Auto sector – looking for light at end of tunnel

for the future Darkest before dawn…

Looking for light at end of tunnel

The writing is on the wall. Customers will increasingly migrate to EVs when they demonstrate they are economical, easy to use and environment-friendly.

Analysts Will Confirm that the auto sector, globally and in India, fits the classical pattern of a cyclicality. Industry veterans have grown accustomed to the idea that over a typical decade, they would see a couple of boom years usually sandwiched between a year or two of demand collapse. What kept the mood buoyant was the conviction that as the state of development of the country inexorably advanced, so too would the demand for transportation and mobility.

Since 2019 however, the Indian auto industry has been reeling from a succession of events that have suppressed demand and led to a prolonged drought that has derailed the long-term trajectory. The implementation of GST and the BS-6 mandates were anticipated as temporary blips but no one expected their timing would be followed so closely by the onset of the Covid pandemic, or that the pandemic would be so long drawn out in India and across the world. In 2020-21, 2.7 million cars were sold, a figure similar to the sales recorded for 2015-16. Commercial vehicles and two-wheelers fared even worse registering slightly lower sales compared to 2015-16.

VIBRANT INDUSTRY BELIES DIM RESULTS…

The vibrancy in the industry however, belies these dim results. Novelty and new product launches have been magnets, rewarding those automakers that have maintained a healthy flow of attractive new models and penalizing those with bare or stale shelves. Maruti-Suzuki and the Hyundai-Kia group have together garnered the lion’s share of this interest and with their collective market-share approaching 75 per cent leaving all the other manufacturers fighting for scraps. Unable to sustain prolonged losses, General Motors and Ford have been occupied with finding ways to exit the country. Ominously, Chinese manufacturers are waiting to make India their new market conquest and they would have progressed much farther by now had the Ladakh border confrontation not occurred altering sentiments for Chinese products.

Commercial vehicle sales have been kept afloat mainly by the recovery in the lighter class of vehicles that have proven essential for local deliveries and e-commerce platforms that have done very well during the pandemic. Government spending in infrastructure projects have proven to boost sales of heavy commercial vehicles although these do not adequately make up for an overall sluggish economy and its subdued demand for transport fleets. While rural demand provided some encouragement for two-wheeler manufacturers until last year, even that market cannot compensate for the effects of the second wave of Covid. To their credit, Indian two-wheeler manufacturers have boosted their efforts in export markets and the positive result here is hopefully a gain that is sustainable for years to come. This sector stands out in demonstrating global competitiveness across the dimensions of product appeal and quality, economics and emission standards.

A new mountain to climb…

A further and more structural disruption is headed for India’s auto sector. A combination of government regulations and policy nudges, consumer preferences and increasingly competitive economics mean that demand for electric vehicles (EVs) will cause the industry to make significant changes.

Supply-side momentum

Nary a day passes by when there is not an announcement of a new entrant in the world of EVs. Dominated by aspirants in the two-wheeler space, start-ups have mushroomed across India and seek to take advantage of a phase when barriers to entry seem to be low. Admittedly, assembling the skills and components to make an EV-scooter is easier than making one with an ICE engine. As a result there is a wide variety of new solutions ranging from mature, contemporary designs (such as the products from Ather) to many that are still learning the trade. While growth in scale usually comes with time, Ola-EVs have bucked the trend and borrowed a page from modern global start-ups. Flush with cash and confident that astronomical enterprise valuations are merely the outcome of even bolder product and market share claims, they have the possibility to change industry scale and dynamics.

 ASSURED OF MILLION-SCALE SUPPLIES

One major advantage that conventional two-wheeler manufacturers in India enjoy is the enviable supply-chain they have painstakingly developed over the past decades. They are assured of million-scale supplies, matched with high quality and cost commensurate with such scale. This is something the EV eco-system desperately needs in India. While standards have been tightened to increasing localisation, many EV two-wheeler manufacturers still rely on a range of components and kits that are directly or indirectly sourced from China. Motors, motor-controllers, battery-packs and battery management systems continue to get imported, sometimes through indirect routes to circumvent restrictions on Chinese imports. Unless a full supplier ecosystem is created in India, capable of scale and quality, the Indian EV two-wheeler journey risks repeating the path taken by smartphones where most handset kits are procured from China and merely assembled here. If this were to happen, the impact on India’s balance of trade and industrial output will suffer a significant setback.

Government Policies help transition to EV

To their credit, Government of India has been advancing suitable incentives to help the transition of the industry to electrification. Incentives to manufacturers implemented via the FAME-1 and more recently FAME-2 have shown that they can nudge buyer choice. In addition the government has kicked off a far-reaching plan to incentivise the local production of battery cells in India. What microchips are to electronics, battery cells are to EVs. Unless they are localised, as a country, we will suffer a significant competitive disadvantage. In addition policies are underway that seek to streamline and standardise charging infrastructure with the goal of increasing local content, increasing economic scale in the country and making procurement bids for fleet acquisition more competitive. These policies will need to be tuned to be constructive, promote domestic competitiveness and align with consumer sentiments.

Consumer sentiments

Across the world, consumers are warming to the idea of EVs. In India too, as costs continue to drop, a wider variety of products become available and charging infrastructure becomes more predictable, more consumers are attracted to the lower operating cost, smooth operation and the image of ‘zero-emission’ vehicles. Already segmentation is becoming evident. In the two-wheeler space, local area users prefer lower speed vehicles that cost less compared to those demanding higher performance and range. A new genre of sporty EV motorcycles and scooters also promises to enhance the exhilaration of vibration-free acceleration. Similarly, fleet users (including Amazon, Flipkart and Swiggy) are seeking to embellish their Environment, Social & Governance goals’ credentials, the subject of so much focus of global investors today, by committing to EV fleets for their deliveries.

India’s auto sector has a lot of work ahead and it needs careful nurturing with policies and regulations, to get past these challenges and to chart a profitable and sustainable course.

by Mobileeswaran