Can the government get EV engine roaring for two-wheelers?

Royal Enfield posted a fall of 7 percent in domestic volumes in October

Manmohan Verma

These are trying times for the auto industry, more so for the two-wheeler space, the biggest reflection of India’s pulse. The sales figures for 2018-19 are a precursor to the things to come next year. At 19 million units of sale, the industry grew by a moderate 6 percent last year, with no signs of immediate reversal.

This is because, over the past 15 months, the industry has been facing several macroeconomic challenges, starting from sluggish GDP growth at just 6.6 percent, lower consumer sentiment driven partly by high interest rates and elevated fuel prices in the wake of the US-Iran face-off.

In addition, insurance cost has gone up substantially after the new Motor Vehicle policy. NBFC financing of auto loans too has slowed following the shadow banking crisis stemming from high NPAs and liquidity issues. High inventories with dealers have ballooned to 60 days, from 15 days, further dampening the sector outlook.

Against this backdrop, the recent push by the NITI Aayog to make automobile companies shift to full EVs for three-wheelers by 2023 and two-wheelers with an engine capacity less than 150 cc by 2025 has set the cat among the pigeons, which has ruffled many a feather.

While one can understand the intent of the Aayog underscoring the urgency to pitchfork India into the EV space and tackling the huge challenge of pollution, the industry’s angst is equally understandable as it has precious little time to prepare for this challenge. The industry is already gearing up for the changes to be in sync with Euro VI guidelines kicking in from April 2020.

There are already worries about the impact on prices as the new technology of catalytic converters mostly consists of imported parts, and it may not be easy to pass the cost to consumer completely. In such a precarious situation, the new EV policy recommendation has left the industry in a state of panic and a lot to align with.

The current world leader in e-mobility is China. In India, two-wheeler and three-wheeler sales last year stood at around 7 lakh units, with the most being three-wheelers and about 20 percent two-wheelers. All major OEMs (original equipment manufacturers) - Honda, Hero MotoCorp, TVS, and Bajaj - find the proposed timelines challenging as the transition is likely to cause a major disruption in the sector.

On the other hand, there are many startups which have been waiting for this anticipated disruption around the automobile EV policy, which has been in the making for a while. The prominent companies in this space are Micromax, founded by Rahul Sharma, which launched its motorcycle model ‘Revolt’ recently, and Ather Energy in Bengaluru, which is also ready with its launch, others being Okinawa in Gurugram, Kinetic Green Energy and Power Solutions in Pune, and 22 Kymco - a JV between 22 Motors and KYMCO of China - in Bhiwadi.

While these startups are working to indigenise parts to at least 50 percent localisation level to qualify for incentives under FAME II policy of the central government, they are using high import content to the tune of 50 percent imports which impact the cost of the product adversely. The challenge around cost is one of the biggest problems to be solved before EVs become a consumer-attractive segment in India for the price sensitive two- and three-wheeler buyers.

There are many other facets to this vexing issue. Technology is one, which is mostly imported. The main parts are Li-Ion battery, induction motors, controllers, cooling systems, charging systems and the like. These are again mostly imported from China, which has the second-largest reserve of Lithium in the world (22 percent) and is the closest supplier. These parts are also cost competitive, which create long-term challenge for Make in India initiative unless the government decides to support EV R&D efforts.

EV technology is still evolving and will take a long time before it stabilises. Future technologies will have better material by way of Li-Ion cell configurations, use of composites material, aluminum alloys, and carbon fiber. These will make two- and three-wheelers light, rigid, strong and safe, resulting in better mileage for the same charge of the battery.

While the government’s intent behind the new E-mobility guidelines is genuine and well appreciated, its ambition needs to be tempered. If the continuous dialogue among top industry players, the government and the NITI Aayog evolves naturally, keeping in consideration the negative impacts on employment, investment, technology absorption, and industry competitiveness, then the efforts can bear fruit in the long run.

A genuine initiative by all parties can move the industry in the right direction. Hence, it will be better if the guidelines and deadlines are set jointly among the Centre, NITI Aayog and industry bodies such as SIAM, ACMA, CII and SMEV. For a smooth transition to EV, we need government initiatives to be increased by way of R&D for supporting auto ancillaries sector, lowering of GST from 12 percent to 5 percent, and incentivising customers to go in for EVs during future replacement of their vehicles. This can be done by waiving registration charges and provision of special line of credit with low interest rates to OEMs for technology absorption and capital investments.

In addition, we may need a PPP model for putting in place charging infrastructure pan-India to really facilitate a cleaner and electric-driven India.

Manmohan Verma is Leader (automotive, manufacturing and operations excellence), Praxis Global Alliance. Views expressed are personal.