Invest Guide April 2023

Due to its large contribution to global emissions, the transportation sector has made electric vehicles ("EVs") a priority topic, including in India's recently released union budget ("Budget"). The "E-Mobility Mission"—India's national initiative to promote transformative mobility and battery storage—remains a priority for the country. This article examines some of the most significant government-sponsored projects in the Indian EV sector, as well as reasons for China’s rapid growth and leadership in the Electric Vehicles space.

India’s Efforts To Push Electronic Vehicles -

In 2013, India began pushing hybrid and electric vehicles via the National Electric Mobility Mission Plan 2020 ("NEMMP") with the goal of achieving national fuel security. The government's objectives at the time were to offer financial and fiscal incentives to promote the developing technology and offer financial assistance to prospective purchasers in order to make a purchase.

Faster Adoption and Manufacture of Hybrid and Electric Vehicles in India plan I ("FAME 1") was introduced in 2015 by the Ministry of Heavy Industries with the goal of stimulating interest in EVs and facilitating their widespread adoption through the development of a market, a range of supporting technologies, and a variety of test and demonstration programs. However, even after significant amounts had been spent over a period of four years, an independent consultant gave FAME 1 a negative evaluation due to the system's subpar performance in important goal metrics, such as fuel savings and carbon dioxide reduction. As a result, the MHI notified FAME 2 of the situation.

FAME 2, which has been given a new deadline of 2024, intends to encourage consumers by lowering the upfront cost of EV purchases (including under income tax, and boost demand for a specific number of EVs across categories.

In order to qualify for FAME 2 subsidies, manufacturers must meet phased manufacturing program ("PMP") criteria for increasing the percentage of electric vehicle ("EV") components sourced from within the country. Also, in order to support domestic production, the previous Budget increased the already high customs charges on imports of semi-knocked down and built EV units.

The Production Linked Incentive ("PLI") program was given the green light by the government in 2021 for the automotive sector, which encompasses electric vehicles (EVs) and the production of Advanced Chemistry Cells ("ACCs").

ACCs are a relatively new technology that could eventually take the role of lithium-ion in the manufacture of EV batteries. So, in the absence of additional advancements in green hydrogen technologies, this PLI program aims to lower import dependence, battery prices, and eventually, EV costs. Some Indian states have established policies relating to the production of EVs, including subsidies, exemptions, and other incentives on top of those granted by the central government.

Tackling The Waste and Emissions -

It was proposed in the Draft National Auto Policy of 2018 (the "Draft NAP") that provisions be made for the banking and trading of carbon dioxide ("CO2") credits by vehicle manufacturers. In this scenario, credits that are awarded to a manufacturer may either be: (i) utilised to compensate against debits, or (ii) traded/transferred among businesses. The Draft NAP also proposed that businesses be permitted to organise a pool in order to more effectively manage their CO2 emissions.

Recent changes were made to the Energy Conservation Act, 2001 to enhance the existing system for controlling energy consumption. A carbon credit trading plan is one area where the EC Act has been updated to give the federal government more authority. Emissions from motor vehicles, as specified by the Motor Vehicles Act of 1988, are also now within the purview of the EC Act. According to the modification, there might be a fine of up to INR 10 lakh for failing to adhere to the rules. Manufacturers of vehicles that violate the fuel consumption standards are subject to an extra fine of up to INR 50,000 per unit sold.

In light of the foregoing, the Bureau of Energy Efficiency may establish energy consumption criteria for automobiles and institute a carbon credit system to ensure adherence to fuel efficiency regulations. According to recent news accounts, a nationwide carbon market mechanism is scheduled for implementation this year. The BEE created a preliminary plan for such a market and made it available for reviews by interested parties in late 2021. In the future, carbon credits may be awarded to charging stations that use renewable energy to power EVs. The idea is that the owners of electric vehicle charging stations could benefit from this secondary revenue source by charging for their services.

In the meantime, the Ministry of Environment, Forest, and Climate Change notified the public in 2018 of the Battery Waste Management Rules, 2022 which are intended to replace an older piece of legislation. Producers, sellers, and importers ("producers'') are responsible for collecting and recycling/refurbishing batteries that they introduce to the market with "extended producer responsibility." Producers can employ or approve any other organization to fulfil these EPR requirements. In order to fulfil these duties, the BWM Regulations also want to make it possible for producers, recyclers, and refurbishers to exchange EPR certifications.

