Kunal Khattar, founder partner at AdvantEdge, a mobility-focussed early-stage VC firm, talks about the role of various stakeholders as the electric vehicle (EV) sector grows in India—from startups like Ather to multinationals like Tesla. Edited excerpts:
Q. Tell us about the opportunity you see in India’s transition from ICE [internal combustion engines] vehicles to EVs?
As investors, our focus lies in the ever-evolving landscape of technology-driven disruption. Shared mobility, for instance, significantly disrupted various sectors, from public transportation to bike taxis and traditional taxi businesses.
However, what truly excites us now is the paradigm shift from ICE to EVs. We’re witnessing a global shift where over 5 percent of new vehicle sales in numerous countries are electric, indicating a pivotal moment where EV adoption accelerates. This acceleration is bolstered by well-established charging infrastructure and growing consumer consideration of EVs.
Our calculations hint at a once-in-a-lifetime opportunity with potential wealth creation surpassing a trillion dollars. Over the next eight to 10 years, we anticipate the sale of around 100 million EVs, leading to the emergence of new auto component companies, disruptive original equipment manufacturers (OEMs) like Ather and Ola Electric, innovative distribution models, after-market opportunities, including battery recycling and replacement, EV financing, insurance, servicing and pre-owned EV sales. Additionally, the treasure trove of real-time data generated by EVs presents numerous business opportunities.
While autonomous vehicles are on the horizon, India might need more time to fully embrace them. Nevertheless, when we consider the disruption across the automotive industry, from component manufacturers to dealerships, finance and insurance, and combine it with the transition of shared mobility towards electric options, it becomes evident that this is a trillion-dollar wealth creation opportunity.
As a fund, our aim is to strategically invest across this sector, identifying and supporting companies poised for successful outcomes in this transformative era.
Q. What are your views on the path to profits for EV companies in India?
Ola and Uber (globally) have achieved profitability at the operating level, though the journey was impacted by the 18-month disruption caused by Covid-19. Creating equilibrium between supply and demand in a two-sided marketplace is crucial. Initially, these platforms had to invest heavily in building supply before demand caught up, resulting in significant expenses. Covid-19 forced them to essentially rebuild their supply and demand from scratch, giving the impression of continuous capital burn.
Customers also realised that free rides and discounts wouldn’t last forever. Prioritising growth over profitability is common for startups, but as capital raising becomes more challenging, the focus shifts to profitability. By scaling back operations and concentrating on acquiring and retaining paying customers, profitability becomes achievable, even if it’s at a smaller scale than initially envisioned.
Both Ola and Uber, though potentially not at their pre-Covid scale, are generating free cash flows from their core business models. This shift towards profitability is not unique to India; it’s happening globally in the shared mobility sector, where dominant players can maintain pricing and prioritise profitability over growth.
The quality of service may have suffered immediately after Covid due to vehicle repossessions, but it’s gradually recovering, and demand remains strong. While India’s market conditions differ from the US due to income disparities, with lower disposable incomes in India, building billion-dollar companies takes time. Patience from investors is crucial, and India will continue to produce successful companies with the right approach and capital support.
Q. And in this context, what are some of the challenges on the OEM front?
As an OEM in the EV industry, the cost dynamics are critical. The cost is heavily influenced by scale, particularly regarding the bill of materials (BOM). Presently, we rely heavily on China for EV cells, which account for a significant portion of an EV’s value, whether it’s a two-wheeler, three-wheeler or four-wheeler. China’s dominance in cell manufacturing is evident, but the good news is that the prices of lithium ion cells, including LFP and other chemistries, have been steadily declining and are currently at historic lows.
For early-stage EV OEMs with lower volumes, BOM costs can be high, while selling prices are market-driven. This means absorbing the additional manufacturing cost without overpricing your EV compared to ICE vehicles. Initially, low volumes may result in negative unit economics, necessitating capital from investors to bridge the cost gap.
However, the advantage of EVs over traditional two-wheeler OEMs lies in the fact that about one-third of a vehicle’s ownership cost is related to fuel or energy expenses. With EVs, OEMs and partners can tap into this revenue stream by providing charging solutions, shifting the energy revenue away from public sector companies like Indian Oil or Bharat Petroleum. This additional revenue stream, coupled with increasing volumes, positions OEMs to achieve unit-level profitability faster, bolstering their path to profitability.