, been burning midnight oil to export their China-made vehicles but they are eventually hurting their own factories in other markets! Yuck, a case of exploding head syndrome!

However, one exception to the Chinese market is the German Volkswagen, which seems to be doubling down on the Chinese market. When others have been fleeing from China, Volkswagen pumped in 5 billion Euro in 2023. It has been shoring up its production of EVs. It has ramped up some of its plants to produce EVs. It has also begun hybridising its ICE models. For its petrol cars, it seems to be eyeing tier-2 and tier-3 cities where ICE vehicles are still popular and government regulations have not imposed any restrictions. As per a global study, unlike 580 vehicles per 1000 persons in Germany and 800 in the US, it is barely 185 vehicles per 1000 in China. The German major is probably banking too much on such cities to prop up its dwindling fortunes. Interestingly, even as EV market is soaring, the market for customised EVs is also skyrocketing concomitantly. In 2023 China exported over five million EVs and has beaten the Japanese in their own trade. In Q4 the BYD sold over 5 lakh cars - far ahead of Tesla. China hopes to double its share of exports by 2030, leaving behind the West and Japan, especially in Europe. Irked by the growing injection of subsidies by the Chinese government, EU last year initiated probe against Chinese exporters. Even the White House is toying with the idea of an additional bout of import tariff, in addition to the existing 27.5% levy. Mr Biden may take a host of measures to protect the domestic industry but the fact of the matter is that the Chinese EVs are cheaper and better quality with internet facility on the dashboard. As compared to Tesla's cheapest model which costs USD 39000, the Chinese comparative EV costs only USD 12000! Plumb crazy! The latest much-advanced variant of BYD, launched recently, is 17% cheaper than its earlier models. Thanks to rapid innovation it is all coffee and croissants for BYD so far!

A glaring contrast to the Chinese market can be found in the car-crazy America. Despite Mr Biden's hefty subsidy through the Inflation Reduction Act (IRA), EV revolution continues to be caught in the vortex of scary inertia. In Q3 last year, EVs accounted for barely 8% of all car sales. In the full year, barely one million EVs were sold - much less than less car-frenzied Europe. Car dealers say that as against 54 days of inventory for ICE models, it is 92 days for EVs. The grim market realities have compelled the major auto majors to delay their mega investments in EV production lines. For instance, GM has delayed its USD 12 bn investment and also deferred its decision to turn its existing factory into the one for EV-pickups. Even battery makers have turned over-cautious. SK Battery last year not only reduced its output but also laid off employees at its two plants in the US. The biggest dampener for consumers in America is the high price. As against an average cost of USD 47000 for an ICE model, EVs cost USD 52000. One reason is that most EV manufacturers have been rolling out high-end expensive models for better profit margins and not producing EVs for masses. Another setback came when the GM and Honda dropped their plan to invest USD 5 bn to produce an affordable EV. And this is despite Mr Biden's USD 7500 tax credit benefit on EVs. A similar case is seen in the UK. EVs' sales have marginally fallen in 2023 after the government whittled down the subsidy on new EVs and potholes have predictably emerged on the road to adopt more EVs. In contrast, France has logged 26% jump in fresh registrations of EVs and 4% in Germany. And this is despite EU being in an economic abyss post-pandemic.

Extracting an insight from the sluggish sales in the US and UK, what clearly emerges on the horizon is that the quality and price of lithium-ion battery are critical to reduce the price of EVs in the future. Incidentally, China monopolises the production of lithium battery to the extent of 80% of the global market. Given the anxiety of the West against the geopolitical fractures with China, mega investments for battery manufacturing are under way in the US and Europe. Giga-factories are being set up in Germany, Hungary and many States in the US. The Biden Administration has been offering bucket-load of subsidies. South Korean battery makers have been joining hands with the US auto majors to set up multiple plants but experts fear that given the tepid trend in EV sales, the US may smash its head against excess capacity. Secondly, what may further irk the West is the China's Octopus-like grip over the basic raw materials for producing batteries such as Cobalt, graphite and nickel. China has taken over all major mines in Latin America and Africa. Notwithstanding the Chinese dominance, the US share is likely to rise to 12% but only by 2030 and China will continue to control 70% of the supply chain. Against these ground realities two predictions which may safely be made are - the global auto market is going to be terrifically upended - Japan may be one of the prominent losers as China is increasingly eating into its markets in East Asia and is projected to grab about 25% of EV market in Europe. A new player like India needs to reduce its dependence on imports of key raw materials from China and focus more on exploring local mines. Finding and exploiting strategic minerals needed for the EV market would also help India undertake greater exports once the ban on ICE models comes into force in many countries in about a decade! Time for India to zip zap zoom and stop getting too queasy about the tariff at this stage!


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