In addition, the BWM Regulations are designed to support the development of new industries and foster entrepreneurship with regard to: (1) the collection, recycling, and refurbishment of used batteries; and (2) the use of recovered materials from such waste to create new batteries. The BWM Guidelines aim to encourage the development of innovative recycling and refurbishment technologies and the injection of capital into these sectors by establishing a minimum recovery percentage.

Focus On Charging Infrastructure -

The Ministry of Electricity updated its guidelines and regulations for EV charging infrastructure around a year ago, and they were last modified in November 2022. Private companies are already devoting resources to developing and deploying electric vehicle charging and battery switching infrastructure. The 2016 model building rules were modified by the Ministry of Housing & Urban Affairs to add enabling clauses that would allow the installation of EV charging infrastructure in residential and commercial building premises, as well as in key urban areas. Furthermore, the Budget's announcement of viability gap funding (VGF) for battery energy storage systems ("BESS") is anticipated to result in the construction of new essential facilities.

Present and Future Innovations -

In 2021, the Centre for Study of Science, Technology and Policy ("CSTEP") carried out a pilot experiment known as the "CSTEP Study" with the goal of determining whether or not the solar rooftop photovoltaic ("SRTPV") technology can be used on a larger scale in Indian cities. CSTEP aimed to show how solar energy may be used to charge electric vehicles because India's power infrastructure still relies heavily on coal. According to the CSTEP Research, SRTPV systems have a number of benefits, including (i) being a financially feasible technology for the goal of obtaining clean energy, (ii) being easily installable due to their modular form, (iii) offering a low-cost alternative and/or supplement to traditional grid-charging, and (iv) potentially mitigating the negative effects of demand spikes with respect to grid-based EV charging. As a result, CSTEP investigated the financial aspects and advantages of using grid-connected SRTPV to power EVCS both with and without a BESS. In this context, the CSTEP Study recommended implementing net metering at EVCS to address the discrepancy between the generation and consumption of solar energy.

Yet, it is possible that the electrification of road transportation and the deployment of decentralised renewables like rooftop solar would increase the complexity of managing power grid distribution in the long run. This means that even in a pessimistic scenario, major cities may experience grid congestion. As a result, it might be necessary to use "smart" charging methods and the digital grid. This possibility is acknowledged in reports produced in collaboration with NITI Aayog. Consumers may more effectively utilize battery storage and boost the use of renewable energy with smart charging thanks to improved load control features, usage-based analytics, automatic payment, and ultra-fast charging technologies. Also, the EVCS market will benefit from advancements in technology like portable charging stations and bi-directional charging.

Key Focus Areas -

Efficient Charging and EV Fleets -

When compared to other EV markets, China has a significantly larger share of fast charging stations—more than two out of every five publicly accessible ones. Certainly, public charging infrastructure in China has been rapidly deployed thanks to government subsidies and proactive growth initiatives implemented by public utilities. Meanwhile, new use patterns like electric taxis, ride-sharing, and other public/logistics fleets have increased the profitability of the EV charging business as a whole thanks to legislative limits on energy costs and a growing demand for public charging (resulting, in turn, from greater urban consumption). Also, the cost of manufacturing the fundamental charger modules for fast charging stations has been significantly reduced (by roughly 70%) thanks to the speed and scale at which EVSE have been deployed in China.

Public charging access needs to change in a way that is proportional to the sector's expansion and increasing level of complexity. In particular, the long-term goal of the EV ecosystem must be to achieve a degree of functionality that consumers are accustomed to in conventional cars. However at the moment, only private hubs are used for most EV charging.

Factors such as real estate costs, average commute times, population density, and the prevalence of 'private' charging stations should all be taken into account when determining the optimal density of charging stations for electric vehicles (at home or at the workplace). While private charging methods are probably going to continue to satisfy a sizable portion of the total demand, there is still a huge need to increase the availability of public charging stations. Moreover, EV chargers must be both easily available to the general public and quick in order to accommodate extended trips. Range anxieties alone may continue to be a major barrier to widespread EV adoption until consumers who lack the resources to utilise private EVCS are given the right incentives.

