Why vertically integrated OEMs are best placed to lead the EV revolution

According to a World Bank report, themed “Electric Mobility Market Assessment, Business Model and Action Plan in India”, the deep economic transformation of India will be accompanied by rapid growth in passenger and freight demand and this will require a transition to more sustainable transport solutions.  In this context, electric mobility is anticipated to play a major role in India’s transport transition during this decade. Against that backdrop, a study by one of Asia's leading think tanks (CEEW-CEF) suggests that the electric vehicle (EV) market in India could be a USD 206 billion opportunity by 2030.

The government has recognized the role that electric mobility can play in enabling it to achieve its stated goals on emissions reductions, energy security and industrial development. Accordingly, it has announced a wide-range of policy and regulatory initiatives. These include measures and incentives to encourage manufacturing and adoption of Electric Vehicles (EV), setting up of charging infrastructure and manufacturing of suitable batteries, amongst others.

While this has attracted investments to various segments of the EV ecosystem in India, as thing stand, electric vehicles have captured a market share of merely 2.6% of automotive sales; ICE vehicles still dominate the scene. So, while there is immense potential for growth in EVs and the government is doing its bit to support the transition to new mobility, the fact remains that manufacturing EVs is a completely different ball game. Now, the moot question is: what business models can OEMs adopt to ensure that they leverage the massive opportunity before them, sustainability?

The solution lies in vertical integration of production facilities rather than the horizontal integration model followed by legacy automobile producers.

While the market for ICE-based vehicles was developing rapidly, automakers realised that the fastest way to scale up was to undertake product design and focus on supply chain management, while outsourcing component manufacture to a network of suppliers. This model worked for the legacy auto industry due to the fact that combustion engines had reached a level of technological maturity and there was marginal scope for considerable change in design. To expand their business they focused on horizontal integration, a strategy which entails mergers or takeovers of competitors.

In the case of new mobility, the situation is starkly different due to its nascent stage, complex supply chain and relatively few components compared to vehicles built around ICE. Outsourcing components and relying on suppliers could typically compromise quality and drive costs upwards in the case of EVs, suggesting that the mantra for success in the EV space is vertical integration. This strategy, which entails forward and backward integration all along the production chain, facilitates tighter quality control over the final product. It also ensures better production planning, less supply chain delays, scope for implementing unique innovations and more efficiency in terms of ROI. As a result, not only can the EVs produced be superior in quality but more aggressively priced too.

One company that has already recognized the importance of vertical mobility in the EV space is Ola Electric. By integrating many production steps, it is on its way to becoming the leading vertically integrated mobility player, across the two-wheeler and passenger vehicle segments. The company plans to implement full scale integration from software to battery and electric motor production to battery management systems, towards building a powerful operating system vertically. With complete confidence in the final product that it brings to the market, due to control over quality at every stage, and the ability to scale up on its own terms, the company plans to export its vehicles after meeting local demand.

To discuss the way forward for the industry and how India can become a global hub for the design, manufacture and sale of EVs, CNBC TV-18 brought together luminaries from the EV space under the banner of its ‘Thought Leadership’ series.

The power-packed panel, which comprised BVR Subbu, renowned auto industry veteran, former President of Hyundai Motors India and an independent President with Ola Electric; Anil Kumar, CEO, RedSeer Consulting; Avnish Bajaj, Founder and MD of Matrix Partners, India and Randheer Singh, Director – Electric Mobility, NITI Aayog, shared sanguine forecasts for the future of EVs.

While BVR Subbu expected 30% of all top-end cars to be EVs by 2030, Randheer Singh forecast that by 2030, in a business as usual scenario, 27 million vehicles would be EVs and in the alternate scenario, that figure would be nearer 69 million, with an accumulated capital expenditure of USD 158 billion.

While discussing the evolution path between the present and 2030, the panelists were in consensus that the 2-wheeler segment would lead the adoption. Based on RedSeer Consulting research, Anil Kumar ventured that by 2030, practically 80% of 2-wheelers on the road would be EVs. Going a step further, Avnish Bajaj explained that this was due to the fact that India is one of the largest two-wheeler markets in the world. Further, 2-wheeler EVs offer adequate usage of 100 to 200 kms per charge and the convenience of charging though a power point at home.

They did, however, envision some concerns with respect to other EV segments, where range will always be important and suitable charging infrastructure will be required. The adoption of these vehicles and the setting up of charging infrastructure presented a chicken and egg situation, which seemed to be stalling their growth. Other concerns that emerged during the discussion related to quality, safety and cost-competitiveness.

The Thought Leadership participants agreed that India can emerge as a major supplier, particularly to countries with tropical climates, given its strategic interest in creating EVs. Adopting a vertically integrated strategy at the national level too, with interventions to promote every stage of the supply chain, could ensure that India does not miss this bus in this sunrise sector.

The discussion concluded with the clear consensus that the future of mobility will be electrified. Three key areas that will see focus and innovation will be transformation of business models in this ecosystem, robust recycling and reuse setups and lastly, ramping up skilling and capacity building.

Moneycontrol journalists were not involved in the creation of the article.