Manufacturing Risks Associated with The Nascent Indian EV Industry

MANUFACTURING RISKS ASSOCIATED WITH THE NASCENT INDIAN EV INDUSTRY

Stakeholders should be patient with the market adaptation before any fruitful result is observed and be assured that government policies and legislations will eventually strive to support the needs of the EV industry in a gradual manner

The urge of combating global climate issues and resorting to alternative sources of energy, with respect to the automotive market, is clearly reflected in several of the recent Indian government policies. For instance, the launch of Faster Adoption and Manufacturing of Hybrid & Electric Vehicles ("FAME") scheme by the Department of Heavy Industry, the introduction of Motor Vehicles Aggregator Guidelines in 2020 by the Ministry of Road Transport and Highways, and the amendment of Charging infrastructure Guidelines and Standards by Ministry of Power, are all aimed at revolutionizing the Indian automotive market. Additional legal policies and schemes like the Production Linked Incentive (PLI) scheme (November 2020) and Scrappage Policy, 2021 also lend their support in the incentivization of manufacturers in the automotive sector.¹

The primary reason behind the grant of such widespread incentives flowing from the government, is to strive towards its ambitious goal of 100% Electric Vehicle ("EV") sales by 2030. To this effect, various states have also adopted specific policies targeting their comparative advantage in the EV production cycle to facilitate a more comprehensive regulatory regime across the country. However, as the automotive manufacturers positively embrace these incentivized policies (which they undoubtedly should) , they must also take a step back and acknowledge the potential risks associated with the nascent EV industry in India. The risk assessment is also significant, considering the fact that India is a relatively "late joiner" after the United States and China, in the EV industry, and thus possesses an upper hand in mitigating risks of the said industry. Therefore, this piece would attempt to address the potential risks that the manufacturers are likely to face if they operate in the novel EV market of India.

A. Market Risk

Capital Cost

It is an undeniable fact, that there is a high capital cost associated with producing the core battery component of EVs, which places a higher entry barrier for both the manufacturers and the consumers. While manufacturers tend to exert more pressure on innovations to reduce the cost of the battery and thereby maintain a profit-making state, consumers usually have to bear the burden of purchasing a luxury car without much support from financing². Moreover, the availability of limited financing options and high interest rates for EV loan accompanied by low loan- to value ratios, add to the misery of the consumers and are likely to render EVs less attractive to them³. Thus, a lack of sufficient incentives to gather groups of substantive buyers, would lead to a potential reduction of sales revenue and consequentially revert the risk back to manufacturers. This can be substantiated from the fact that the EV sales already account for less than 1% of the total sales in the automotive industry.⁴ Thus, the manufacturers need to devise innovative solutions to lower the burden of the capital cost on the consumers, and prevent themselves from witnessing a dip in their sales of EV in the Indian market.

Vehicle Servicing

To achieve sustainable development of EV industry or the brand reputation itself, well-trained technicians are in dire need to repair, maintain, troubleshoot the defects and rectify problems. Therefore, while engaging in the Indian EV industry, manufacturers should acknowledge this risk and mitigate it by utilizing the IT talents, abundant in the nation, and afterwards deploy appropriate skill development training⁵. This would not only boost the productivity levels of the technicians, but also leverage the interests of the manufacturers in the long run.

Strategy Planning

While Indian government is constantly updating incentive schemes for EVs, automotive companies should tailor their market strategies to be in sync with the latest policies and compliances, economic benefits and vehicular technologies. This essentially expands their customer base while maintaining an edge over the rivals, especially when other competitors are all rushing into the lucrative EV market.

Raw Materials for Batteries

Another hindrance for Indian EV market is the limited reserves of raw materials like lithium and nickel. These metals are essential in the production of EV batteries and considering the lack of such reserves in India, automotive manufacturers might have to consider other sources of inputs in order to produce the expected output of EVs.

Moreover, it is also pertinent to note that the extraction of lithium is hazardous to human health, as the metal is found along with other radioactive elements.⁶ Lithium extraction is also proven to cause harm to the environment. Thus, in order to promote sustainability and also safeguard the health of the people, the manufacturers might have to resort to battery recycling capabilities.

