Tesla’s share price increased by 6x in 2020 and it added ~400 billion dollar in market cap this year. It is currently valued at ~460 billion dollars. For context, that’s more than Ford, Toyota, General Motors and Fiat put together!
If you feel that Tesla is overvalued, you are not the only one. These numbers have astonished the market pundits and broken the concepts of value investing. Tesla sold ~400k cars and made ~$25 bn in revenues, while Toyota sold 9 Mn cars in the same period and made $250 Bn in revenues. Then, why is Tesla valued more than nearly the entire established auto industry?
Tesla is not your average stock. Tesla has 18% market share in global sales of Electric Vehicles. Investors see Tesla as much more than just a car manufacturer. Tesla’s stock is a proxy for betting on the market of electric vehicles. And this brings us to our story of electric vehicles (EVs). A lot is happening in this space - push from climate change activists, cutting edge R&D on batteries, billions of dollars of investments - just to name a few. We’ll take you on a 7-min ride driving through the global market for electric vehicles, value chain and stopping all the way in India.
Electrified Global & Indian Market
Oil has been at the forefront of global geo-politics and global economy for almost a century now. Oil has been rightly called as the Black Gold. Now, as the world is becoming increasingly environmentally conscious and moving to renewable energy, it’s a matter of years that oil will lose ‘the special status’. Electric Vehicles and battery technology will solve this gap.
Globally, EVs account for ~3% of the sales of new vehicles. EV industry grew by 44X from 2011 to 2019 (in terms of unit sales), with ~2.2 M units sold in 2019. The global Electric Vehicle market size was estimated at $162 B in 2019 and is expected to reach $800 B by 2027, at a CAGR of 22.6 percent.
The current adoption of EVs in India is less than 1% with India making just 0.5% of the global EV market. But, the Indian EV market is one of the fastest growing ones. The government’s target is 30% adoption of EVs by 2030. The market is expected to grow at ~43% CAGR from 2019-2030. Avendus Capital estimates the market size of EVs to be around ~$6.7 Bn by 2025.
The Indian EV market has multiple unique requirements. 2W and 3W make up for over 80% of the overall market and are likely to be the first adopters of electric vehicles.
In the 4-wheeler segment majority of sales comes from vehicles less than Rs 10 lacs. And majority of the electric cars available in India are more than Rs. 10 lacs. So, we might need to wait for a few more years when electric cars can become a common site on the India roads.
Though Tesla has been the poster boy of the Electric Vehicles market. The market itself is much more than that. There’s a complex ecosystem encompassing the market.
Indian EV Ecosystem
The ecosystem is driven by a wide range of players including battery manufacturers, OEMs, EV charging stations, EV charger manufacturers and the policy maker government promoting adoption of EVs among customers.
Let’s have a closer look at bottlenecks and growth drivers for some of the value chain components of the EV ecosystem.
The Infrastructure Challenge
EVs run for a few 100kms on full battery however Internal Combustion Engine (ICE) runs for a distance of 1000+ kms in many cases on a full tank of fuel. This requires EVs to be charged more frequently than ICE vehicles. Additionally, the charging process of EVs may take up to a few hours compared to a few minutes for refuelling an ICE vehicle. Ecosystem also faces major infrastructure related challenges too.
In 2019, there were ~650 charging stations in India, as compared to 300,000+ in China.
In addition to scarcity of charging stations, another challenge is that there are a dozen different types of charger-socket combinations depending on the OEM of EV. This scarce charging station coupled with the challenges of finding the right charger poses a two-fold infrastructure challenge for long distance travels.
We believe that the early adoption of EVs will primarily be for in-city travels with dependence on charging at home. This gives birth to a new challenge - power distribution grid challenge! Majority of households in India are connected through 200 kVA transformers which cannot handle more than 20 cars being simultaneously charged by a 7.4 kWh AC charger. Hence, a simultaneous structural change in distribution grid is required for adoption.
The price is not right?
Now, coming onto the consumer side of the problem. The EVs are costly. Especially, if we look at an ultra-price sensitive market like India, it is a big problem. But the initial cost doesn’t give us an apple to apple comparison. A better metric for this is Total Cost of Ownership - TCO (= upfront cost + fuel cost + maintenance cost - salvage value).
