Investors and the government want EVs. Consumers not so much. But only for now

in hive-175254 •  last month 


The Indian government has been gung-ho about EVs for a while now. In fact, not just the government, even VCs and PE firms are pouring a lot of money into this entire space - be it battery tech, infrastructure, or manufacturing. However, EV penetration in the auto sector is merely 1% and customers do not seem to be that excited about it.

I also just signed up for a project within the space and learnt the reasons behind the dichotomy stated above. Thought it was interesting and worth sharing. It may also help those who are looking to invest in this space or are neglecting it because they think EVs will not take off.

Governments really want EVs to take off because of 2 key reasons. First, they want to tackle pollution problems in cities and meet the climate goals they would have set for themselves. Second, and more important, India especially wants to reduce its fossil fuel import bill. India imports 85% of its crude and this is the main culprit for its CA deficit. On the contrary, India has enough resources to generate electricity - thermal and solar.

Before we understand why investors are keen, let us understand why consumers are not embracing EVs with open arms. There is just one simple answer: Total Cost of Ownership. India is a unique market. 80% of India's auto sales are 2 wheelers. The next biggest segment is Passenger Vehicles at ~15%. The Total Cost of ownership is made up of 2 things: Upfront Cost and Maintenance/Running Cost. For 4 wheelers, the upfront cost differential for the cheapest 4 wheel EV is in the range of 75% to 100%. The difference in running costs for both vehicles will cover up for this difference in 100,000 km to 200,000 km without adjusting for the time value of money (wide range, as a number of factors impact per km running costs). No consumer in India will pay this differential just because of their love for the environment. For 2 wheeler, the upfront cost differential is lower and government subsidies can almost make up for that difference. Yet the customer response is tepid. That is because e-2 Wheelers with decent range/top speed are too expensive and subsidies are not uniform across states.

Why then after such poor responses from consumers to date are investors excited? First, the industry is at a point when a lot of unknowns are now known. The EV world has settled on the fact that Li-Ion chemistry is the best for the industry. Depending on the product, companies can choose different Li-Ion chemistries but the risk of investment in battery manufacturing has been reduced because of the above market consensus. Battery costs too have been declining as demand for EVs picks up globally and that is benefitting India. In fact, in the next 4 years, batteries will be so cheap that upfront e-2 Wheelers will be cheaper than ICE, all else remaining constant. Second, from a climate change point of view, in a country like India that depends heavily on coal for its energy needs, even with 100% thermal energy generation, CO2 emissions from 2 wheelers (they generate 5x the pollution as PVs) may be halved if the electrification of 2 Wheelers is completed. The third most important point is that if in 3-4 years, it is given with high certainty that upfront cost differential in 2 wheelers will go away, then to develop and test a product that has mass appeal is now. For a new company to develop and launch a product after government approval is about 1 - 2 years. That means VCs can see a substantial return on their money in 5 years. Their investment is also likely to benefit from favorable government policies.

In my opinion, 2 wheelers have the best potential in India to be electrified. (Most private investment in India is also happening in 2 wheeler space. In PVs, it is the incumbents that are investing.) There are risks to every industry and it is the same for this space. However, the industry is learning rapidly and evolving. Soon enough, another bottleneck: lack of financing options for consumers, will be dealt with. In the next 5 years I feel that just like the government and investors, even consumers will warm up to electric vehicles.

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Absolutely correct analysis
Good post 👍