EV adoption likely to stem foreign exchange outgo on oil imports

The sharp increase in imported fuel prices could well speed up the day when the overall foreign exchange outflow on an electric car powered by a 30 kWh lithium ion battery will be equal to, or below, that of an internal combustion engines (ICE) car of the same model.

The foreign exchange outflow has two elements. The imported cost for manufacturing  an electric car is very high compared to a ICE-powered model. The second element is the operating  cost of  running the vehicle by using  imported  fossil fuels through  the  entire life cycle of an  ICE-powered car which is assumed to be 15 years with an average run of 12,000 kilometres annually. An electric car hardly has any operating cost which leads to a foreign exchange outflow in the same period.    

Once this happens,  the government will be able to reduce its overall foreign exchange outflow due to a burgeoning fuel import bill —this is a key goal in pushing electric vehicles, apart from the need to reduce carbon emissions.  

According to Nomura,  Its research had pointed out that in 2020, the import cost of an electric car was more than double that of an ICE-powered car (the import cost in manufcturing and also imported fuel cost) of the same model. It had assumed that an ICE car would require around Rs 3 lakh of imported oil (minus all taxes) for the entire life cycle of the vehicle.  

But, based on an assumption that oil prices will remain stable throughout, the research had projected that by 2030 the gap will not only be bridged but that the import cost of an electric car will be lower than an ICE powered car of the same model.

However, with the price of oil breaching Rs 100 per litre due to the prolonged Russia-Ukraine war and the speed at which the government is pushing for localisation through the Production Linked Incentive scheme, the gap could close much faster. Exactly when, though, is difficult to predict owing to the volatility of oil prices.

Nomura’s research says that the manufacturing import cost of an  electric car in 2020 was eight times that of an ICE car of the same model. In 2025, it will be 6.2 times. In 2030, it will be 4.3 times (see chart). The reasons are simple: the benefits of localisation through local supply chain development, higher electric vehicle penetration and the proliferation of charging stations will reduce the dependency on imports.

Unlike in ICE vehicles, where localisation in the most popular cars has reached over 80 per cent, the scenario in electric cars is very different.

Industry estimates say that in some of the popular electric cars manufactured here, imports account for 40-46 per cent of the total manufacturing cost.  The key components which

constitute the bulk of the imports are the cells which go into making the lithium ion battery and the components which go into the making of the motor and the motor controller.

The cost of the lithium ion battery accounts for 43 per cent of the total cost of manufacture and 80 per cent of the cost of making a lithium ion battery is the cells and they are not manufactured in India. A similar percentage of the cost of manufacturing controllers and motors is also imported. Motors and controllers account for  14 per cent of the overall manufacturing cost.

Clearly, the government is aware of the large import dependency in manufacturing electric vehicles which is why it has been pushing for localisation. It is why it has identified eligible players for two Production Linked Incentives schemes: one for the manufacture of electric vehicles and the other for the manufacture of advanced chemistry cells to power batteries. It has also earmarked over Rs 18,100 crore as incentives to be given to the players as part of the grand plan for the localisation of  advanced chemistry cells batteries.