By Uday Narang
The FAME (Faster adoption and Manufacturing of Electric Vehicles) Scheme was launched by the government of India in 2015. As the name suggests, the scheme was to promote the usage of vehicles with electric drive technologies.
As India marched on its EV journey, several sellers started appearing in the two- and three-wheelers segments. Most of these adopted the China import route to sell in India. Subsequently, there was news of the wrongful availing of subsidies under the scheme and two major OEM came across in the media.
On May 23, the Ministry of Heavy Industries (MHI) revised the scheme and cut the subsidy amounts from Rs 15,000 per kWh to Rs 10,000 per kWh for electric two-wheelers with a cap of 15% of the sale price of the EV from the earlier 40% of MRP. As of now three-wheelers subsidy continues as before.
This year’s data show the industry has claimed 47% or Rs 3,000 crore of the allocated amount in subsidies, mostly between FY2020 and FY2023. The government had shown its intention to support the industry by increasing the amount by 38% to Rs 5,172 crore in the Union Budget of FY 2023- 24.
India has been a land of subsidies, mostly on the consumer side, with the government providing subsidised foodgrains, cooking gas, electricity, cash transfers, education, and several others. It provides subsidies to reduce costs, make goods available at affordable prices and check prices by bearing part of the cost (fiscal) or by tax breaks among others (monetary). For the industry, the subsidies are on the supply side in the form of PLIs (Production linked incentives) and on the demand side by absorbing part of the cost for users. Prior to EVs, the government had subsidised solar, LED, and wind energy industries in renewable energy.
In the case of EVs, the FAME scheme was to incentivise demand and the amount was calculated on battery size (per kWh basis), to be passed on to the buyer. As of now since lithium-ion cell manufacturing doesn’t happen in India, it was deemed to make the EVs affordable.
Since there was a cap on the number of EVs (million two-wheelers and 500,000 three-wheelers for subsidy claim), it was supposed to incentivise local battery packs/cell manufacturing by industry.
Presently the cost of cells for two-wheelers is around $130 (Rs 10,733) per kWh in international markets. With an average capacity of 3 kWh per scooter, the cell cost works out to be $390 or around Rs 32,000. Assuming the cell price to be around 70% of the battery pack price, the net pack price should be around Rs 45,000. Subsequently, if we assume the battery price to be 50% of the vehicle price, the vehicle net price works out to be on average say Rs 1 lakh.
With the price tag of Rs.1 lakh the electric scooter is basically at par with a 100-125 cc IC engine scooter (say Honda Activa Rs 90,000 or a Hero Splendor Rs 88,000).
Therefore, TCO becomes very favourable once both the versions – EVs and ICs are in the same price range or with a marginal price differential of around Rs 20,000 (without subsidy). So essentially there is cost parity if we assume battery packs are priced at $180/kWh or Rs 15,000/kWh. This is possible with indigenous pack manufacturing line set up costing
around $5 million (Rs 41 crore) per GWh (sufficient for 1 million scooters).
The FAME scheme in the case of two-wheelers has served its purpose of demand incentivisation as numbers for the 2022 show (around 800,000 e-scooters were registered on VAHAN portal, low-speed ones are extra as they are not captured in Vahan). The industry is at a point now where the serious players desirous of a long-term business will set up the supply chains to manufacture EVs at large scale, irrespective of demand subsidy.
The automotive industry is a capital-intensive industry with an investment turnover ratio of around 3. For an industry expecting a turnover of $10 billion (Rs 82,470 crore) in 2030 (6 million annual sales), an investment of $3 billion (Rs 25,000 crore) would be required.
The investment on battery packs, BMS, motors, and controllers is the key to becoming a large-scale EV industry.
Also, the industry needs serious R&D in powertrain, battery, and electronics. Modern EVs are more like electronic gadgets packing in huge computing power with high-speed connectivity. This needs a strong integration of automobile and IT engineering.
As the post-FAME2 (Rev.23) industry matures, two developments will take place – one the industry will see only serious players, and most of fly-by-night players, importers/sellers would vanish.
Secondly, there would be a price adjustment for high-quality vehicles. So most incumbent players (led by the big 4) would roll out EVs and provide customers with a choice of an EV in the price range of Rs 1 lakh to Rs 1.5 lakh.
In the automotive industry, VA/VE (value addition/value engineering) is an essential part of continuous improvements. Engineers continuously work on alternate materials, processes, efficiency improvements, and waste reduction.
The EV industry needs to follow the same path to negate the impact of subsidies. For instance, as subsidies reduce, OEMs need to look for higher efficiency and smaller batteries. This is where high energy, power density chemistries would be required. Also, we will need compact motors designed for EVs with higher power density and efficiency. The industry will become competitive under pressure from new entrants and a threat of substitution technologies. The FAME 2 reduction might well bring these.
As the industry enters the post-subsidy era, only serious EV players with the technology and capacity to sustain manufacturing in the long-term would survive. In the short-term for opportunistic players, it’s pretty much game over and rightly so.
In a way, FAME2 has subsidised Chinese industry all these years and it is time to stop it. However, the industry, of which MSMEs form almost 50% of the manufacturing landscape of India needs to be supported, possibly through a separate PLI scheme. They will need access to capital at a lesser rate of interest from public banks. This would ease a lot of their pain points and incentivise investments.
Overall the reduction in FAME 2 subsidy is a timely wake-up call for the industry. It also calls for integrity and sophisticated business practices on the part of the industry and not to fall for short-term gains.
India has a chance of becoming a huge manufacturing base for the world by 2050, it is important to invest in critical new, green energy industries. New tech startups in the industry will bring in breakthrough technologies which will help expand the market as well as bring technology-led price benefits.
All in all, the Indian automotive industry needs to take the technology lead, not just become a
‘build-to-print’ industry. Electric vehicle presents an opportunity to do that. That’s the whole intent of “Make in India”.
The author is the Founder and Chairman of Omega Seiki Mobility.
Disclaimer: Views expressed are personal and do not reflect the official position or policy of Financial Express Online. Reproducing this content without permission is prohibited.
