Impact of EV penetration on Indian Automotive Component Industry

According to a report on Automotive Component Manufacturers Association of India (ACMA) website, India’s automotive parts manufacturing industry had a turn over of INR 3.95 lakh crores (USD 57 billion) in FY 2018-19. The industry contributes 2.3 per cent to India’s GDP, 25 per cent to the country’s manufacturing GDP and provides employment to 50 lakh people.

Apart from serving the domestic demand, the industry supplies components to automotive companies around the world and accounted for exports worth more than INR 1,06,048 crore (USD 15.16 billion) in FY2018-19, with key export items – drive transmission & steering, engine components, Body/Chasis, Suspension & Braking etc.

30% of this export revenue comes from powertrain related components for ICE vehicles.

Impact of EV Push on Automotive Components Industry

Suppliers of Powertrain components have their work cut out in the wake of ongoing and expected EV penetration at home and around the world.

Niti Aayog wants to electrify India’s 2W segment (under 150-cc engines that make up for 90% of total 2W market) by 2025 and 3W segment by 2023. Government’s efforts also focus on getting the buses and commercial fleets adopt electric vehicles. According to industry experts, thought a complete shift to EVs would not happen so fast considering the state of the overall ecosystem, India’s mass mobility vehicle segment including 3Ws, 2Ws and buses could see 40% or higher EV penetration by 2030. Forecasts for global EV penetration stand at 30% by 2030 across several vehicle segments including private cars.

Related: Basic components of an of EV powertrain

This shift towards EVs accompanied with the emergence of connected, shared and autonomous mobility at a global level is bound to change the dynamics of auto-component demand in coming years. Let’s look at multiple factors at play here:

1. Rise of electric vehicles means a weakening demand trend for engine-related components and a hot market for constituents of EV powertrain in due course.

This image from an EY report shows the kind of effect EV penetration is likely to have on the current set of automobile components. The same impact will be felt on the employability of personnel with associated skill sets.

2. In the case of an ICE vehicle, multiple components of the powertrain account for significant parts of the total cost. Whereas in case of an EV, the cost composition is heavily skewed towards battery pack and associated software – as depicted in the image below.

3. As the number of components in the EV powertrain is smaller, it translates to a lower need for maintenance and aftermarket sales of parts. Aftermarket sales (replacements and accessories) have traditionally been a big source of revenue for the auto parts industry and accounted for Rs 67,491 crore (USD 10.1 billion) in FY 2018-19 in revenue as per ACMA. EV adoption will lead to a decline in ‘replacement’ revenue.

The composition of ‘accessories’ revenue is also likely to see a rejig down the years as shared mobility makes deeper inroads in our lives. For instance, the trend might lead to less spending on fancy dashboard accessories while the demand for infotainment systems for the passenger seats and telematics systems goes up.

4. Currently, most of the EV components are imported from China that gives Indian makers a stiff cost and technological competition. As a result, a hasty EV push will end up inflating the country’s import bill. Govt intends to push local manufacturing of EV powertrain components by linking FAME subsidies with the level of localization of the automobile. The move has met with some criticism for the OEMs as localisation is a multi-step process, that might take up a couple of years to develop and supply the components at scale. From the component makers perspective, the speed of localization will depend on volumes of EVs being produced in the country, which they see as a challenge at the moment.

5. Lithium-ion Battery Manufacturing – The battery pack is the most heavily priced component of an EV powertrain and India’s current capability of producing the Li-ion cells is almost nil. Multiple efforts are being made by the government agencies to initiate local production by facilitating technology transfers to industry and making international tie-ups to procure necessary raw material.

According to a report on FactorDaily, legacy auto component manufactures like Motherson, JBM, Brakes India, Sandhar, Sona BLW, JTekt, Green Fuel, Paracoat, Rico and Mahle are already exploring opportunities in electric mobility space. Bharat Forge, that holds a 48% stake in Tork Motors, plans to manufacture EV components in a 50:50 JV with Germany’s Refu Electronik GmbH and has made an investment of around INR 90 crores. TVS Lucas has built capability to export electric motors for two-wheelers.

