India has the unfortunate distinction of being among the worst polluted countries in the world, with 14 out of the top 15 most polluted cities here. This is due to a number of factors including traffic congestion of largely fossil fuel powered vehicles. During the lockdown experiment driven by Covid-19, residents got to experience relatively clean air. Electric Vehicles (EVs) have zero tailpipe emission and can help in curbing pollution in urban centres in India. However, the penetration of EVs in the country has been dismal to say the least in spite of spiralling pollution levels.
The Government of India has made multiple attempts to give a push to the EV industry, but with limited success. Starting with the MNRE scheme in 2010, where they offered demand-side incentives for consumers. Even though support in the form of incentives and subsidies are important, they can only go so far. Eventually the key for mass adoption of EV’s is driven by things like the value proposition, the upfront investment and the overall total cost of ownership (TCO). Such factors will determine long term adoption of EVs in various form factors and use cases. This has been borne out by data from China, where EV sales after dramatic year on year growth, declined in the second half of 2019, as Government subsidies were reduced in mid-2019.
We at AdvantEdge believe the adoption of EVs in India will happen over multiple phases with economics dictating acceptance and scale, which will keep moving in favour of adoption of EVs over time due to improvements in technology, as well as reduction in costs.
In China, the EV penetration story started with electric scooters/bikes and we would have expected the same in India, as their smaller size, make them more suited for early EV adoption. However, in India, the adoption started almost 10 years ago organically with the unorganized e-rickshaws in Delhi, as a first/last mile feeder service to the Delhi Metro. E-rickshaw numbers have now grown to over 1.5mn, while still only having penetrated the northern and eastern belts of India. FY19 sales stood at 400,000 and the market is expected to grow to 4-5mn vehicles by 2025.
In our view, electric two-wheelers (2Ws) have not seen the same level of adoption till date in India, in spite of targeted subsidies under FAME I (Faster Adoption and Manufacturing of Electric Vehicles), as they have traditionally been used predominantly for personal mobility with no large 2W fleet operator or other commercial B2B use cases like bike taxis existing.
Being utilised for personal mobility means, these vehicles are only driven 50/60 kms per day and hence, the owner is not able to fully utilise the benefit of lower operating cost of EVs. On the other hand, electric 2Ws being utilised by fleet operators and commercial use cases with high utilisation levels achieve TCO parity with ICE vehicles at ~100-120 kms per day.
As a country, India sold over 17mn 2Ws in FY20 out of a total automotive sale volume of 21mn vehicles. Electric 2Ws consisted of just 0.9% of the total sales, with low-speed scooters having a max speed of 25 kmph making up 90% of the volumes.
The sales volume of electric 2Ws more than doubled between FY18 and FY19 from 54,800 to 126,000, according to the Indian Society of Manufacturers of Electric Vehicles. This growth was mainly driven by incentives given under the FAME I scheme launched in 2015, which gave subsidies based on vehicle types. A switch to FAME II in 2019, adjusted the eligibility criteria by introducing elements such as minimum range, speed, battery capacity and domestically made parts, etc. This switch impacted the 2W EV industry with growth slowing to 20%, as many of the existing vehicles did not meet the eligibility criteria. The automotive industry slowdown and liquidity crisis affecting easy access to credit did not help the situation.
We believe the current operating cost differential and unit economics warrant a transition for commercial use cases of 2Ws from ICE to EV.
Let’s quickly look at the numbers and metrics to understand how EV’s stack up to ICE options. The approximate cost of ‘fuel’ per kms is Rs 0.15 for an electric 2W vs Rs 1.5 for an ICE 2W. Hence, at 100 kms per day for 300 days a year, the annual saving would be Rs 40,500! The price differential between a high-speed electric scooter and an entry-level ICE 2W is about the same. We still haven't factored in the FAME II subsidy or maintenance costs yet in the equation. This calculation may be a simplification but it still provides ample proof that the economics are calling for a rapid transition.
In India, the emergence of large 2W fleets for commercial uses that are doing over 100 kms per day is going to accelerate this shift. Keeping in mind the need for high utilisation, fleet operators can also solve for lower range in EVs easily by providing a hub-based swapping solution or centralised charge points for their riders. We already have over 1mn 2W vehicles being used for food delivery (Swiggy, Zomato), grocery delivery (Big Basket, Grofers), e-commerce (Amazon, Flipkart), bike taxis (Rapido, Ola Bike, Uber Moto), etc and this number is expected to grow 3x by 2025.
The two-month lockdown due to Covid-19 in India was a black swan event for all digital commerce companies, which have seen unprecedented growth in daily order volumes and has led to rapid expansion in demand for last-mile delivery across the country.
However, the cost of last-mile delivery remains high with the current ICE form factors in use. The customer is not too keen to pay for the same either. This high cost makes the unit economics for certain business models with low average order values (AOV) like food or low margin business like grocery delivery extremely challenging. We expect the electrification of 2W fleets for last-mile delivery to significantly lower operating costs, with early adoption either via platforms owning or getting vehicles through service or leasing contracts with driver owned marketplace model penetration happening over time.