Furthermore, it is important to underscore that Chinese EV manufacturers have been attempting to create a monopoly in the EV battery market, by acquiring substantial amount of lithium reserves in foreign countries. This has been China's prevalent global practice ever since it surpassed the United State as the largest EV market in the world⁷. In this backdrop, manufacturers investing in the Indian EV market would have to politically and strategically plan to import these scarce raw materials in advance, so as to avoid incurring any further production cost. Moreover, alternative batteries using aluminum can also be adopted by Indian manufacturers, by capitalizing on the fact that India is the 4th largest producer of aluminum in the world.⁸

B. Technical Risk

Performance

Driving distance of EVs is one of the most significant drawbacks as the majority of them can only travel half the distance of conventional vehicles at full charge⁹. Adding to this, the Indian terrain and weather compounds the problem because the drivers have to plan their trip in advance and avoid long distance travel. Furthermore, they have to also factor in the additional energy loss in maintaining battery temperature against the scorching heat in India. Even though the viable solution of increasing the availability of charging infrastructures has been adopted, EVs are relatively less convenient than their counterparts (conventional vehicles), especially in hot and rural remote localities. The issue of range anxiety has also plagued the EV industry, because the drivers are often unsure of the range of distance that the EV can traverse before coming to a halt, whereby lesser charging stations would only add to their misery.

The battery life span of an EV is another challenge that can be confronted by the manufacturers. In this context, it is pertinent to observe that the general norm of the EV industry is to provide an 8-10 years warranty for the battery pack. However, the lithium-ion batteries under hot weather could suffer from rapid energy loss, thereby effectively causing battery depletion in the long-run. To counter such an effect, the liquid-cooling system must be adequate in maintaining constant temperature of the batteries. However, if the manufacturers resort to speed charging it could lead to a faster decay in the life expectancy of batteries in EVs¹⁰. The charging mechanism will most certainly be the transition hurdle for most consumers when they are so used to refilling the tank in a nearby gas station without thinking twice about waiting it to be fully "charged".

One of the mechanisms that the manufacturers can deploy to solve the above problem, is by installing battery swapping stations.¹¹ This would reduce the waiting time, as the consumers would visit these stations with their low batteries, akin to fuel stations, and exchange them for fully-charged batteries, thereby receiving greater flexibility in using the EVs. However, such a mechanism is riddled with different constraints for the manufacturers, who would need to devise proper solutions, so as to implement this idea into fruition. While producing exchangeable batteries, the manufacturers would have to ensure that the batteries are standardised and interoperable, and this could hinder the prospects of certain newer designs or innovations in the EV sector. Moreover, when the batteries would be received at these switching stations, they might be degraded to different levels, which can cause difficulties for the operators to gauge the viability for an effective and reciprocal swap.

The deployment of such a mechanism is also likely to shift the ownership of the battery from the consumer to the operators of the battery swapping stations. As a result, the cost of the batteries could be subjected to a higher price and ultimately match the price of petrol, or other fossil fuels, ultimately acting counterproductive to the very nature of EVs as being an alternative to the existing vehicles. Therefore, the daunting task of reducing battery charging time while maintaining its capacity, or allowing for a swapping mechanism would prove to be the complex problem that the manufacturers would have to solve.

Charging infrastructures

The current lack of electrical charging infrastructure should not be overlooked by the concerned authorities. This can be substantiated from the fact that India would require around 4 lakh charging stations to meet the demand for 20 lakh EVs on the roads by 2026¹². According to an independent study by the CEEW Centre for Energy Finance, India would need to deploy 29 lakh public charging stations by 2030 in order to support the EV adoption as envisaged in the base case target of NITI Aayog. Nevertheless, the present situation does not look promising, as across the whole country, India has only 1,800 charging stations. Apart from this, there is a sufficient lack of support for the grid development, which caters to the increased demand of EVs in the automotive sector. In reference to an industry analysis, the growing usage of EVs would boost power consumption by 100 TWh by 2030. This coupled with other obstacles like lack of instruments to lease government-owned and agency-owned land to set up the public charging stations, and scarcity of affordable renewable energy suggest that charging EVs would further burden the coal-fired electrical system.

