Auto: 2W EV: It’s either volumes or profits, for now

25 Aug 2023 , 10:46 AM

Sales volume of electric 2Ws have come off post reduction of FAME subsidy effective June 1, 2023. Electric Vehicle (EV) penetration in 2Ws has come off to 4-5% in recent months, from ~6% in the preceding 6 months. Leaders (Ola and TVS) have further strengthened their presence (market share), post subsidy reduction. Ather and Bajaj are largely holding onto their share for the 3rd and 4th spots. Ampere has lost the most marketshare. EV OEMs have not fully passed on the impact of subsidyreduction to customers, choosing to bear the hit. Further, Ola and Ather have launched lower-priced models to revive volumes even at the cost of profits. Slow EV penetration may give some breathing space to ICE majors. However, if aggressive pricing by EV start-ups results in sharp rise in electrification, it may pose a challenge to the listed OEMs who would like to keep EV losses in check. 

2W EV volumes have softened post subsidy reduction: 

Central government reduced the quantum of FAME subsidy for e-2Ws, effective Jun 1, 2023, driving up vehicle prices. Electric 2W registrations have slipped to 50-55k in recent months, from an average of 75k in the preceding 6-8 months. In terms of electrification rate, the industry has come off to 4-5% from ~6% in the preceding months.

OEMs bearing the hit from subsidy reduction, wholly or partly: 

Subsidy reduction would have entailed a sharp increase in vehicle prices and hurt affordability. To soften the potential volume impact, OEMs have borne the hit, either wholly or partly. TVS and Bajaj chose to pass on a large part of the impact via price hikes. Ola increased prices to a small extent, and chose to bear a large part of the impact. Ather’s price hike was also lower than the requisite hike. 

New models launched at lower prices to spur volumes: 

Ola recently launched 3 lower-priced variants of the S1, priced at ~Rs90k, ~Rs100k, and ~Rs110k, vs the existing S1 priced at ~Rs120k. These new models come with lower specifications (battery size, range, charger, instrument panel). Similarly, Ather has also launched lowerpriced models at ~Rs130k and ~Rs138k (vs existing model at ~145k) with lower specifications. In case of Ola, price cut seems much more than the downgrade in specifications, implying lower profitability. In case of Ather, lower prices more or less match with the cut in specs. 

“Path to profitability” extended further: 

Lower “contribution per vehicle” and lack of volume scale-up would extend path to profitability for EV players. As analysts of IIFL Capital Services have highlighted in the past, the price and ownership cost parity of EVs vs ICE was driven by subsidies and a favourable GST regime (5% vs 28% for ICE). Reduction/withdrawal of FAME subsidy may make it difficult for the EV-makers to build a sustainable business model. However, if the government doles out sizeable PLI incentives to the EV-makers, it may partly offset the loss of FAME subsidy. As per news reports, Ola clocked an operating loss of USD136mn in FY23, on a revenue of USD335mn. 

Does this give some breathing space to ICE majors? 

TVS has proved that traditional ICE-OEMs are capable of making a mark in the EV world. The other large ICE OEMs have not yet pushed the EV case. As the pace of electrification in 2Ws has slowed post the subsidyreduction, listed OEMs may get some breathing space. However, if EV start-ups push up 2W electrification rates despite higher losses, ICE majors may find it difficult to ignore the trend.