The prospect of electric vehicles (EV) disrupting the automobile industry has led to both excitement and fear.
Why is the transition problematic to India?
Some experts feel it is all doom and gloom for the incumbent auto original equipment manufacturers (OEMs) as EVs replace internal combustion engine (ICE) cars and create a change never seen before.
They will suffer the same fate as the horse carriage manufacturers which OEM’s replaced more than a hundred years ago.
The transition from conventional to electric vehicles is of huge significance as globally the passenger vehicle industry has a turnover of $1.8 trillion and volumes of 90 million.
The sheer size of the revenues and profits at risk, and the multitude of players in the value chain affected are not trivial.
From power semiconductor designers to cobalt miners and cathode manufacturers, the beneficiaries are numerous as are the losers.
The reality is that automobiles are one of the few manufacturing sectors where India has had success.
The country will export nearly 800,000 cars in 2017, a value of at least $4 billion, with nearly 90 per cent localisation.
In small cars, we are now a global manufacturing hub and added with it is our success in auto components, another $4-5 billion of exports and global competitiveness.
India is projected to be the third largest car market in the world by 2020, with domestic volumes over 4.5 million.
Currently, we have component localisation of above 85 per cent, with the majority of the value addition in India.
If the industry is moving to EVs, it undercut whatever manufacturing edge we have in this space.
What is the inevitability?
The move towards EVs is inevitable as it a technology changing innovative product.
The only question is timing and it is also driven by global warming concerns.
Disruption has started at the high-end premium vehicles but will come down to the mass market eventually.
The biggest issue is cost, as the battery of an EV is about $17-18,000, compared to an ICE (engine, transmission and exhaust systems) of about $5,000.
This gap will narrow as the costs of batteries fall by about 20 per cent annually and more stringent emission and fuel efficiency norms raise the costs of conventional engines.
Since EVs are faster, more fuel-efficient, easier to manufacture and with zero emission, once costs are similar the switchover should happen rapidly.
The industry will see 10 per cent penetration in 2025 and 30 per cent by 2035.
China will lead this transition followed by the European Union while Emerging Market (EM) countries will lag, given the lack of adequate charging infrastructure.
As the OEMs lose control of the core technology, which are batteries, their ability to differentiate and earn reasonable margins will reduce.
This will severely impact the component suppliers, specialists in engine and transmission components, or companies focused on fuel injection and exhaust systems.
However, the industry has at least a decade to adjust.
Even under the most bullish assumptions of EV adoption, global ICE vehicle volumes (including mild hybrids) will decline by only 0.75 per cent per annum between 2016 to 2026.
This is due to rising ICE sales in the EM markets offset the rapid switch to EVs in the developed world.
In 2016, China led the world in sales of EVs, driven by subsidies and forced government fleet purchases.
It is going to create a national champion in batteries and is determined to close the gap with Korean and Japanese battery makers by 2020.
India unfortunately has a very limited play in this technology disruption with no battery manufacturing plant.
No attempt by any Indian company or the government to try and catch up.
We missed the semiconductor, the smartphone, the polysilicon and the flat-panel technology waves.
We cannot afford to miss another transition, and remain just an importer of critical enabling technologies of the future.
The government will have to help leap this transition safely with a better strategy.
