E2Ws on a brake: Serial fires, chip shortage may slow the pace of growth

Is the electric two-wheeler (E2W) juggernaut slowing down after a year of fast-paced sales growth? There is no doubt that the business faces a double whammy. On the one hand, three E2W makers have been forced to recall over 6,700 scooters after several of them caught fire, attracting government inquiries. On the other hand, the Ukraine-Russia war has ended hopes that the component and chip shortage would be over soon. Many project the shortage to last till 2023.

April saw the first month-on-month drop in registrations, after a 58 per cent jump in March. In Feb­ru­ary, registrations were up 15 per cent over January. Most scooter companies were planning for 20-30 per cent month-on-month growth in sales.

Electric vehicle (EV) makers insist that demand is intact despite supply chain constraints. “The slowdown has been primarily because of chip shortage. We want to do 10,000 scooters a month to meet the growing demand but can’t even produce 30 per cent of that because of the shortage. We had expected the shortage to be over by August this year but now it seems it will continue till March,” said Tarun Mehta, founder of Ather Energy.

Hero Electric Chief Executive Officer Sohinder Gill said the near collapse of supply logistics with a waiting period of 60 to 90 days had impacted his company too, but he expects the situation to improve. He admits, however, that the recent fires had been “unfortunate” for the industry’s growth.

Analysts, too, have become more sceptical. HDFC Securities projects slower growth principally because of the persistence of the chip supply challenges in calendar year 2022 and the recent fires, which will force manufacturers to focus on quality and safety checks. They expect e-scooter penetration at just 25 per cent in FY25. Gill agreed and pointed out that serious manufacturers like his company were revisiting their design and supply chains for improvements. And they were also actively participating in better testing and certification standards.

Nomura expects electric scooter penetration to be around 30 per cent by 2030. It points out that 70 per cent of the internal combustion engine (ICE) two-wheeler market is for motorbikes and there is no strong contender in that space on the horizon, though Ola says it has an e-motorbike in the works, and so do Bajaj Auto and TVS. So far 97 per cent of the E2Ws are scooters. Goldman Sachs projects E2W market reach at 38 per cent at a base case and a maximum of 50 per cent by 2030.

That is some distance from the government’s target of 80 per cent E2W penetration by 2030. This rapid transition is based on heavy subsidies via two tranches of the Faster Adoption and Manufacturing of Electric and Hybrid Vehicles (FAME) scheme in India to make EVs affordable. “The government is trying to force the pace by a carrot-and-stick policy. There is pressure from government agencies to scale up and deliver. And the carrot here is subsidies through FAME II, GST and state incentives,” said a senior executive with a two-wheeler maker.

There are several consequences to this policy. One is skewed equity. The government is subsidising the rich by offering a Rs 60,000 to Rs 70,000 subsidy to own a vehicle that costs the company Rs 1.7 lakh to manufacture. Yet the common man is paying high petrol prices.

Two, original equipment manufacturers (OEMs) are building huge capacity and volumes to meet the government target. Leading e-scooter companies are ramping up capacity from 0.67 million currently to around 6 million by 2023.

But as one analyst asked, “What happens when the government has to reduce and eventually pull the plug on subsidies?” The Rs 8,600-crore FAME II scheme, for instance, runs till 2024. First-mover China has understood that building an EV ecosystem through huge subsidies is unsustainable: Once they are lifted, prices rise, demand drops sharply and many companies fold.

Three, will scale on its own be enough to reduce the yawning gap in the cost of producing an EV vis-a-vis an ICE model?  EV newbies point to their sheer economies of scale — witness Ola’s annual capacity target of 10 million, which is half the two-wheeler market currently.

But most new players are burning cash. Goldman Sachs estimates that companies with revenues of Rs 5 crore together are making a negative earnings before interest, tax, depreciation and amortisation (EBITDA) margin of 25 per cent based on FY21 numbers. But some of them have reached near-positive margins primarily by keeping their research and design (R&D) spends low. Those manufacturers that have spent more on R&D (such as Ather), which is key for product quality, have had to combat those that are building market share by taking losses and skimping on R&D.

Incumbent ICE two-wheeler players point out that the incentives have also attracted fly-by-night operators and assemblers masquerading as manufacturers, bringing in low-quality products without adequate testing and quality checks, which explains the serial fires. This is reflected in the number of players in the game — there are 46 high-speed e-scooter manufacturers in the country and the top 10 account for 97 per cent of the market.

To top it all, lithium prices are expected to rise 20-40 per cent in 2022. Lithium accounts for over 20 per cent of an e-scooter’s raw material cost. E-scooter companies say this could push consumer prices up by as much as six per cent, narrowing the price parity with an ICE model.

The impending entry of the incumbent ICE two-wheeler makers could skew equations further. They have legacy advantages in cash reserves, a distribution network and, unlike most E2W makers, have access to production-linked incentive schemes. Given consumer concerns over safety, they are treading carefully and focusing on R&D.

They contend that technology disruption of this kind cannot be pushed through with ambitious and virtually unachievable targets. “In the initial pe­r­iod it will be a niche, expensive and unproven product due to high de­v­elopment costs, and there is a learning curve after which prices bec­ome more affordable and the product reliable. Over the last three years, the government has created confusion and shown lack of clarity on priorities to OEMs,” said one manufacturer.

After all, it took 20 years for smartphones to reach 64 per cent sales penetration in India and laptops 20 years to reach 75 per cent. Can electric two-wheelers, which are priced much higher, hit 80 per cent levels within 12 years?