Need For ZEV -

Industry players have proposed that India may need a government mandate for Zero Emission Vehicles ("ZEV") due to the fact that new registrations of EVs still make up less than a twentieth of yearly sales. Credit trading mechanisms to incentivize increased production or sales of electric vehicles may be implemented if such a law were enacted. ZEV regulations with credit/offset-based features and financial penalties for non-compliance, as implemented in the EU, China, and a number of states in the US, have contributed to a meteoric rise in EV sales. For instance, California, which is home to more zero-emission vehicle (ZEV) models than the rest of the United States put together, has a credit requirement in the form of a percentage that can be met through the trading of credits.

In fact, ZEV requirements across the globe have aided in accelerating the adoption of EVs in conventional transportation, in part by broadening the product selection, offering innovation road maps, lowering costs, encouraging investments in charging infrastructure, and overall fostering investor and consumer confidence. Moreover, India might restructure its current fuel economy regulations in a way that supports technological innovation, much like Europe has done to promote increased electrification. So, domestic producers may be encouraged to produce more EVs for the fleet average standards.

Lithium is one of the essential raw materials that must be imported -

India continues to be significantly dependent on imports from China and Hong Kong to meet domestic demand for lithium and lithium-ion for use in the manufacture of EV batteries, as is seen from a 2022 press release released by the Ministry of Mines. Around 40% of an EV's overall price is attributable to Li-ion batteries. India's original equipment manufacturers ("OEMs") and, ultimately, its consumers, are still constrained to purchasing more expensive EVs than conventional vehicles because of supply chain challenges and a strong reliance on imports. As a result, the worldwide supply chain disruptions continue to threaten the Indian EV industry.

Lithium, nickel, cobalt, and manganese make up 80% of the cost of an EV cell, and India's lack of access to these components is a big stumbling block to the country's EV growth. Lithium and cobalt reserves are limited in India, and the country also lacks the essential equipment for mineral refinement.

How China Became The Leader In Electric Vehicles Market -

China's rapid ascent to the top of the global electric vehicle production and consumption charts happened before the majority of the population caught on to the magnitude of the shift. China has been the largest market for electric vehicles for eight consecutive years, and this trend shows no signs of slowing. In the space of only two years, the number of EVs sold annually in the country increased from 1.3 million to a staggering 6.8 million. To put it in perspective, in 2022, the United States sold just approximately 800,000 electric vehicles.

Even the most knowledgeable observers have been taken aback by the industry's rapid growth. Along with sustaining China's car industry's growth throughout the epidemic, this supremacy in the EV market has also helped China advance its goal of being a global leader in climate policy.

The question remains, how could China accomplish this feat? The government has played a crucial role in the EV industry for quite some time, maintaining both the supply and the demand for electric vehicles. A plethora of domestic EV companies have developed and are continually optimising new technologies to meet the real-world needs of Chinese consumers as a result of government subsidies, tax breaks, procurement contracts, and other policy incentives. As a result, there is now a sizable population of young people on the market for electric vehicles.

Yet, the history of the sector's development involves more than simply Chinese government policy; it also involves Tesla, Chinese battery technology researchers, and consumers across the rest of Asia.

What Prompted China To Begin Investing In EVs And When Did It Begin?

Prior to making a significant investment in EVs in the early 2000s, China's auto industry was in a difficult situation. It was a major player in the production of conventional internal-combustion vehicles, but none of its home-grown brands were competitive with the imports that dominated the market at the time.

They understood that they would never catch up to the American, German, and Japanese legacy automakers in terms of internal combustion engine innovation. Furthermore, Japan and other nations were already taking the lead in hybrid car research, where the early years' batteries played a secondary role to the gas engine. As a result, China was not really able to compete.

This prompted the Chinese government to abandon proven technology and make investments in whole new fields, such as battery-powered automobiles.

There was a great deal at stake; electric vehicles were still in the experimental phase at this point, with major automakers like Toyota and GM abandoning them after only a few years. Yet, the potential payoff was substantial: China could gain an advantage in what could be a sizable portion of the car industry.

