In this article, we look at why electrification of vehicles in India makes sense and more specifically, why India is so well suited to go down this path given the constraints that exist with electric vehicle technology in general.
As seen below, we can broadly list out four factors expected to provide tailwinds for electric vehicle adoption in India and they include macro drivers, auto & mobility specific drivers, electric vehicle ecosystem related drivers and finally, policy drivers.
Globally, EV penetration has mainly been driven by the third and fourth categories. Policy drivers like regulatory incentives and tightening emission norms have incentivised EV adoption.
Historically, there has been a very close correlation between incentives for EV adoption and market penetration, given unfavourable unit economics, when comparing electric with internal combustion engine driven vehicles. As an example, China has given almost $60 billion of subsidies over the last 10 years and this has led to the country having almost 50% of the electric car parc by 2019. It has also allowed them to create 3 of the 4 leading OEMs in the space, namely BYD, BAIC and SAIC. In July 2019, the Chinese Government reduced the subsidies it provided to electric cars, which led to a dramatic slow down in EV sales and the Government was forced to extend subsidies to support the EV industry.
Tightening emission norms are also leading to an increase in cost of ICE vehicles and in turn narrowing the price differential between the two. Recently in India, the Government mandated that OEMs must switch from BS-IV to BS-VI compliant vehicles and from 1st April 2020 onwards they could only sell such vehicles. This led to a 10-15% increase in the price of ICE powered two-wheelers in India.
The other key category driving global EV adoption is specific to electric vehicle technologies.
Electric cars have been around for centuries, with the first models emerging around the middle of the 19th century and by 1900, they accounted for more than a third of all vehicles on the streets.
Their decline was mainly driven by lower speed, shorter range and most importantly, higher price relative to ICE vehicles, which Henry Ford’s mass produced Model-T ensured. The re-emergence of EVs as a challenger is also driven by reversal of these key factors. The invention of the lithium-ion battery in the 1980s, allowed cars to travel longer distances, and over subsequent years, battery costs (which currently account for 30-40% of a vehicle’s cost) have been falling year on year (from over $1k/kWh to under $200/kWh in the last 10 years), which is helping in narrowing the price differentials. Battery prices are projected to fall below $100/kWh in the next 4-5 years, allowing electric cars to achieve price parity with ICE cars in the near future. Further, improvements in vehicle and charging performance are also making the value proposition very exciting and in some categories the total cost of ownership has already turned favourable in India.
In India’s case, the other two factors - macro and auto specific, are also very critical and worth emphasising. As a country, India has large incentives to switch to electric given its large reliance on oil imports, as well as having major challenges with pollution. India imports over 80% of its oil requirements and is the world’s third largest oil importer. In FY20, the country imported 227 million tonnes of crude oil worth over $100 billion. As per the IEA published World Energy Outlook 2019, India’s oil demand is expected to jump to 305 million tonnes by 2025. Additionally, India unfortunately also has the distinction of being among the worst polluted countries in the world, with 14 out of the top 15 most polluted cities located here.
On the other hand, interestingly, India is also one of the largest two-wheeler and three-wheeler markets in the world, which makes it very uniquely positioned and well suited for electrification, both from a user economics and user convenience perspective.
Electric two-wheelers are already at economic parity with ICE vehicles on a total cost of ownership basis for multiple use cases, depending on vehicle specifications and usage levels. The same also holds true for three-wheelers, which additionally are only used for transportation of either goods or people. Commercial applications, especially by fleet operators, benefit from being able to solve for lack of charging infrastructure, one of the key roadblocks to EV adoption.
Specifically in the Indian context, another mass two-wheeler EV adoption story - just like in the case of e-rickshaws - may be kickstarted without the presence of a robust public charging infrastructure (and associated upfront investment) in place, since two-wheelers generally operate for fewer kms per day, compared to the current range that is available, thereby allowing for easy home charging. Hence, we expect faster adoption by the likes of Bounce, Vogo, Dominos, Yulu, etc. and a possible government mandate for EV adoption by large fleets could be an additional push for such players.