In quest for greener vehicles don't scare away the existing auto investors

The automobile sector has been one of the few success stories in Indian manufacturing. According to the Ministry of Heavy Industries, India is now the largest manufacturer of two- and three-wheelers, and the fourth-largest maker of passenger cars in the world. In 2018-19, the auto industry constituted 7.1 per cent of the country’s gross domestic product (GDP), 27 per cent of India’s industrial GDP, and 49 per cent of its manufacturing GDP, and provided jobs to 37 million people, directly and indirectly.

It will also undergo a dramatic structural change because of technological shifts taking place. Over the next decade and a half, electric vehicle (EV) technology will evolve enough to take over half or more of both the passenger as well as the commercial vehicles markets.

This has implications not only for the existing players and the internal combustion (IC) eco-system but also for the government’s plans for manufacturing. It is crucial for the government, therefore, to make sure that it gets its policies correct both for the short term as well as the medium and long terms. 

While FAME I and 2 (Faster Adoption and Manufacturing of [Hybrid] and Electric Vehicles in India) has provided many incentives to fast-track the EV journey, the government needs to ensure that its efforts to speed up the process does not scare away the global players that have invested heavily for decades in IC-based manufacturing facilities. It is more than likely that many of these automakers will survive and thrive even in the EV world — certainly, they are pouring money into R&D to ensure just that. Most importantly, it is expected that both IC-based vehicles and EVs will co-exist for a decade at least, if not more.

Of late, government policies have been in the news more for dissuading existing players than encouraging them to invest more. Several global names have already lost interest. After a decade of operations, motorcycle maker Harley-Davidson is closing down its plant and quitting the country. Recently, a senior executive of Toyota Motors in India said that the company no longer wanted to make fresh investment here.

Last year, reports suggested that Ford Motors was reducing its presence in the country by shifting most of its assets to a joint venture with Mahindra & Mahindra. In 2017, General Motors (GM) exited the Indian market after 21 years of operations.

Chinese automakers are still interested in investing in the country but the government is understandably chary of them.

It can be argued that the players who quit or are getting discouraged got their business models wrong. But the grumbling about the government’s attitude towards the industry has been growing. The problems have to do with the constant fiddling with taxes and policies. In taxes, the government has not been able to shed its socialist mindset that automobiles are a luxury. Cars attract the highest goods and services tax rate —28 per cent — as well as a rate of cess that depends on the size of the vehicle and also engine capacity.

The bigger problem, say automakers, is that long-term planning is difficult because of rapid changes in government plans, whether they have to do with deadlines for phasing out IC engines or import duties and curbs on components.

While the government is right in thinking that EVs are the future, it needs to realise that the technology is still evolving and the global auto players would be balancing the current IC investment in the country with their future investment in building an EV ecosystem. If global automakers already present in India start losing faith in the government’s policies, it is unlikely that they will invest in building an EV ecosystem here. 

The other point is that EVs also present a challenge for the country’s overall manufacturing goals. The EV auto components ecosystem will consist of fewer but bigger players and also employ fewer people largely because EVs have a smaller number of parts and also because bigger investment will be required in many areas. 

According to the Automobile Components Manufacturers Association of India, in FY18-19, the industry accounted for 2.3 per cent of India’s GDP and 4 per cent of the country’s exports and employed over five million people. As the shift to EVs takes place, quite a few smaller players are expected to go out of business. 

And despite the government incentives, it is not guaranteed that India will become a hub for EV component manufacturing. In many areas of EV components, India is at a disadvantage. These include microprocessors, controllers, and even batteries. 

The government has provided good incentives for battery manufacturing, which is the biggest portion of the EV. However, unless technology advances find a replacement for Li-Ion batteries, India will remain vulnerable because it has discovered very small Li reserves. The major reserves are in Chile, Bolivia, Argentina, China, and Australia, or Congo.

That makes it important for the government to plan and attract investment in other sectors. But for that, it needs to send out the right signals. Scaring off global investors who have spent millions of dollars and several decades in the Indian automobile market is not the best way to attract future investment in the sector — or any other sector for that matter. 

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