The prospect of electric vehicles (EV) disrupting the automobile industry has led to excitement, fear and numerous research reports. Some experts feel it is all doom and gloom for the incumbent auto original equipment manufacturers (OEMs) as EVs replace internal combustion engine (ICE) cars and they will suffer the same fate as the horse carriage manufacturers they themselves replaced more than a hundred years ago. The automobile majors are obviously far less bearish, and continue to believe they will thrive and lead the transition. They believe only they have the scale, distribution, brand and technological resources needed to thrive in a world of EVs.
This transition is of huge significance as globally the passenger vehicle industry has a turnover of $1.8 trillion, profits of $150 billion and volumes of 90 million. Just for context, the smartphone industry has revenues of $340 billion and the personal computer industry revenues are $170 billion. The transition from ICE vehicles to battery-powered EVs will cause disruption on a scale not seen before. The sheer size of the revenues and profits at risk, and the multitude of players in the value chain affected are not trivial. From power semiconductor designers to cobalt miners and cathode manufacturers, the beneficiaries are numerous as are the losers.
Lithium-ion batteries will be one of the main building blocks for transportation, renewable energy storage and back-up power. These batteries will be one of the critical technologies of the next few decades.
Why does this matter? Especially to anyone based in India? How will it impact our companies? Why should we worry?
The reality is that automobiles is one of the few manufacturing sectors where India has had success. The country will export nearly 800,000 cars in 2017, a value of at least $4 billion, with nearly 90 per cent localisation. In small cars, we are now a global manufacturing hub. To this, we must add our success in auto components, another $4-5 billion of exports. This is one of the few sectors where we have global scale and competitiveness. Make in India works for small cars. India is projected to be the third largest car market in the world by 2020, with domestic volumes over 4.5 million. Currently, we have component localisation of above 85 per cent, with the majority of the value addition in India. If the industry is moving to EVs, will it undercut whatever manufacturing edge we have in this space? Will we remain a car manufacturing hub with high domestic value addition or become a cheap assembler of imported lithium-ion batteries and components? Will we become in cars, what we are today in smartphones: Cheap assembly with limited domestic value addition?
First some background
The move towards EVs is inevitable. The only question is timing and it is not only driven by global warming concerns. It is fundamentally a better product — just look at the wow factor associated with Tesla. Disruption has started at the high-end premium vehicles but will come down to the mass market eventually. The biggest issue is cost, as the power train of an EV (basically the battery) is about $17-18,000, compared to an ICE power train (engine, transmission and exhaust systems) of about $5,000. This gap will narrow as the costs of batteries fall by about 20 per cent annually and more stringent emission and fuel efficiency norms raise the costs of conventional engines. Most experts expect a crossover in cost somewhere between 2025 and 2030. Given that EVs are faster, more fuel-efficient and with zero emission, once costs are similar the switchover should happen rapidly. Studies I have seen show EV penetration of 25 per cent by 2025 rising to 90 per cent by 2035. The more bearish studies indicate
10 per cent penetration in 2025 and 30 per cent by 2035. China will lead this transition followed by the European Union. Emerging Market (EM) countries will lag, given the lack of adequate charging infrastructure.
This huge shift will shake up the whole industry. If one looks at the pattern of technological disruption seen in other sectors, then value will move away from the traditional auto OEMs and their suppliers to core components (batteries) and enablers of the new generation of automobiles. As the OEMs lose control of the core technology, which is batteries, their ability to differentiate and earn reasonable margins will reduce.
EVs will be much simpler to manufacture with almost half the components of the classic internal combustion engine vehicle. This will severely impact the component suppliers. Specialists in engine and transmission components, or companies focused on fuel injection and exhaust systems will lose out. These are today’s highest margin areas with maximum complexity and will be completely disrupted and rendered obsolete.
However, the industry has at least a decade to adjust. Even under the most bullish assumptions of EV adoption, global ICE vehicle volumes (including mild hybrids) will decline by only 0.75 per cent per annum between 2016 to 2026, as rising ICE sales in the EM markets offset the rapid switch to EVs in the developed world. The fall off accelerates post-2026.
Our component suppliers have a decade to penetrate the value chains of EV suppliers. Whether supplying to new companies like Tesla or the existing OEMs, suppliers need to ensure their relevance in the new designs. Given that all our car exports go into EMs, we should have time to adjust as EM volumes for ICE cars will continue to grow for the coming decade.
The reality is that China has taken a leading position in battery technology. In 2016, it led the world in sales of EVs, driven by subsidies and forced government fleet purchases. It is going to create a national champion in batteries and is determined to close the gap with Korean and Japanese battery makers by 2020.
India unfortunately has a very limited play in this technology disruption. We have no scale in battery manufacturing neither do we have the technology. I have heard of no attempt by any Indian company or the government to try and catch up. We missed the semiconductor, the smartphone, the polysilicon and the flat-panel technology waves. We have absolutely no technology or manufacturing capacity of any substance in any of these areas. It looks like something similar will happen again in battery technology as well.
The government will have to help, but as a country we need a strategy. We cannot afford to miss another transition, and remain just an importer of critical enabling technologies of the future.
The writer is with Amansa Capital. Views are his own