India's auto sector at crossroads: Adapting to EVs and global competition

The Bharat Mobility Global Expo, being held in several locations in the National Capital Region, provides an opportune moment to consider the state of the automobile-manufacturing ecosystem in India. It is worth remembering that this was, till recently, one of the few sub-sectors of manufacturing where India had demonstrated competence. In particular, the automotive-component business had managed to reach a level of proficiency that was reflected in healthy export earnings and sustained relationships with global original equipment manufacturers (OEMs). India also had large private-sector companies in the OEM space that were able to incubate research and development and open up new markets. Yet it has to be acknowledged that the sector is going through a period of transition, to which India is yet to have a clear response. This transition is defined in particular by three trends: The technological shift from internal combustion engines (ICEs) to hybrid or electric vehicles (EVs); the vast overcapacity being built up in China; and the subsidies and support being provided for reshoring in the large consumer markets of the West.

 

The context of these three trends provides a ceiling on the size and growth of Indian ICE-focused companies in the automotive sector. Some of these have healthy balance sheets, driven by growth domestically in the medium and large utility vehicle space. But a dependence on domestic growth has its limits, as is becoming increasingly obvious. The question is where the next motive force for the sector will come from, and even whether it is sufficiently future-proofed against these three disruptive trends. The reports from the auto expo underline the fact that much of the energy has shifted away from Western OEMs to Chinese carmakers.

 

BYD, for example, has promised to expand the range of its cars available in India. There are quantitative restrictions and tariffs on imports, but it is possible that Indian consumers will buy whatever is available. Yet, for geopolitical reasons, India has put restrictions on Chinese investment in India. Given that the geopolitical climate is changing alongside the technological landscape, it may be time to revisit this decision. A $1 billion investment offer to India by BYD in partnership with a local firm for focusing on re-export to peer markets deserves re-evaluation, for example. Other such opportunities might also be sought. It is to be noted that the same company said yesterday that a $1-billion plant in Indonesia would be completed by the end of this calendar year. If India waits much longer, it might lose out on the technological frontier.

 

The auto-component sector must also be given time to evolve, through the creation of alternative ecosystems. It has been noted that such investment has created commercial complexes and ecosystems in locations in Southeast Asia and Mexico. India’s security concerns about Chinese investment in core infrastructure are eminently defensible. But investment in other manufacturing sectors, particularly EVs, may not have the same security implications. The fear is that India will be shut out of the legacy export markets in the West while also being cut off from technological innovation like in EVs. This could end up creating only a high-cost domestic industry that leaves both consumers and producers worse off.