Upfront cost (cost of buying) of the EVs is much higher than it’s ICE counterparts. Cost of batteries account for ~35% of the cost. Despite a ~85% drop in cost of batteries in the past decade the upfront cost of EVs is still high! However, TCO is lower in many cases - driving the purchase decisions of EVs.
E-vehicles are more attractive in cities with high congestion as mileage drops due to vehicle idling. Through TCO economics we believe that the early adoption in EVs will be in the commercial segment. The likes of hyperlocal last-mile delivery businesses and cab services.
The Government comes to the Rescue
If we look at the actions of the GOI in the last few years, it becomes vividly clear that EVs are an important priority for the government.
The government adopted the Faster Adoption and Manufacturing of Hybrid and EV (FAME) scheme in 2015 providing subsidies of ₹895 cr ($130 Mn) for EVs. The scaled up FAME II in April 2019 budgets ₹10,000 crore as subsidy to promote sales of electric vehicles and setting up of related infrastructure like charging stations. Last month GOI announced ₹18,000 crore worth of PLI (Production Linked Incentive) to boost production of lithium-ion cells in India.
To address the infrastructure and network challenge we mentioned earlier, the government is planning to have one charging station every 25kms! The plan also specifies mandatory installation of multiple variants of chargers enabling charging of Indian, Korean and Japanese made EVs.
Niti Aayog is planning to roll-out policies so that lenders offer credit at affordable rates to buyers of EVs. Currently the interest rates on EV loans is around 20-25% as compared to 10-14% on ICE vehicle loans.
Current wave in EV players
The Indian EV space is still nascent when compared with western counterparts. However, multiple players have already entered into this category. Investors have pumped in close to $700 Mn of capital in the India EV space till date.
Multiple players have entered in the past few years. Ranging from Sun Mobility, Lithium Power, VoltUp in the infrastructure space, Mahindra, Ather Energy , Hero, TATA in the manufacturing and Bosch, Exicom in the battery pack supplier space. However, among all the players, one notable player caught our eye, and that is Ola Electric.
Ola Electric, which was setup as a 100% subsidiary of ANI Technology, spun off from Ola. Backed by Matrix Partners, Ratan Tata, Ola Electric raised $250 Mn from SoftBank and became one of the fastest to enter the unicorn club! With this, it became Bhavish Agarwal’s second startup to cross $1Bn in valuation.
Ola Electric has ambitious plans. They eye on a full vertical integration and control over the end to end supply chain. Ola Electric started in the battery-as-a-service (BaaS) and setting up battery swapping stations. They have already partnered with Bosch to design and manufacture Lithium-ion batteries. Now, they want to manufacture their own vehicles.
In May 2020, it acquired Amsterdam based Etergo BV to enter the global 2-Wheeler market. Ola Electric will launch its own line of 2-wheelers in 2020 both for Europe as well as Asia. What next? The vehicles will not be our daily 2-wheelers. The AppScooter will be a smart scooter, comes with screen, integrated GPS - Navic and probalay app controlled battery management capabilities.
“Every year, almost twice the number of two-wheelers are sold across the world compared to cars. With electric, digitally connected capabilities, two-wheelers will further emerge as the most preferred urban mobility paradigm around the world and empower every consumer” - Bhavish Agarwal
Treading on a Bumpy Road
Well, it seems like we have painted too rosy a picture. And the answer is yes. Let’s start with Ola Electric. It doesn’t have much to show for to justify its billion dollar valuation. They want to put 1 million EVs in India by 2021. To put it in perspective, for FY19-20, less than 250k electric vehicles were sold in India. Not only does this number seem wild, Ola Electric is trying to do all the things in a very constrained timeline.
Ather Energy, one of the most promising startups in this space, had to take a 10% haircut in valuation in its latest round of investment.
The EVs are a classic case of the chicken and egg problem - We don’t have a big enough charging infrastructure and supply of EVs because there is not enough demand for the vehicles. And the demand is not enough because - you guessed it right - consumers want an EV infrastructure with low cost EVs.
Well, one thing is certain that sooner or later we will transition to EVs. Interesting thing would be to witness what journey does India (and the world) take to reach the destination!
This article is co-contributed by Nevil