Published on 16/01/2018 3:32:53 PM | Source: Motilal Oswal Securities Ltd

Electric Vehicle: Clear policy and fiscal/non-fiscal incentives are key Localization of key - Motilal Oswal

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EVs: Clear policy and fiscal/non-fiscal incentives are key Localization of key

EV components critical for lowering cost, protecting jobs We attended ‘ETAuto EV Conclave 2018’, a conference focused on electric vehicles (EVs), wherein key industry stakeholders brainstormed to chart a roadmap for EV transition in India. Notably, all stakeholders were unanimous in their view about a) need for a clear policy to expedite EV adoption, b) need for localization to protect jobs and reduce cost of EVs and c) importance of EVs in meeting future emission norms. However, there were mixed opinions about the role of hybrids and swappable batteries. Industry participants believe that, despite the imminent transition to EVs (40% penetration of EVs by 2030E), ICE powered 2W/4Ws will still grow at a 4% CAGR.

Clear policy on EVs – a key for OEM commitment

* OEMs and component companies unanimously sought clarity on EV policy, without which investment commitment would be uncertain.

* While the Indian government has set a target for 100% EV penetration in intracity commercial transportation and 40% in personal transportation by 2030, it is yet to frame policies to attain these targets.

* It is critical for industry to work toward localization of EV components to reduce total cost of ownership.

* The government is working on a comprehensive EV policy, including the FAME-2 scheme for promoting EVs.

Government needs to play a bigger role

* Considering the current higher prices of EVs, the government needs to play the role of a facilitator through fiscal and non-fiscal incentives.

* Globally, countries successfully adopting EVs (China, Norway and the Netherlands, etc.) have received massive support from the government.

* Government needs to initially offer incentives (both fiscal and non-fiscal), and gradually shift toward legislation measures to drive adoption of EVs.

* People need to be incentivized to change and adapt. In fact, most of the participants believe that non-fiscal incentives like reserved parking, free parking and no tolls play equally important role in faster adoption of EVs.

What needs to be done to speed up EV adoption?

Industry participants suggested the following measures to speed up EV adoption:

* Continuing incentives on EVs under the FAME scheme (2Ws: INR17-22k; 3Ws: INR25-61k; 4Ws: INR124-138k) till prices of lithium cells drop below USD100/Kwh.

* Better charging infrastructure

* Non-fiscal incentives for EVs

* Localization of EV components (e.g. MM’s EVs have 66% import content)

* Government and Fleet buying

* Also, the financing environment for EVs needs to get better, as financiers are hesitant to finance EVs due to uncertainty over the resale value. Also, they do not want to fund batteries due to declining battery prices and also as batter life is yet to be established.

EVs critical for future emission norms

* Beyond BS-6, it would be difficult and expensive to meet future emission norms with current ICE engines. EVs (incl. hybrids) provide best solution for the same.

* It will be virtually impossible for diesel engines to meet Euro 7 Real Driving Emission (RDE) norms, whereas petrol engines too will find it difficult to meet such norms.

Divided opinion on battery swapping and hybrids

* Global players did not see battery swapping as a viable solution, as it has been tried out in many markets globally without any success. Key reasons for failure of swappable batteries globally are: a) need for standardization of battery packs, b) safety hazard and c) significant investment in battery swapping infrastructure.

* However, a few India players believe that swappable batteries can overcome problems of charging infrastructure as well as range anxiety.

* Similarly, there was divided opinion on role of hybrids in evolution of EVs. Proponents of hybrids believe that it is the best solution until battery prices and charging infrastructure develops. On the other hand, many OEMs were of the opinion that companies will have to select which areas to invest in, considering the vast investment alternatives available in the auto industry, such as autonomous/connected cars, ICE engine (to meet emission norms) and EVs (battery, fuel cells, etc.). Localization critical for lowering costs and protecting employment

* Considering that two thirds of EV components (batteries, motors, electronics, chargers, etc.) are imported, it is imperative for the industry to increase localization for reducing costs of EVs as well as protecting jobs in the auto/auto component industry.

* For the auto component industry, currently over 50% of revenues are dependent on engine components, which could be at risk.

* Auto component industry employs ~3m people, making localization of EV components as well as reskilling of manpower critical. Else, EVs could lead to exporting of these jobs.

Demystifying four myths surrounding EVs

* Dr Goenka, MD of MM demystified four myths surrounding EVs: a) Holistic emissions, b) Power shortage in India for EVs and c) Lithium substituting oil imports.

* According to a study done by MM, battery EVs (BEVs) have significantly lower well-to-wheel emissions than any competing ICE engine-powered car. Unlike ICE engines, BEVs not only have any zero tail pipe emissions, but also have 15-25% lower CO2 emission after factoring in power generation emissions.

* Contrary to general perception that India does not have sufficient power to support EVs, 10m EVs in operations would only consume ~3.2% of power generation (based on 2022 power generation capacity in India).

* There have been concerns raised about availability of lithium to support aggressive electrification globally. However, according to Dr Goenka, there is 25- 30 years of sustainable reserve of lithium globally, assuming 100% of all PVs sold globally are EVs. Furthermore, lithium is recyclable, which reduces concerns about availability.

* Last, there are apprehensions that the transition toward EVs will shift India’s import bill from oil to lithium. According to MM’s estimates, by 2022 for 200k KM’s usage, total import per car for lithium would be USD2,750 as against USD4,800/car of oil imports.

ICE engine cars to grow ~4% CAGR despite ~40% EV penetration by 2030

* Based on EV penetration of 40% by 2030 and ~8% CAGR in volumes for PVs/2Ws, ICE powered PVs/2Ws will still grow at ~4% CAGR.

* Adoption of EVs would be faster in last mile connectivity (commercial application) and gradually penetrate in personal mobility.

Valuation and view

* We believe electrification of automobiles is inevitable, considering a) improvement in battery technology, b) fall in battery prices, c) higher cost of environment compliance for ICE engines and d) increasing focus on environment. However, the pace of electrification in India will be significantly influenced by a) government policies, b) speed of charging infrastructure development and c) magnitude of fall in battery prices and localization of components.

* While EVs have potential to disrupt the competitive landscape of OEMs in India, we believe it is big challenge, but even bigger opportunity for the auto components industry.

* We prefer players that are relatively well placed/not impacted by EVs. We prefer Maruti Suzuki and Tata Motors in OEMs, and Motherson Sumi in auto components in this evolutionary phase of EVs in India.

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