Electric vehicle market: A marathon or a sprint?

Electric vehicles have seen a stupendous 3x rise in sales in the previous fiscal, but sales are dominated by two and three wheelers, and still a small fraction of the total addressable market. However, with signs of consumer behaviour change, aggressive expansion by industry players and an overall push to the ecosystem, mass EV penetration could come in sooner than expected.

• EVs promise benefits on several fronts – lower running costs, zero carbon emissions, government subsidies, convenience of charging at home, no noise pollution, etc. For India, they could provide a vital solution to bring down the huge oil import bill.
• The cost, convenience and easy availability of charging are key challenges. This is not even a factor with the conventional petrol/diesel cars, thanks to decades of infrastructure development on their side.
• However, in the face of these challenges, change is sweeping the automotive landscape and EVs are here to stay. According to data from Federation of Automobile Dealership Associations of India (FADAI), electric vehicles witnessed a humungous 3x surge in FY 2022, with sales of 429,217 EVs compared to 134,821 EVs in the previous year.
• With costs declining consistently and charging infrastructure coming up at a feverish pace, electric vehicles could become mainstream in the market sooner than expected.

When a new product category is introduced in the market, it has to face a difficult period initially, which is characterized by high buyer inertia. If the product and technology represent a radical change in conventional consumer patterns and sensibilities, a large number of buyers will perceive the purchase to be risky, especially if it comes at a high initial cost.

Everett M Rogers wrote an iconic publication Diffusion of Innovation in 1962, where he presented a model to better understand this process. This model divides the market into Innovators (2.5%), Early Adopters (13.5%), Early Majority (34%), Late Majority (34%) and Laggards (15%); where percentages indicate the share of the addressable market. This follows a bell curve, where maximum adoption occurs in the Early Majority and Late Majority stages. These consumer categories differ in a number of ways, notably their financial background, social status, ability to take risk, identify new ideas, and new ways of doing things.

Now let us understand this process vis-à-vis the electric vehicle (EV) category, which is as radical as it gets from a consumer perspective. The Internal Combustion Engine technology that it seeks to replace was first introduced in the market in 1776, when Nikolaus Otto, Gottlieb Daimler and Wilhelm Maybach developed a practical four-stroke cycle (Otto cycle) engine. Nevertheless, EVs promise benefits on several fronts – lower running costs, zero carbon emissions, government subsidies, convenience of charging at home, no noise pollution, etc. For India, they could provide a vital solution to bring down the huge oil import bill.

NITI Aayog estimates that India can potentially conserve about 64% of anticipated passenger road-based mobility-related energy demand and 37% of carbon emissions in 2030 by pursuing a shared, electric, and connected mobility future. This would lead to a reduction of 156 Mtoe in diesel and petrol consumption in 2030 and net savings of roughly ₹ 3.9 lakh crore (approximately US$ 60 billion).

Consumers are well aware of the challenges of environmental pollution today as well as the benefits of cleaner transportation. As a consumer, though the key problem areas that would come to mind are the high initial costs, perceived risk of buying an electric vehicle and the behavioural transformation it entails.

The cost, convenience and easy availability of charging is a key challenge, which is not even a factor with the conventional petrol/diesel cars, thanks to decades of infrastructure development on their side. With the current level of EV charging infrastructure, buyers would immediately perceive EV ownership as a hassle, especially on long drives. Another factor is resale value of old cars, which can affect buyer sentiment.

However, in the face of these challenges, change is sweeping the automotive landscape and EVs are here to stay. According to data from Federation of Automobile Dealership Associations of India (FADAI), electric vehicles witnessed a humungous 3x surge in FY 2022, with sales of 429,217 EVs compared to 134,821 EVs in the previous year.

Electric two-wheelers still account for the overwhelming majority, selling 231,338 units over the year, even though they would also count for just 1.5% of total two wheeler sales. Many are linking this to the strong economic rationale, with the correspondingly rising prices of fossil fuels. Other factors fuelling the rise include the drop in EV prices with FAME 2 subsidies, growing numbers of launches, easy financing options and a buoyant youth market. Incidentally, today’s generation seems to be driven strongly by environmental conservation and sustainability.

According to CRISIL’s analysis, 2 wheelers and 3 wheelers have attained parity with ICE vehicles in the previous fiscal with runs of 6,000 km and 20,000 km respectively. By 2026, the parity may be strong enough for EVs to sustain in the market without subsidies.

A corresponding proliferation of four wheelers will take some time, as existing players are firming up their product roadmap and ecosystem. Tata Motors, for instance, launched a concept car Avinya based on the EV-only Gen-3 platform, and is getting into manufacturing of electric vehicles and semiconductors. Maruti is planning investments of around Rs 10,445 crore in Gujarat by 2026 for local manufacturing of Battery Electric Vehicles (BEVs) and BEV batteries.

The government has given a further push to EV penetration by tripling its budget under the FAME 2 subsidy scheme for FY 2022-23 to Rs 2,908 crore, which is nine times higher than FY 2021. Incentives for electric two-wheelers have been increased to Rs 15,000 per kwh from Rs 10,000 and the cap on incentive has been increased to 40% of the vehicle cost from 20% earlier. The scheme has already been extended to March 2024 from March 2022 in the original announcement.

Meanwhile, EV charging stations are expected to come up at an exceptional pace. The government made a landmark announcement in January this year, when it de-licensed public charging stations, thereby allowing any individual or entity to set them up more easily. EV owners can charge at homes or offices from existing connections at domestic tariffs. It is also offering government land to government/public/private entities to set up public charging stations on revenue share models.

ICRA states that India is likely to see around 48,000 additional electric vehicle chargers with investments of around Rs 14,000 crore by over the next 3-4 years amidst healthy EV penetration in the country. As this critical barrier to adoption dissipates, India could start approaching the centre of the Rogers bell curve in Electric Vehicles much sooner than earlier anticipated.