Five years ago, we knew we were going to encounter at least three monstrous waves: the adoption of the BSVI norms, migration to electric vehicles and the way we will deal with mobility. I have confidence that the industry’s leadership and indeed, its mechanisms will adapt, survive and navigate these troubled waters.
From 2013-2014: the Indian auto industry has had an encouraging growth. Two-wheelers, cars and commercial vehicles had grown at eight, six and close to ten per cent respectively. So, we’ve had over five years of robust growth.
Nowhere in the world, this industry is immune to business cycles. So, we had to have some cooling off; this particular cooling off has been more profound and more painful than typical slowdowns.
There have been numerous reasons for this. For one, the tightening of credit norms. If you go back a few years, lenders were so liberal in providing loans! So we were headed to some sort of an unsustainable bubble.
Why the slump?
Beyond that, the slump has been very different for different sectors. The two-wheeler sector was more affected because rural demand was subdued. On top of this, several regulatory measures required technologies to be changed or enhanced. Motorcycles beyond 125 cc should have anti-lock braking systems and insurance pre-bought for two years.
Diverse factors affected the demand for cars. Replacement of vehicles, arising from people upgrading one model to another, became discretionary and deferred.
Trucks had yet another set of dynamics. The slump in the overall economy has undoubtedly led to a drop in freight demand. But that came on top of trucks introduced with heavier axle loads. So, we saw an increase in freight logistics’ fleet capacity. Further, the government decided to allow a certain measure of overloading. On top came a faster turnaround, thanks to the elimination of check-posts. These have effectively increased capacity and reduction in fleet replacement.
All these changes would’ve been easy to accept and adjust in any other year. But during the past year, we were on the threshold of BSVI norms. Whenever there is a change in regulatory standards, the year before is usually an excellent one for the industry. There is a certain amount of spree for buying cheaper. Particularly buyers of commercial vehicles won’t care whether they have a BSIV or BSVI truck: because the price is going to be more expensive anywhere between 5 and 15 per cent.
So, the fact that this year wasn’t a bumper year, but rather one of a demand drop, is a setback for the industry. When you add up all these factors, the deep slump in demand shouldn’t be surprising.
I continue to be an optimist over where we’re headed. Remember, what we had to go through the previous BSIII and BSIV emission regime change? There was such a lot of confusion. But this time, the government, the auto industry and even the oil industry have got ready for this transition. Many of the automakers across sectors have started to roll out their BSVI machines. There is a more significant effort across the industry and the supply chain to fine-tune their approach to cross a critical threshold.
How to get out of this?
There’ll be pressure for immediate short-term reliefs. eg. a lower rate of GST. Probably the best course for the
economy is stable policies over a long period.
The other quick-fix suggested is the scrapping of old vehicles. I view that solution with mixed emotions. On the one hand, in a country like ours with constrained affordability, it’s not fair to force someone who had bought a car 10 or 15 years ago to scrap it. There is a moral and social dimension. On the other hand, there can be a sensible approach to incentivising retirement of second-hand vehicles; or pass them to secondary markets farther away from a metro; this will also address the air quality issue of the metro.
Impact of BSVI transition
Vehicles prices will go up anywhere between 5 and 15 per cent. This wide range because there are different classes of vehicles that require varying degrees of change. The increase would also depend upon the degree to which manufacturers succeed in making the entire supply chain reduce its profit margins. Every emission change over in the last 30 years has seen margins compress because emission improvements aren’t something consumers would pay for.
Can diesel cars be phased out?
Now, many say diesel and petrol have reached parity at the pumps and they cost about the same. Can diesel cars be phased out? But fuel economy is different and mileage matters more. The out of pocket expenditure every time you fill up a tank of diesel/petrol is an issue. Better fuel economy of diesel matters.
Alongside the focus on emission standards, there has been a parallel evolution and improvements of standards related to other aspects, such as safety. These continue to advance and these also have the effect of increasing the price of vehicles.
Becoming globally competitive
In the past, the Indian industry, in particular, would be apprehensive about newer safety regulations as every new safety technology involved more spend on buying from a foreign supplier. Most of the techniques, whether the anti-lock braking system or electronic stability control system were all leading to a higher quantum of purchases from global Tier One suppliers. This meant the manufacturers spent more. Today, many of the Indian automakers, particularly Tatas and Mahindras, produce some of the safest cars. The Tata Nexon and Mahindra XUV300 are products that conform to the highest safety standards.
With upgraded safety and emission standards, Indian products are better suited to a large range of export markets. Initially, we had very few export options; we exported cars to Bangladesh, Sri Lanka and a couple of countries in Africa.
But as we started to get through the BSII to BSIII evolution, we could sell in countries like South Africa, Turkey and even in the European Union. So, this migration to BSVI standards and the adoption of many of the newer safety standards will place our industry in a much better position to compete in more number of overseas markets.