Yet, countries that had excelled at making gas or hybrid cars had less of a reason to seek new forms of vehicles. In the case of hybrids, for example, Japan was already standing at the pinnacle, so it failed to see why it needed to electrify the auto sector.

Additionally, EVs could help China address a number of other pressing issues, including reducing the country's chronic air pollution, its dependency on foreign oil, and its need to revive the economy after the 2008 financial crisis. For Beijing, it appeared to be advantageous.

China was starting out with a leg up due to pre-existing advantages. EV production uses a different technology, but it still needs the old auto supply chain's collaboration, and China had a respectable one. A budding EV industry can be supported by the same manufacturing capabilities and low-cost materials that kept its gas-car factories running.

As a result, the Chinese government started making investments in related technologies in 2001. In the country's Five-Year Plan, which is its most comprehensive economic strategy, EV technology was included as a priority science research project.

Once Wan Gang, an auto engineer who had spent the previous decade working for Audi in Germany, was appointed China's minister of research and technology in 2007, the sector received a substantial boost. Wan was an early adopter of electric vehicles (EVs), having driven the 2008 Roadster, Tesla's initial EV model. People now give Wan credit for making the national decision to put all of eggs in the basket of electric automobiles. From that point on, the growth of the electric vehicle industry in China has been a staple of the country's long-term economic strategy.

What Did China Do Exactly?

The Chinese government is particularly skilled at concentrating resources on the industries it wishes to expand, and this trait is inherent in the nature of the nation's economic system. It has recently begun doing the same with semiconductors.

Beginning in 2009, the nation started providing financial aid to EV manufacturers who make buses, taxis, or personal vehicles for consumers. Less than 500 EVs were sold in China during that year. Nonetheless, having more cash allowed businesses to continue investing in their models. Also, it meant that people could purchase their own EV for less money.

The government invested more than 200 billion RMB ($29 billion) in related tax incentives and subsidies between 2009 and 2022. Even though the subsidy scheme was officially discontinued at the end of the previous year and replaced with a more market-oriented system known as "dual credits," it had already achieved its goal: the more than 6 million EVs sold in China in 2022 represented more than half of all EV sales worldwide.

Through awarding procurement contracts, the government additionally assisted local EV start-ups in their early years of operation. Public transportation in China has been using electric vehicles since around 2010, before they were widely adopted by consumers.

Many trains, subway cars, buses, cabs, etc., operate in China. In addition to federal and local incentives, some states also provided citizens with incentives to buy electric vehicles. Obtaining a licence plate for a gas-powered vehicle in densely populated areas like Beijing can take years and cost several thousand dollars. Yet, those who chose to buy an EV were essentially exempt from the process.

Last but not least, local governments have occasionally collaborated closely with EV businesses to create rules that can support the growth of the latter. In the EV market, for instance, BYD, a Chinese business that is presently challenging Tesla's dominance, grew to prominence by maintaining a strong relationship with Shenzhen, a city in the country's south and helping it become the first city in the world to fully electrify its public bus fleet.

Thus, China leads the world in EV sales. But where does Tesla, the most well-known individual EV manufacturer, fit in?

Indeed, Tesla's ascent to the position of largest EV firm has been closely linked to the development of China's EV industry.

Despite monetary rewards, regional Chinese governments have actively courted Tesla to establish manufacturing operations there. Tesla was able to construct its Gigafactory in the Chinese city of Shanghai at a breakneck pace in 2019 due to the city's accommodating regulations.

China now plays a crucial role in Tesla's supply chain. More than half of the Tesla cars scheduled for delivery in 2023 will come from the Shanghai Gigafactory, which is now Tesla's most productive manufacturing facility.

Yet, the gains have been shared; Tesla has also been quite beneficial to China. In other words, the company forced Chinese brands to develop and try to catch up with Tesla in everything from technology advancement to affordability. This is known as the "catfish impact" on the Chinese EV industry.

How The Battery Helped Transform The Electric Vehicles Market -

The battery cells, which can account for up to 40% of the cost of a car, are the most crucial component of an electric vehicle. A powerful, dependable, yet reasonably priced battery is the most crucial component in creating an EV that is commercially feasible.

