The EV revolution throws up new challenges for govt, auto sector

Foreign-owned electric-vehicle (EV) companies are expanding their footprint in India with remarkable swiftness. Vietnamese carmaker VinFast has begun accepting reservations for its VF6 and VF7 models. It has reportedly signed deals with dealers for physical showrooms in 27 cities in India. Meanwhile, Elon Musk’s Tesla has finally entered India and is taking orders from its Mumbai showroom for Model Y. The two companies, however, seem to have slightly different strategies. Tesla has chosen not to invest in a local factory, which might have allowed it to avoid paying tariffs on the imported Model Ys. As a result, the car is priced about 77 per cent higher than it is in the United States. VinFast, meanwhile, has not announced the final price for its vehicles; reservations for its vehicles are being taken with a deposit of ₹21,000. But it has claimed that it will spend $2 billion over the next five years on a plant in Thoothukudi, Tamil Nadu, and has further insisted that it will use this plant not just to service domestic demand but also to export to nearby markets. This would allow it to benefit from a government scheme that offers a rebate on tariffs. 

The growth of EVs offers some challenges to both the Indian automotive industry and, more broadly, the government. A recent study by economists at Imperial College, London, and Oxford University’s Sustainable Finance Group has pointed out that the impact on incumbent automakers in India will be variegated. Some, like Tata Motors, might benefit from a switch to EVs; others, like Maruti, might be disadvantaged. But the greater problem lies in the fact that EVs are fundamentally different from internal combustion engine (ICE)-based cars in terms of where the value is captured. The production process for ICE cars is far more disaggregated, with value — and thus profits — being earned at various places along the supply chain. For EVs, value addition is more concentrated, for example, in the production of batteries. This has serious implications for India’s auto-component sector. 

For the government, there are multiple, sometimes contradictory, impulses at work. First, there is an unquestionable protectionist impulse, which should be overcome. Second, there is the natural need to increase the proportion of low-carbon vehicles in India, to reduce both local pollution as well as national emission. This has meant that the government offers incentives to EV purchasers while keeping high tariffs on foreign EVs. Logically, it should welcome investment in India-based EV production. But it has also chosen to minimise investment from the emerging EV superpower, China. BYD, the leading EV manufacturer, had sought to invest $1 billion in India manufacturing, but it has been reported that the government did not allow it. 

A more integrated approach to EV policy will be needed as the market shifts within India. Among other things, questions will be asked about the availability of charging infrastructure and the impact of large-scale adoption of EVs on electric grids, locally and nationally. Whether charging requirements should be standardised across companies is also a thorny question that regulators globally have wrestled with. India, as a large consumer of passenger vehicles and potentially a major producer, will inevitably embrace the EV revolution. The speed, efficiency, usability and local value associated with this transformation, however, will depend upon choices that the government makes now.