The downside to this is Chinese competition, extraordinarily aggressive and heavily subsidised. So, we will have to battle that competition as we force our way into becoming a more massive export player.
Transition to the electrification of mobility
The initial mandate, particularly in two-wheelers, was a complete transition to electric vehicles by 2025. It had been downsized. We’ll see an acceleration in the electrification of mobility. There is an urgency to address the terrible conditions of city air quality and the huge expense on oil imports. The action seems to happen at the two ends – at the two-wheelers’ and buses’ and it’s logical.
At the two-wheeler end, the infrastructure needed to promote migration to electrification is rather easy. At the heavy end of buses, the infrastructure is going to be concentrated on battery charging. In the initial years, electrification will require some form of subsidy from the government. It is easier to justify a grant to a bus system in a metro, rather than to a Tesla.
Huge demand for power
The charging infrastructure is a lot more complicated and expensive. First of all, the standards are comprehensive and wide: we have AC/DC charging and DC low-power/DC high-power charging…
The average charger size is anywhere between 250 and 500 kilowatts. You put five of those and you’re already taking massive megawatts of power in a concentrated location and it has enormous implications for the grid. So, the migration to the electrification of cars is going to take longer and somewhat staggered. There’ll be a few charge points and there’ll be an encouragement to set up charging stations, either at the place of work or residence; it may not be universally available to sustain cars bought in large numbers.
We’ll face a two-fold challenge in manufacturing electric cars. One, increasing outsourcing. We already see large automakers pushing more value addition to their supply chains. Today, even BMW and Mercedes outsource vital components like transmission systems. As we go into electrification, we would see a more significant share of critical systems outsourced to the supply chain. Most of the manufacturers will make their motors, but not battery packs; they may make their motor controllers and battery controllers, but that’s a small piece of electronics compared to a lot of value that goes out.
So, pretty soon, automakers will manage the interiors, the brand, the market, and user experience… but there’ll be a higher degree of outsourcing to supply chains. When this happens, the hope is that the Indian supply chain will continue to retain a good share of the value. Remember the past, when in critical technologies like safety and emission, more of this value went to multinational global supply chains.
Chinese competition…
This concern is amplified in the case of electrification because of the enormous threat from the Chinese. In recent years, there is an acceleration of the pace with which the Chinese are targeting India. MG Motors, a British brand, is a subsidiary of the Shanghai Automotive Industry Corporation of China. Great Wall Motors acquired the Indian facilities of General Motors, making a big push into India. As China finds its domestic market flattening, one can bet, what they’ve done with steel will spread to autos. While we’ve some welcome elements of a Make in India policy, we need a much more cohesive combination of investment policies to retain enough of the value in India.
Recent announcements on electric vehicles, in the two-wheeler space, by Bajaj Auto and TVS Motors, raise hope and reassurance. These products are designed and built in India with Indian components. The two-wheeler industry has created global brands and globally competitive products. Other manufacturers will hopefully build on this.
There are so much energy and passion in the younger generation with the startups coming out in numbers. Their products are different and indigenous. We need to encourage these manufacturers to take the fight against Chinese manufacturers.
There’s another important aspect related to electrification: the amount of energy that’ll be needed. Even if 25-30 per cent of our two-wheelers go electric by 2025-26, we’ll have to create battery production capacity of the order of 30 to 40-gigawatt hours. As of 2020, the global capacity for electric vehicles is around 30 to 40 GWH. That includes the Tesla giga factory and all of the Chinese factories. Maruti has put up a one-gigawatt hour battery at a cost of Rs 5000 crore. So, even if we assume efficiency and scale that could bring the cost down to Rs 2000 crore per gigawatt-hour, 30 to 40 megawatt-hour capacity is going to require more than Rs 60000 crore. That’s a lot of investment to make.
The mobility issue
India is one of the most densely populated countries in the world. We’ve many cities with more than a million population each. Inadequate road capacity is an issue faced by increasing population. This lone factor of congestion, with its immediate side effects of air quality, accidents, and fatalities, accounts for a loss of between 3 per cent and 6 per cent of the country’s GDP; and it’s only going to get worse.
How much space do we allocate to the road? Frankly, there’s no answer. We need to address this inefficient mobility system and have to find a way to house and transport a lot more people much more efficiently. We need to plan our cities and build an efficient mobility architecture.
Fortunately, today we’re having an explosion of opportunities and options. The smartphone has come in and provided us so many ways of getting connected. There are so many ways of making a journey from point A to point B. Five years from now, we all would’ve our journey tailor-made and not the old way of buying a car, engaging a driver and parking it with ease.
I sometimes cringe when people say, Chennai is the Detroit of the East. I don’t know if we want that. But if we do, it must be for the fact that we have a powerful, vibrant industry capable of providing products for the world, not just for us. Whether it’s with an electric vehicle or its mobility solutions and technologies, I hope we’ll be an engine for future mobility and mobility solutions.
