Forcing manufacturers to use local components could backfire without a larger market—and other changes
By guest author Megha Mandavia from the Wall Street Journal.
March 22, 2023
India might be putting the cart in front of the horse when it comes to electric vehicles. EVs are starting to take off, but the government is determined to build a local component industry simultaneously.
That might be a big ask, at least until the market reaches substantially larger scale—and certain other supply-side roadblocks are removed.
Local media reports that New Delhi is auditing claims by several electric two-wheeler manufacturers, which applied for subsidies under the government’s $1.21 billion clean-mobility promotion scheme—to establish whether they sourced at least 50% of components locally as required. In December, India’s minister for heavy industry told the Indian parliament that complaints had been made against 12 electric vehicle and parts manufacturers, including Hero Electric Vehicles Pvt Ltd and Okinawa Autotech Pvt Ltd, for violating the subsidy program’s guidelines. Hero Electric and Okinawa said their products are compliant with government requirements.
India’s EV market faces a typical chicken and egg problem. Demand for battery-powered two wheelers, in particular, has begun to grow quickly. According to Redseer Strategy Consultants, electric two-wheeler sales doubled to 200000 units in the year ending March 2022—and could hit 800,000 in the current fiscal year ending March 31. But for the market to really take off, costs probably need to fall substantially. A cheap, localized supply chain could help—but would also require heavy upfront investment from manufacturers. Counterpoint Research estimates that almost 65 % of India’s EV components are imported: including for many key parts like batteries, magnets and semiconductors.
The discovery of a massive lithium deposit in the Jammu and Kashmir region could help resolve the dilemma, eventually. Meanwhile, New Delhi might be better off focusing on removing supply-side bottlenecks to investment—particularly infrastructure. Strong demand growth for two-wheel EVs creates a clear opportunity for local component manufacturers, but India’s clearest comparative advantage—cheap, plentiful labour—may not be enough on its own to lure capital and technology-intensive industries like batteries and semiconductors without addressing other structural issues.
The growth potential, at least, is clear. In a report released in December, Bain & Company said it expects 35 % – 40% of all vehicles sold in India by 2030 will be EVs, up from just 2 % in 2022. Two-and three-wheelers would lead the transition: up to 45 % of such vehicles sold could be electric by 2030, helped along by early adoption among delivery and logistics fleets.
Soumen Mandal, analyst at Counterpoint Research, believes India would need at least 5-6 years to set up all the component manufacturing plants required to make an EV. A lot depends on whether India can successfully move into batteries. Batteries often make up about 40-45 % of total EVs costs. And while prices have fallen, they remain high for cost-conscious Indian consumers. Mihir Sampat, partner at Bain & Company, believes global battery prices need to fall 20 %-30 % for India to achieve high EV penetration levels by 2030.
Last month’s lithium discovery could help. The Geological Survey of India discovered a 5.9 million metric ton lithium resource in the Jammu and Kashmir region in February. The deposit forms 6 % of the world’s identified lithium resource, according to Jefferies—and could potentially electrify the entire current personal vehicle and two-wheeler fleet in India, the brokerage says.
There is no doubt that India’s electric vehicle industry, especially two-wheelers, is taking off. The country has an opportunity in the component space too—but moving too fast to force firms to go local might end up stunting, rather than supercharging EV adoption.