The automobile industry stands at an important juncture. For over two centuries it enjoyed unparalleled growth with the internal combustion engine (ICE). But now, the change has begun.
Transportation is the second largest emitter of carbon di-oxide and the decarbonisation path for this sector lies in shifting to EVs. For a growing market like India, where the manufacturing ecosystem has matured to a stage such a transition can cause large scale disruption. While on one hand shifting user preference and creating an enabling environment is necessary, on the other, managing the disruption in the manufacturing ecosystem is essential. Several stakeholders, right from the huge factory where the entire vehicle is assembled, to the OEM and the manufacturer of components will be prone to massive change.
Potential for USD 100 billion revenue
India in COP26 joined the EV30@30 campaign which targets 30 per cent of new vehicles sold by 2030 would be EV. The market is expected to have a potential to generate USD 100 billion in revenue and to realise that, a tenfold growth in volume over the next 7 years is necessary. As per data published on the Vahan website, between 1 April 2023 and 31 March 2024, a total of 1,675,800 EVs were bought in India. It is almost 4591 EVs sold every day in FY24 and an additional 1349 units compared to 3242 EVs in FY23. The sustained demand is due to the high petrol and diesel prices and also the increased awareness amongst buyers. In the longer run, the total cost of ownership of EVs is very low compared to ICE vehicles and it subsides the initial high cost.
To upkeep this momentum and further it, several structural challenges must be addressed. A report by Bain and Company identifies that the focus areas must be,
- New product development: EVs should meet needs of various customer profiles with respect to range and performance. For better economics, OEMs may need to reduce, nice to have features from existing premium models as subsidies expire.
- Go-to-market/distribution: The reach should be expanded beyond metros and tier 1 cities and for this, the existing dealership models wont work as EVs have lower service requirement and hence lesser revenue for dealers. OEMs will have to balance speed required to capture untapped markets with the right dealership operating model, in order to achieve scale and profitability over the long term.
- Customer segment prioritisation: Targeting B2B will help in greening the last mile as also expanding EV penetration. Amazon has plans to add 10,000 EV fleets by 2025. Similarly Zomato aims to electrify its entire fleet by 2030 and Uber has committed to add 25,000 EVs by 2026. All these offer volume and manufactures must be ready to scale up operations.
- Software development: Software can help OEMs improve their economics by adding new revenue streams while improving vehicle performance. For example, OEMs can leverage software to enhance power delivery, optimise battery management based on vehicle usage to increase battery life, etc.
- Charging infrastructure: India lags in charging infrastructure with about 200 + EVs per commercial charging point. The number is 20 in US and less than 10 in China. Both fast and slow charging infrastructure along with battery swapping facility must be rightly balanced and widely implemented across the country for wider penetration.
Impact of transition
While the transition aids to a more sustainable world, the impacts of the change varies across different stakeholders associated in this ecosystem. International Forum for Environment, Sustainability & Technology (iFOREST), in their recently unveiled report delved in detail on just transition for India’s automobile sector. The report conducted a modelling study to forecast the growth of EVs under two scenarios – current policy and aspirational policy. In these, EV penetration is expected to reach 29 – 38 per cent between 2030-31 and 47 – 67 per cent between 2036-37. 2W and 3W are expected to take the lead with 3W being entirely electric by 2036-37 and 2W reaching 50-70 per cent in the same period
All this sounds good given the extreme climate conditions we are facing. This transformation is inevitable and India leads the world in EV adoption. So where does the problem lie? Right below the hood. If you open the bonnet of your vehicle, you would find several parts that fire the ICE vehicles to motion. But all these become obsolete with EVs. The entire vehicle is built around a battery pack and given its critical importance; companies will try to make it inhouse. EVs eliminate the need for several mechanical parts. This results in a drastic change in the way things operate. Right from the design of the shop floor to the workers involved everything is to affected.
Less of mechanical and more of electrics and software…
The report estimates that depending on vehicle type around 45 – 84 per cent of parts in an ICE vehicle will become obsolete. In the powertrain of ICE, 90 – 100 per cent parts will become archaic. In non-power train, it will be 28 per cent for 2W, 37 per cent for 3W and 12 per cent for cars, with scope for some parts to be repurposed in EVs. A report by Mc Kinsey Centre for Future Mobility details the shift in value addition composition of vehicles. Around 70 per cent of EV would be centered around the battery pack while 20 per cent will be for the e-motor, 5 per cent in power electronics and 5 per cent in transmission. The auto component manufacturers ecosystem will be under strain.
Reskilling on war footing
The Indian automobile industry accounts for 7.1 per cent of the GDP and employs close to 37 million. iFOREST, in the report studied the impact of transition in about 845 component manufacturers who are members of the Auto Component Manufacturers Association. Of this, 34 per cent would be highly impacted, 13 per cent would be moderately impacted and 53 per cent would have a lesser impact. Production in India is concentrated in specific pockets with the majors being Mumbai, NCR region, Tamil Nadu and Gujarat. The extent of the impact due to the transition differs across these clusters. The report points to around 40 per cent being impacted in Gurugram and around 20 per cent in Hosur and 25 per cent in Pune. But a deeper look shows that in Gurugram the large industries will bear the brunt and mostly medium and small sized industries would be affected in Pune and Hosur. While large companies can re-orient operations, it is often the medium and small that struggle to tide over changes. But the positive trend that is evident in the report is, many of the industries have an awareness on the need to transition and also have initiated the same.
Certain job profiles also would be discontinued. An ICE based vehicle has several moving parts that are mostly mechanical in nature. On the other hand, EVs have fewer parts and also most of the work is related to electrical and software programming related skills. Currently, two-thirds of the auto sector jobs fall between National Skills Qualification Framework (NSQF) levels of 4 and 5. The report identifies that major re-skilling of the work force would be needed to retain them in the newer job roles that will come by. To tide over this transition a new approach in technology and skilling is essential.