Mahindra Electric Manufacturing is expected to supply four-wheeler powertrains to Ssangyong and a few other global players starting 2020.

How can the Industry Prepare for the Transition?

Above dynamics bring both an opportunity and a challenge for traditional auto part makers. The industry needs to act towards required capability building in terms of technology, skill development of employees and procurement of raw materials to avoid losing the race to Chinese imports. The established component makers will also face competition from new entrants in the space specialising in electrical and electronics components. In-time preparation for the upcoming shift will be the key to sustainability for both large and small manufacturers.

Here’s a list of key areas that need utmost attention:

1. Investment in R&D and building manufacturing capabilities specific to EV powertrain components to create an efficient, local EV supply chain.

2. Focus on component categories that have higher cost composition in EV powertrain

3. Securing the supply of raw materials used in EV powertrain components e.g. metals required for battery cell production and rare-earth metals used for permanent magnets in electric motors. India has no known sources of Lithium or Cobalt. More than 90 per cent of the ­current production of rare earths takes place in China. Going forward, we need judicious handling of end of life vehicles and batteries to enable extraction and reuse of valuable materials.

4. Forging the right partnerships – The auto component sector allows up to 100% FDI through automatic route. The Indian components makers should look at tying up with the right partners to get a technological edge in new component manufacturing.

5. Skilling Initiatives – Requirements of an EV supply chain are dramatically different from an ICE supply chain and millions of people depend on the industry for their livelihood. This calls for a larger effort towards understanding how different job areas are going to be impacted and which skills will be needed in the supply chains emerging out of new mobility trends. Accordingly, the government and the industry needs to design and implement re-skilling and up-skilling programs for existing and upcoming workforce.

Government Initiatives to promote EV component manufacturing

1. The government has announced the Phased Manufacturing Program (PMP) for automotive components that applies differential duties on imported components, with an aim to increase value addition and capacity building within the country. The notification will be implemented April 2020 onwards and levy 15% tax on EV components like motors, battery packs and electronic systems from April 2021.

2. Slashing of the tax rate for new manufacturing companies set up October 2019 onwards that begin production on or before 31 March 2023. According to a Livemint report, the effective tax rate for these companies will be 17.01% inclusive of surcharge and cess. Also, such companies will not be required to pay minimum alternate tax.

3. State EV policies are introducing benefits for automakers and components makers to manufacture in their states. e.g. Tamil Nadu state EV policy plans to offer capital and interest subsidies to businesses setting up EV component manufacturing units in the state, along with re-skilling allowances for employees working in the industry.

4. Private players are launching EV skill training courses, some in partnership with government agencies. e.g. DIYguru launched a short term EV training course in partnership with Niti Aayog, and MakerMax plans to conduct online classes to impart relevant skills to students and engineers in the space. Automotive Skill Development Council (ASDC) is conducting workshops with different industry bodies and stakeholders and is expected to launch EV training programs soon through ITIs (Industrial Training Institutes).

Related Read – Top EV powertrain component manufacturers in India.

Conclusion

Going by the assessment of current mobility ecosystem, ICE vehicles and EVs are going to co-exist in India for foreseeable future with EVs gaining share overtime. There will still be a considerable room for conventional vehicle auto-parts over the next decade. At the same time, looking at the evolving dynamics in the space, we need to prepare for a future that looks a lot different from today. The challenges for all stakeholders is to ensure the Indian automotive components industry can retain or further its position in the domestic as well as international market, and this challenge needs a timely and well-coordinated response.

References and useful reads:

1. McKinsey ACMA report
2. McKinsey report on Indian Auto Component Industry
3. EY report on Indian EV ecosystem
4. Factordaily report
5. DHI notification on PMP
6. WRI May 2019 Newsletter