March 1, 2021

AdvantEdge Mobility Podcast: Tesla is Entering India


Ashish Gupta

Ashish: Welcome to the AdvantEdge Mobility Podcast, and today we are talking about something the entire EV ecosystem is talking about: Tesla and its entry into India.
I'm in conversation with Kunal Khattar, Managing Partner at AdvantEdge.

Hi, Kunal.

Kunal: Hey Ashish, pleasure to be back.

Ashish: So today I'm going to discuss with you, the entire conversation that is really buzzing in India, which was around Tesla at century into India. So, what do you think it means for the ecosystem in India?

Kunal: I think Tesla coming to India is definitely generating a lot of hype, so we welcome that, but something that's very clear to us is India is a predominantly a two wheeler market, so even though Tesla is a very high profile brand and has a very high profile founder, ultimately what we're banking upon is the fact that, five to 10 years from now, majority of the sales will come from two wheelers.

But I think what Tesla will do is create a significant awareness for the whole category itself, which is electric vehicles. And that will probably accelerate the adoption of EVs broadly. So we are very excited about Tesla, but I think the kind of volumes that Tesla will generate will be fairly small when you look at the overall market, but they will definitely create awareness levels and acceleration adoption.

And I think people will be more open to deciding or choosing an electric vehicle when they transition or decide to buy their next vehicle in the family or to add another vehicle in the family. But our bet is that it's going to be a two-wheeler market, which is actually the same with regards to traditional ICE as well.

India is the largest two-wheeler market in the world, the largest e-rickshaw market in the world and the largest three-wheeler market in the world. We're still not there at the top with regards to four wheelers. So I think from an EV perspective as well, we think those kinds of volumes will be proportionate.

Ashish: Okay, so the largest two Wheeler market in the world.

So does it change the investment thesis of the fund per say, you know, AdvantEdge has always been known as the leader in the mobility ecosystem in India from a VC perspective, so do you see the entry of Tesla changing the investment thesis at all for the fund?

Kunal: So I think as a fund we have an eight to 10 year investment horizon, so it's basically, we're very early, we're in fact in our first year of deploying capital, so what is definitely not going to change as the fact that we're going to prioritize investing across the entire EV ecosystem.

So apart from the form factor, which whether it's a two, three or four Wheeler, there's a lot of things which come up before and after the manufacturing or the assembly process. So up the value chain and downstream, we are looking at companies that will end up manufacturing, critical components that go into the vehicles themselves. So that irrespective of whether, you need motors, you need battery management systems, you need cells, you need a bunch of other core elements or components that go into it.

Now, whether you're making a two Wheeler or a four Wheeler the sizes may be different. The technology will be similar so that we are even more bullish about investing in, upstream, opportunities. From a downstream perspective, whether it's distribution or charging and charging itself is, there are three form factors in charging - there could be rapid charging, battery swapping, or traditional charging. So we are looking at investment opportunities there itself. There, again, whether you're charging a two Wheeler or a four Wheeler, um, you pretty much need a charging infrastructure itself. So I think the entry of Tesla will create excitement in both upstream and downstream opportunities.

And as a fund, we continue to remain bullish ultimately there are successful companies that will come out across the entire ecosystem. But it's just that to form a form factor perspective, we are bullish on two wheelers, but from infrastructure, like I said, it's common across all form factors and that remains a focus area for us.

Ashish: Okay, so what I hear you say is that as a fund, you continue to look at upstream opportunities and all the way downstream, both in terms of components, as well as distribution charging, et cetera.
So, well a different question. If you were sitting in the boardroom that Maruti or Hyundai or Honda right now, this whole news around Tesla entering and setting up a plant or et cetera, what would be going in your mind?

Kunal: I think as one thing that's shown, if you look at, the overseas markets, it would not be difficult for her to say the number of OEMs were found napping, after the success of hybrid technology that Toyota championed, I think most OEMs were thinking that EV adoption will be much slower.

I think that's surprised everybody with this pace at which they were able to bring down costs. Um, and now. Even though they have a, you know, single digit market share overall in the auto ecosystem. Their market value today is more than the balance. 97, 98%, companies combined. So I think that is a lesson to be learned here that you're going to definitely have to look forward.

Um, I think from an OEM perspective, if you're a current market leader, I think it's important to not underestimate how fast EV adoption is going to happen. And I think I would be worried if I was an OEM, but what's important is that we think that adoption in India will happen faster on the two wheelers side than four wheelers.

Um, and I think, OEMs recognize that if you look at one of the companies that are actually credited with a first mover advantage in India is a company called Ather, and India's largest OEM, which is Hero Moto has a significant minority stake in that. So they definitely recognize the potential of EVs, and the good news is that they are already looking at making strategic investments that they feel will be supplementary to their traditional ICE product categories.

Ultimately they're going to have to leverage their existing distribution network to be able to scale EVs faster than those who don't have that benefit of that distribution network.

Ashish: So it means the game is on.

Kunal: Absolutely the game is on, and you know, we have courtside seats to enjoy the competition and hopefully be able to identify, companies that will challenge incumbent players, and create world-class companies in India, and hopefully develop technologies that can be sold across the world.

Ashish: I have one final question for you today. We spoke a little bit about the ecosystem and you said, look, the ecosystem is really going to grow. We spoke about your own investment thesis, you're extremely bullish on EVs on mobility, and that will continue. And finally, the fact that, you know, the game is on and OEMs will come in, but do you think this news about Tesla, does it also impact consumer perception in any way?

Kunal: I think there is always, if you look at adoption, especially if it is a new technology or new brands, there's always initially a smaller segment of customers who adopt new technologies. You know, traditionally we call them innovators and early adopters. Um, I think the advent of, of Tesla will hopefully accelerate adoption and so that a larger percentage of people will start looking at EVs as an alternate to traditional ICEs.

India is, and will remain a price sensitive market. We reiterate that adoption in two-wheelers will be faster, um, because the volumes are just large, inherently larger, but for that to happen, number one - EVs will have to become more affordable, charging infrastructure will have to be more widely available and finally, I think financing options, should be more creative.

So what we're expecting is one of the critical things that has to happen, and fortunately government regulation has now permitted is the disintermediation or the separation of the EV and the batteries, given the current cost of the raw material that go into batteries, which by itself constitutes almost 30 to 50% incremental cost.

If you're able to separate that and if individuals or consumers are allowed to buy the EV, but pay for the battery on a usage based or a monthly leasing model, that will effectively make the price of a EV, almost that of a traditional car. Ultimately, if you buy a vehicle today, nobody asks you to pay for five years of petrol or diesel upfront, so if you want to create a level playing field and have faster adoption, you want to try to minimize how much a consumer's behavior has to change. And I think that's going to happen as well.

So from customer's perception, I think this was as another positive point. We’ve already started to see a number of new EV make and model launches happening, and we're expecting the number of launches to go up multi-fold in the next couple of years. The customers will be having the ability to choose from different brands, different products at different price points. And I think all of that augurs well for the economy.

Ashish: Okay that’s’ interesting. So what you're saying is that EV is here to stay, so put on your seatbelts - literally, and let's go for the ride.

Kunal: Absolutely, all the way!

Ashish: Great Kunal, thanks so much for this conversation. And I'll see you again soon on some hot burning EV topic in India, which is looking after.

Kunal: Absolutely. Always a pleasure.