Thursday, June 20, 2024

Mint Explainer: Is the craze for electric two-wheelers waning in India?

All is not well in India’s electric two-wheeler industry.

On paper, sales are booming. In the just-concluded 2022-23 fiscal year, sales grew by over 60% at nearly 8.5 lakh units. As has been the case in the past few years, the heavy lifting was done by high-speed electric-two wheelers that qualify for government’s Fame-II subsidies. This segment nearly trebled in size last year (2022-23) at 7.27 lakh units against 2.5 lakh units in the previous fiscal.

Yet, things are not particularly rosy. Even with this growth, the industry has missed the projected one million units sales for the fiscal by 27%. Ominously, actual sales lagged projected sales in each month of the year, which indicates a deeper malaise and not something temporary like a price hike or an interest-rate revision.

Two major factors are at play here. One, the government’s decision to withhold subsidies to companies pending an investigation into allegations of under-invoicing and not meeting localisation requirements. This started affecting sales in the aftermath of the festive season in October. Even on a month-on-month basis, the performance of the industry was dire, with sales below 70,000 units when they should have been near 100,000.

At the heart is confusion over whether manufacturers met localisation norms to avail Fame subsidies or flouted them. Also in question is whether the norms were too stringent in the first place and hence too difficult or even impossible to comply with. This is not improbable considering the allegations are against almost all companies, including the big five — Ola Electric, Ather, Hero Electric, Okinawa and Ampere.

There is no easy fix to this and if the government is strict, it will take time to resolve. In the meantime, with the subsidies withheld, some companies are facing a shortage of working capital. The funding winter in the startup ecosystem has also dampened spirits. These are major headwinds.

The other major factor is a spate of consolidation that’s sweeping in the industry. Slicing and dicing data for February 2023 versus 2022 shows the extent of this. While the total number of players in the market has gone up from 93 last year to 173 this year, the number of companies that are selling over 1,000 units in a month has fallen from 10 to 7. Moreover, the share of the top five players in overall sales has gone up from 67% earlier to 79% this year. This indicates bigger players are scaling up and taking bigger chunks of the pie while smaller players are left to fight for leftovers. This is not a sign of a healthy, profitable industry.

The number of companies with sales between 100 and 1,000 units has gone up from 18 to 24, which suggests inability of some players to scale up sufficiently. The effects of the funding winter are at play here. Companies with sales less than 100 units also went up from 65 to 142, accounting for most of the new entrants.

This consolidation is not entirely unexpected. Experts always believed the two-wheeler market in India could support only about a dozen mass-market players in the long term. Consolidation, however, was expected to happen after 2025, after the expiry of Fame-II subsidies.

What does this mean for electric two-wheeler sales? EV penetration in India, at a little over 5%, is still in its infancy and offers tremendous room for growth. The next few quarters will see legacy players like Hero MotoCorp, TVS, Honda and Bajaj get more aggressive with their EV two-wheelers. This will surely expand the market, though some of it will come at the cost of the smaller startups.

On the low base of under a million units — the overall two-wheeler industry volume is a hefty 16 million in comparison – sales are bound to go up, albeit at a slower clip. But on the evidence of 2022-23 and the churn already underway, even the most pessimistic Niti Ayog projection of 72% penetration by 2031-32 seems off the charts.

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