Upscaled EV manufacturing needs zero emissions mandate

Two recent developments in the electric vehicle (EV) space have stirred a lot of interest. One is the announcement of the new EV policy to attract global investments and promote EV manufacturing, with adequate value addition in the electric car segment.

The other is the new reports on a very significant suggestion included in the working paper of the Economic Advisory Council to The Prime Minister (EAC-PM), co-authored by EAC-PM chairman Bibek Debroy and director Devi Prasad Misra, to fix an EV output quota for auto companies. 

While the new EV policy has evoked a mixed reaction in the industry over the potential impact of competition from foreign players and imported vehicle models, the onboarding of the idea of fixing e-vehicle quota annually by the EAC-PM awaits much deeper support to make this a reality and a game changer. 

The new EV policy is asking for a minimum amount of Rs 4,150 crore to attract foreign investments. It will use this to set up manufacturing facilities in three years and target for commercial production to reach 50 per cent of domestic value addition within five years.

There will be a sharp reduction in customs duty from 100-70 per cent to 15 per cent on imported vehicles, with a minimum cost insurance freight value of $35,000 and above for five years. The duty foregone on the total number of permitted EV imports is limited to Rs 6,484 crore (equal to incentives under the production-linked incentive scheme), whichever is lower.

This policy allows the import of completely built EVs at a concessional duty, on condition of setting up manufacturing facilities later. A maximum of 40,000 EVs at no more than 8,000 per year for five years is allowed if the investment is $800 million. This is targetting global car makers and those aiming to make India an EV export hub.  

It is not clear yet how this policy will play out and how the takers will respond. There is speculation about the new competition. Market watchers expect new model entries in the expensive high-end car segment, which has a smaller market share in India with a only few models of domestic manufacturers.

It is not yet known how the targeted localisation will eventually impact the affordable car space and the mass market dominated by domestic players.

Domestic players are reportedly worried about the competition at this early stage of electrification, when the EV production base is nascent, cost curves are high, volumes are low and the market is yet to mature.

Read Centre releases white paper on pathways to catalyse tech innovation ecosystem for e-mobility

They will have to step up to bring in advanced and better performing and diverse technologies quicker to survive the competition from foreign investors who have to meet the 50 per cent localisation target within five years. This also means that domestic players, who are still fence-sitting on the electrification agenda, have to fast pace their slow track.

Clearly, this new policy is part of the larger strategy to promote and support local manufacturing in order to leverage a low carbon strategy for a larger economic spin-off.

Already, production-linked incentives for advanced chemistry batteries and state-level EV policies have offered a slew of incentives for local manufacturing facilities. But for these to deliver on their intended objective, more effective levers are needed for sustained scalability of the market to reduce uncertainty.

Targets and mandate required

This makes the suggestion of the EAC-PM working paper — to set an annual target or quota for EV sales for the manufacturers — very significant and important.

Just relying on demand incentives as part of the Faster Adoption and Manufacturing of (Hybrid &) Electric Vehicles (FAME) strategy and state-level incentives to create an assured, scalable market is not adequate.

More is needed to address the barriers of ‘upfront cost, range anxiety, lack of model options, unknown resale value and early stages of technology development’, as reported to have been highlighted in the working paper of EAC-PM.       

This also needs a regulatory target for sustained fleet electrification and zero emission supply mandate for the EV manufacturers.

Reliance on only demand incentives makes consumers compete for a limited number of EV models in the market, that may put upward cost pressures. But a supply mandate for manufacturers to produce and sell a certain share of their annual vehicle production as EVs and also to meet their fuel economy target can put downward pressure on the cost curve, as they will have to compete for the market to meet their targets.

This competition can drive innovation and product diversification, increase choices for consumers and build consumer confidence. This actually works in the interest of domestic manufacturers.

Usually, it is assumed that the auto industry will not accept such a strategy. But a stakeholder opinion survey conducted by New Delhi-based Centre for Science and Environment in 2022 had shown that original equipment manufacturers (OEM) are actually not unwilling to accept the zero emissions vehicle (ZEV) supply mandate.

But they are conservative about targets. Predictably, their preferences for indicative targets vary across segments, depending on their expected growth in the segment.

While two/three-wheeler OEMs are open to potentially higher regulatory targets, the car OEMs advocate a minimal target. But it is still important to begin quickly — even with a conservative target. This can give a reality check to Society of Indian Automobile Manufacturers’ own voluntary EV target of 40 per cent and to the Centre’s own intended aspiration of transformative electrification in the timeframe of 2030-40. This can put all policy accelerators in full gear.

The ZEV supply mandate and regulatory targets, along with stronger fuel economy standards and credit trading mechanisms, can enable better leveraging of all policies in place — including demand incentives, production-linked incentives as well as state policies — for quicker acceleration. Resultant economies of scale and lower costs can, in turn, reduce subsidy burden subsequently and allow the EV initiative to be more revenue neutral.

More assured and sustained market development can also accelerate supportive national battery development programmes for large-scale cell production and commercialisation of mature cell technologies, development of new cell chemistries, stronger, reliable and affordable supply chain of critical minerals and higher levels of technology readiness in India.

Be it localisation, mobilisation of foreign investments, or India’s own effort to secure minerals from overseas and domestic mining to support domestic manufacturing — tying up such massive investments can become more viable and catalytic, if industry has a regulatory target and ZEV supply mandate for a long-term policy visibility of a scalable market.