Electric Vehicles – Threat or Opportunity for Incumbents?

India is steadily moving towards higher adoption of electric vehicles (EVs), with ~5% of 2-wheeler sales in FY23 being of electric vehicles. This follows global trends, which are seeing rising share of electric vehicle sales. Electric Vehicles can be helpful on the road to Net Zero, with reduced emissions around the vehicle, and reduces India’s dependence on oil as a source of power.

A key question arising in several minds has been this – how does this trend impact the current set of Indian automobile and automobile ancillary manufacturers? Does it threaten their existing plants and supply chains? Or does it give rise to newer revenue streams, and greater size of opportunity?
 

Source: Vahan Database. Note: 2Ws – 2 Wheelers, PVs: Passenger Vehicles

Higher Wallet Share of Vehicle Cost – Value Capture

Currently, it is estimated that over 60% of the lifetime cost of owning a vehicle is fuel costs. As fuel is replaced by batteries, the wallet share of automotive industry could rise substantially. In fact, higher adoption of electric components, gives potential shift from unorganized to organized players in the after-sales service and aftermarket revenue. Further, as cars become smarter, there is potential to monetize data such as owners’ behavioural patterns for automobile makers.
 

Source: Kotak Securities
 

In the traditional internal combustion engine, the West had technological advantage for more than 100 years. The developing technology of EVs offers opportunity for Indian automotive industry. It’s rising amount of skilled Indian manufacturers and labour force offers competitive advantage. Indian manufacturing is known for its frugal mind-set on costs – coupled with large domestic scale and cheaper cost of labour, Indian EV manufacturers can potentially have a relative cost advantage globally. Further, government focus on supporting domestic manufacturing to enhance self-reliance has seen significant benefits towards automotive manufacturing, with specific incentives for new technologies such as batteries.

The EV led change will affect different parts of the industry differently – with segments such as batteries and electric components getting higher revenue potential, while Engine components and Exhausts losing relative relevance. Meanwhile, some segments will see relatively no impact, such as lighting and exteriors.

Way Forward

Source:Morgan Stanley

Conclusion:

India’s automotive space finds itself at an interesting point, as both demand and supply trends support growth. On the demand side, factors such as rising incomes, higher urbanisation rates, demographic dividend, and themes such as premiumisation and higher mobility needs support growth. On the supply side, there is adequate focus on manufacturing from a policy point of view, while balances sheets allow taking leverage for growth. Government focus on transport modernization also plays well into growth, scale and efficiency tailwinds for the broader transportation and logistics theme.

In this light, advent of electric vehicles in India and globally could prove to add to the overall pool of revenue available to the Indian automotive industry. To take advantage of the growth in the Indian transportation and logistics theme, Investors could consider investing in the HDFC Transportation and Logistics Fund. The NFO period for the fund is July 28, 2023 to August 11, 2023.

Sources: Vahan Database, Kotak Securities, Morgan Stanley, Press Information Bureau, and other publicly available information

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HDFC Transportation and Logistics Fund: An-open ended equity scheme investing in Transportation and Logistics themed companies