E2W makers gear up for scale, hope FAME will continue to fuel operations

Electric two-wheeler (E2W) companies see FY24 as the year to build scale. Most companies say they are planning to ramp up volumes, raise fresh capital, expand distribution, launch an array of new products, and take their first steps into global markets.

Crucially, FY24 will also test their abilities to survive without the second edition of Faster Adoption and Manufacturing of (Hybrid) and Electric Vehicles (FAME II) subsidy, which ends this financial year. Most companies want it extended for a year or two.

The subsidy ranging from Rs 40,000 to Rs 60,000 a vehicle covers 40 per cent of the ex-factory cost of the vehicle and helps manufacturers sell at affordable prices to customers. Even companies investing in R&D concede that despite some re-engineering they will need to increase prices after FAME.

Some players are banking on the production-linked incentive (PLI) scheme if subsidies are stopped. Under this scheme, the government is offering sops from 13 to 16 per cent on incremental sales of a particular year over a designated base year.

That would certainly provide eligible players such as Ola, Bajaj and TVS a cushion to reduce costs. But several other companies, such as Ather, Hero Electric, Okinawa or Ampere, have not qualified for the scheme because they do not meet the minimum net worth criterion under PLI. This could create an uneven playing field — and scope for another battle. Talks are on with the government to resolve it.

With sales falling by a fourth over March, the first month of FY24 has been dismal, after the government pulled up manufacturers for allegedly violating subsidy norms and withheld over Rs 1,200 crore of subsidies from October last year and threatened some with de-registration.

But after hectic parleys with the Department of Heavy Industry late last week Ola, Ather, TVS and Hero Motocorp, which account for 62 per cent of an E2W market that has more than 90 players, agreed to collectively pay Rs 287 crore back to their customers for pricing them separately for battery chargers.

In return the government will disburse over Rs 800 crore of the withheld subsidy in phases. Hero Electric and Okinawa, which have been threatened with subsidy recovery notices, are also in talks with the department to settle their specific issues on under-localisation. Now, they have announced plans collectively to invest $450 million to grow capacity and localise the supply chain.

So, what are companies planning after a tumultuous two months? In FY23, E2W volumes hit 0.73 million and a penetration of 4-5 per cent of the overall two-wheeler market, missing the industry target of around one million. Going forward, manufacturers expect sales to more than double to 2 million but with one rider. The government must signal as early as possible an extension of FAME, even if the per unit subsidy is lower.

But that target might look conservative if the largest player in the business, Ola Electric, is able to deliver the goods. Ola Founder Bhavish Aggarwal is looking at a four-fold increase this year over its total sales of 250,000 since its launch. To make that a reality it is ramping up annual production from 0.5 million to 1.5 to 2 million this year.

Ola Electric has the advantage of deep pockets. The unlisted SoftBank-backed company has raised over $866 million in various tranches and is valued at $5 billion. And with the two-wheeler business EBITDA-positive, it plans to raise money again.

Aggarwal is not the only one. Chennai-based TVS has announced plans to spin off the electric vehicle business into a separate company and reports suggest it hopes to raise $250-300 million. Armed with pending bookings of over 30,000 electric scooters and sales of 100,000, it is also focusing on scale.

At an analyst meeting last week, TVS CEO K N Radhakrishnan said: “It’s a milestone year for the EV segment. We are now in the investment phase and are building scale and also ensuring customer satisfaction. Profitability will come with scale, volume, variants, premiumisation, exports and cost reduction.” But Radhakrishnan also pointed out that both subsidies and PLI for E2Ws would clearly help.

Ather, the third key player, has ramped up volumes and value three to four times year on year, starting from 7,000 in FY21 to over 100,000 in FY23. Can it sustain that momentum? The management doesn’t offer projections but analysts tracking the company said it already has plant capacity to hit 400,000 though it will also need to invest in its supply chain.

That investment decision, however, would depend on FAME. The company has a bigger cushion if the subsidy is not extended because it charges around 30 per cent more than competitors. But it also has the disadvantage of not being eligible for PLI.

The key to increasing volumes is to offer more products at varying price points and expand distribution and markets. Now, manufacturers are discovering a large global market in South East Asia, Latin America and even Europe.

Aiming for volumes Ola is launching the Ola S1 Air at Rs 84,999, its lowest priced E2W in July. Three to five variants of scooters are expected this year. An e-bike is also planned in the second half of FY24. Bikes account for 60 per cent of the internal combustion engine (ICE) two-wheeler market and there is almost no competition in the green version.

TVS, too, has promised new products at different price points. As Radhakrishnan said, “We will be bringing in new products apart from the iqube that are relevant to various customer segments, and we will build scale.”

He added that they have seen huge demand for the 1Q from international distributors, which they could not fulfil for lack of capacity. But this will change as it is planning to make a foray in the global markets by the second quarter of this year.

Ather also sees an opportunity for exports. A senior executive said it plans to test the markets in South East Asia and Latin America for the first time this year. In terms of product line its strategy is simple — it will avoid segments where margins are negative just for the sake of building volumes. One key element of the strategy is not to get into the sub-Rs 1 lakh segment (as Ola is now doing) and where companies such as Hero Electric, Okinawa and Ampere have focused.

But market reach is a major focus. A senior executive of the company said, “The scope for expansion is huge. ICE players have over 4,000 showrooms and distribution points, the electric vehicle players have barely 200.” The company plans to double its touchpoints from 200 and is looking at doing the same with its 120-odd outlets.

Clearly, most E2W makers are gearing up to expand in the year ahead. The big question is whether this expansion will be with or without the FAME fuel.