Last week, the governments of Tamil Nadu, Punjab, Telangana, Maharashtra, and West Bengal invited the auto company Tesla to set up shop in their respective states. This open invitation was a response to company founder Elon Musk’s tweet that Tesla was “facing a lot of challenges” launching their electric vehicles in the country. The enthusiasm with which the five states have rolled out the red carpet for Tesla isn’t surprising. Estimates have pegged the market opportunity for the electric vehicles sector in India to be worth approximately $206 billion by 2030. Despite contributing less than one per cent of all vehicle sales in the country, overall electric vehicles sales are rising, with over 50,000 new registrations each month.
In India, Tesla and other global electric vehicles (EV) manufacturers will be caught in a catch-22 situation. Governments are keen they set up shop and manufacture domestically. However, these companies would rather sell completely built units (CBU) made outside the country. Subsequently, Tesla, Audi and Hyundai have urged the Narendra Modi government to cut import duties and help bring down prices and generate demand for EVs in India.
However, the government remains unmoved and maintains the 100 per cent import duty on CBUs manufactured abroad. Instead, it has been pushing for greater localisation of EV manufacturing through multiple policy measures such as the Faster Adoption and Manufacturing of (Hybrid &) Electric Vehicles Scheme-II or FAME-II. Additionally, it has launched several Production Linked Incentive (PLI) schemes for manufacturers in the automobile, components and Advanced Chemistry Cell (ACC) battery sector to develop indigenous supply chains for critical EV components.
To boost sales, the government has also launched several consumer-centric incentives, such as tax exemptions, subsidies and interest subvention schemes, intended to trigger a mass demand for EV mobility options.
Making EVs in India
Five main components are required to manufacture an electric vehicle – chassis and body, battery and thermal dynamics management systems, battery packs, electric motors and power electronics. Since the first two are also manufactured for conventional and hybrid Internal Combustion Engine (ICE) vehicles, they cost less than EV-specific components and can be locally sourced. However, the last three items are unique to EVs and contribute a little more than 60 per cent of an EV’s total cost.
India does not possess critical raw materials such as lithium, cobalt and nickel, which are used to make lithium-ion (Li-ion) battery cells. Consequently, Indian manufacturers must rely heavily on imports of battery cells from China, Japan, Korea, and Taiwan, and assemble them into battery packs. Earlier this week, the Modi government announced that it had received an encouraging response from investors under the PLI scheme to manufacture ACC batteries domestically. But most bidders are expected to start manufacturing only from 2025. So, India’s import-driven strategy, for the domestic assembly of critical battery packs, will continue for a few more years.
Additionally, the manufacturing of electric motors and power electronics requires critical raw materials, deep technological expertise, and large capital investments to manufacture – all of which India lacks. Global manufacturers have enjoyed a significant head start in this segment and churn out components that are significantly cheaper than domestically manufactured products. Consequently, import dependency has been the only option for domestic manufacturers to secure critical parts for EV assembly.
Consequently, domestic EV manufacturers are exposed to increasingly volatile global supply chains and higher costs due to Covid-related disruptions and the US-China trade war. The prices of lithium carbonate and lithium hydroxide, crucial components in Li-ion battery manufacturing, have risen by 413 per cent and 254 per cent respectively since the start of 2021. Similarly, the prices of praseodymium and neodymium oxide, used to make magnets for electric motors, have almost doubled in the past 14 months. As a result, some manufacturers have hiked prices of their EVs to counteract the rise in raw material cost. Meanwhile, customers have to wait for as long as six months to get their EVs home.
Building an Atmanirbhar EV supply chain
According to FAME-II guidelines, companies need to ensure that locally manufactured components account for a minimum of 40 per cent of the price of an EV bus and 50 per cent for all other categories, if they want to avail benefits under the scheme. However, estimates peg the current level of localisation in the EV sector at approximately 20 per cent, owing to the lack of critical raw materials and the relatively lower costs of imported components. Despite these challenges, there are four distinct opportunities that can strengthen India’s plans to locally manufacture EV components and build resilient supply chains.
First, recent commitments by Indian industrial houses such as Reliance Industries, Adani Group, and Tata Chemicals to locally manufacture battery cells is reassuring. Importantly, these initiatives aim to explore new chemistries and technologies to manufacture battery cells using materials that India can source locally. However, there is an urgent need to calibrate strategies on battery development by working in a closed loop. In other words, manufacturers need to think about the life cycle of batteries and formulate plans to mine urban waste to ensure that precious materials can be extracted from batteries. This strategy has the potential to save up to 50 per cent of materials required to produce new batteries.
Second, local manufacturing of electric motors and power electronics require heavy capital investments and high-end technology deployment. However, these are much lower for two-wheelers and low-speed three-wheelers as compared to larger vehicles. Focussing on this segment could help spur domestic manufacturing capacities. A few EV companies are already taking the lead on manufacturing at scale with Ola Electric building a 10 million unit annual capacity FutureFactory in Tamil Nadu.
Third, India managed to localise its automobile manufacturing by integrating component manufacturing hubs located across the country in Manesar, Ludhiana and Pune, with assembly facilities in Chennai. Building these robust supply chains ensured that high-end technology, innovation and investments could move downstream from automobile manufacturers to a diverse set of big, medium and small component manufacturers spread across India. These integrated supply chains have developed India into one of the global leaders in two-and three-wheeler manufacturing. Replicating this integration of clusters, with new entrants such as the battery factories in Gujarat, Andhra Pradesh and Telangana and the software development hubs in Bangalore could create shorter supply chains and insulate EV manufacturers against volatility of the import market.
Finally, EVs have become the new fulcrum of collaboration between technology and automobile players. Standard features of new-age EVs include improved digital connectivity, efficient battery and vehicle range management systems, and enhanced safety. Experiments are also underway to evaluate automated driving functionalities of EVs that can significantly reduce human error.
India has long established itself as a global software development hub for the automobile sector, developing code for legacy players such as Mercedes, General Motors and Ford. These domestic capacities can help solve the real-world challenges of EV safety, battery charging and range management. Additionally, India’s software players can also help EV manufacturers in managing their supply chains better through automation and blockchain.
India’s growing market for EV mobility, particularly in the two and three-wheeler segment, offers a significant opportunity to transition India’s road transport sector towards a low carbon pathway. Significantly, the spill-over benefits also have potential to create more jobs, reduce local air pollution and crude dependence. However, these opportunities can only materialise if policymakers and stakeholders in India’s EV sector recalibrate their focus towards building local and more resilient supply chains.
The author works at Koan Advisory Group, a technology policy consulting firm. Views are personal.
This article is part of ThePrint-Koan Advisory series that analyses emerging policies, laws and regulations in India’s technology sector. Read all the articles here.
(Edited by Neera Majumdar)