Chinese companies made significant strides in battery technology. To be more specific, Chinese businesses have promoted lithium iron phosphate batteries, or LFP technology, over the past ten years as opposed to the much more widely used lithium nickel manganese cobalt (NMC) batteries in the West.

LFP batteries are safer and more affordable than traditional batteries, but historically they weren't the best option for automobiles due to their lower energy density and subpar performance in cold weather. Contemporary Amperex Technology Co. Limited (CATL), a Chinese battery manufacturer, spent ten years studying LFPs while most of its competitors abandoned the technology.

The advantages of LFP batteries, which made up one-third of all EV batteries as of September 2022, are now being recognised by the EV industry once more. That demonstrates how far LFP has advanced, and sole credit for this breakthrough belongs to Chinese cell manufacturers.

One significant benefit China has had in the production of batteries is its control over a large portion of the raw materials. Although the nation doesn't necessarily have the most natural resources for battery materials, it has the bulk of the world's capacity for refineries when it comes to vital elements like cobalt, nickel sulphate, lithium hydroxide, and graphite. China's dominance over chemical materials is "the ultimate domination of the industry, which China has clearly pursued for years far before others even realised this was anything essential.

Other nations are already making agreements with Chile and Australia to take ownership of rare-earth metal mines as they have grasped the value of battery materials. But, China's head start has provided local businesses with a persistently reliable supply network.

Because China's manufacturing capacity has been and is still being expanded, Chinese-made EV batteries are not only cheaper but also more widely available.

How Does The EV Market In China Currently Look?

As a result of all of this, China now has a significantly higher domestic demand for EVs than the rest of the world: In a survey, more than 50% of Chinese respondents were considering battery-electric vehicles as their next car in 2021, which are twice the global average and the highest percentage in the world.

For these buyers, there are numerous Chinese-made possibilities, including BYD, SAIC-GM-Wuling, Geely, Nio, Xpeng, and LiAuto. The latter three are pure-EV start-ups that went from nothing to household brands in less than ten years, whereas the first three are examples of gas-car enterprises that successfully switched to EVs early on.

However, a new generation of automobile purchasers emerged at the same time as these businesses (as well as other Chinese IT behemoths), and they do not perceive Chinese brands as being less prestigious or of lower quality than foreign ones.

Can Other Nations Replicate China's Achievements?

Almost definitely, several nations are currently envious of China's EV experience. Even if they follow China's lead, it might not be so simple for them to succeed in the same way.

While the US and certain European nations have the technology capacity and supply chains necessary to significantly boost their own EV businesses, their political systems are likewise different. The question for any nation that wants to compete with China is, “Is it prepared to make investments in this industry like China did? Is it willing to grant this industry special protection and allow it to enjoy a very high degree of policy priority for a considerable amount of time?

Nations like Brazil or India lack China's historic car industry's size and sophistication in managing expansive industrial policies using a variety of policy instruments, such as credits, subsidies, land use agreements, tax incentives, and government procurements. But, China's experience implies that EVs may present a chance for emerging nations to surpass more developed nations.

Now, Chinese brands are focusing on foreign markets. What difficulties do they encounter?

Chinese EV companies believe they have a unique opportunity to grow internationally and establish themselves as household names. Despite its saturated market and the delicate political climate, several of them are already accessing the European market and even considering moving to the US. Chinese gas cars could not have imagined such a thing.

Yet, they might need to adapt their marketing lingo and techniques for other markets. They'll have to adjust to the various technical requirements and preferred software services. Also, they will need to develop the ability to satisfy various consumer preferences and customer service requirements.

China shipped 679,000 electric vehicles in 2022, a 120% increase from the previous year. It's likely that this trend will continue as the population grows.

Conclusion -

If India is to compete with China, Local battery manufacturing facilities and OEMs should improve their internal capabilities to reduce India's dependency on li-ion imports by forming international alliances, joint ventures, and acquisitions, among other strategies. Companies that produce metals and mine minerals may also make investments in order to develop their skills and buy resources from around the world. In the meantime, technology-driven start-ups in India have already begun to enter the cell/battery production market. In the end, it is crucial to develop home-grown EV cell technologies that are scalable and appropriate for local climatic circumstances, notably for reasons of passenger and vehicle safety. Similar to China, India must maintain a strong R&D focus and increase FDI in the industry.