Driver Safety

Although manufacturers ensure that their EVs conform to the safety standards specified in the state or local regime, subject to conditions like overcharge, erratic temperature, short circuit, fire collision, vibration, humidity and water immersion, the differences in configuration of EVs and conventional vehicles would trigger different safety regulating standards. For instance, high voltage battery fires caused by overcharging or short circuit are not only intense and long lasting but also emit toxic gases due to the combustion of chemicals. Regarding product liability, an insurance company, Allianz, has stated that automotive insurance claim amount is already the largest and most complex among all sectors and it is expected to grow further in proportion to the enlargement of EV market, wherein the rise in defects and quality issues of batteries are highly anticipated¹³. The above-mentioned potential threats and insurance claim phenomenon are observed in many jurisdictions, which should caution the automotive manufacturers to avoid negligence or product liability claims. Cyber securities might also pose minor threats to manufacturers when EVs have more connectivity and reliance on data, sensors, and software. The in-built artificial intelligence should be able to cope with malicious malwares and system glitches in order to prevent the destruction of EVs, and prevent the manufacturers for bearing the product liability claims, arising from the same¹⁴.

Some of the special product liability risks associated with EV manufacturers in India can relate to the high costs being borne by them in the lengthy litigation proceedings, which persist for many years. Adding to this, the time and cost invested in defending these product liability claims might often go in vain, due to the consumer-friendly jurisdiction in India.

Environmental Impact

The environmental pollution should not be envisaged as a major risk because the main reason for resorting to renewable energy sources in vehicles is to reduce the harmful emissions of greenhouse gases and to seek sustainable alternatives as fuels. However, it is imperative to understand that the processes in handling the batteries throughout its life cycle should be scrutinized, and this should extend from the extraction of raw materials to the recycling, reuse and disposal of batteries, which might potentially lead to environmental pollution.

C. Policy Risk

The initial implementation of FAME scheme by the government, was intended to achieve vehicle standardization with particular emphasis on manufacturing, however, the recent drafting has shifted the focus to the construction of EV Charging infrastructures, which could easily confuse manufacturers and consumers regarding the objectives of the said policy¹⁵. Moreover, when the investors and manufacturers were struggling to envisage a positive prospect of the EV industry, the policies have consistently failed to provide significant profit-accruing opportunities and such policies have been constantly postponed due to not meeting the expected targets. Hence, the inconsistency in policy goals and the lack of definite schedule for policy implementation are the political risks that might impede the engagement of manufacturers into EV market. Furthermore, the terms and conditions of the FAME scheme does not support a majority of the EVs,¹⁶ like the low-speed electric two-wheelers, and lead-acid battery powered EVs. On the other hand, the high-speed expensive EVs require registration charge and driving license. All of these restrictions tend to discourage customers from purchasing EVs and thereby result in an adverse application of the otherwise laudable objectives of the policy.

From the manufacturers' perspective, the government's plan to impose heavier taxes on non-EVs as compared to EVs, is a disastrous one, because they would be forced to enter into a EV market, which is producing low sales, and thereby do not justify the need for such a forced transition. This is disproportionately puts the existing automobile OEMs under pressure, as they would be compelled to enter the EV industry, at the behest of complying with lower tax regime.¹⁷

D. Infrastructure Risk

EVs, unlike the conventional vehicles, rely heavily on the charging stations and given the short traveling mileage, the location selection and distance of adjacent infrastructure would vastly affect the effectiveness of promoting EVs. Currently, the sale of EVs is at the sub-optimal level while station operators are sceptical about the policies and thus, afraid of altering their business model for such a high opportunity cost, which will resultantly effect the reliance of EVs on charging stations.

OPPORTUNITIES PRESENTED BY COVID-19 PANDEMIC

It is irrefutable that the pandemic has led to the downfall of the global economy and while EV production has been suspended temporarily, there is a huge opportunity for the Indian EV market to not only cater to local consumers, but also to expand its scope worldwide through exporting. India might be able to seize the opportunity and capture a portion of exporting sale of EVs when the world is currently seeking alternatives for China since the commencement of COVID-19¹⁸. Europe will be the potential market for Indian export of Lithium- ion batteries since those countries are preparing conducive environment for EV adoption similar to the policies adopted by India.

CONCLUSION

An amalgamation of the issues highlighted in this piece present the risks associated with the Indian EV industry, and provide sufficient foresights to automotive manufacturers for planning their business strategy and precaution plans in accordance with such risks. The product launching announcement from some the world's most valuable EV manufacturers would definitely stimulate the market reaction and the proactive policies adopted by various states would best serve as assurance to investors that India has the capability to function at par with China in the war of EVs. Stakeholders should be patient with the market adaptation before any fruitful result is observed and be assured that government policies and legislations will eventually strive to support the needs of the EV industry in a gradual manner.

Disclaimer – The views expressed in this article are the personal views of the author and are purely informative in nature.