By Srihari Mulgund and Deepak Mittal
The automotive industry is at the cusp of a transition to Electric Vehicles (EVs). The two-wheeler and passenger car segment have seen substantial activity with a flurry of startups, mainly in 2Ws, and legacy players aggressively launching new products. The bus segment is the most recent to join the party. Driven by strong tailwinds, government support and unit economics, the segment is gearing up for major growth over the next decade.
India has witnessed rapid economic growth, urbanization and consequent demand for mobility over the past few decades. However, the public transportation in the country has not kept pace with this transformation. The cities are plagued with increasing traffic congestion and high pollution levels mainly owing to a lack of high-quality public mobility infrastructure. For example, the number of buses per 1,000 people in India stands at 1.2. It is significantly lower than in countries like Thailand (8.6), Russia (6.1) and Australia (4.0)
The Indian e-bus market is at a nascent stage. Only about 3,000 e-buses have been registered so far.The pending orders are only close to7,000. Maharashtra, UP, Delhi and Gujarat account for more than 75% of the overall registrations.
This scenario is likely to change with the Indian Government’s massive push for cleaner public transport and substantial investments planned in mobility infrastructure. The Central and the state governments are supporting EVs through various incentives like the FAME II scheme, PLI scheme, exemption in road tax, and lower GST.
The technological advancements resulting in improvements in charging time, range, and anticipated fall in battery prices (which constitutes 40% of the overall vehicle cost) are likely to drive strong adoption of EVs in the bus segment. Many states have been unfolding pro-EV policies with specified targets for e-bus penetration.
Based on the announced policy frameworks and targets for e-buses, the state and city road transport corporations (STUs) alone present a cumulative annualized potential of more than 15,000 e-buses.
The evolution of the e-bus market, which has recently seen the emergence of many new players, and the share in this market will depend on the battery technology, product innovation, and their overall execution strategy.~
Overall, the penetration of e-bus in annual bus sales is estimated to reach ~30% by 2030. The penetration levels are likely to vary significantly across usage segments, as unit economics for transition to EVs differ based on duty cycles and running days.
STUs lead the way
Segments like STUs and intercity buses, which clock the highest daily usage, are likely to see the highest penetration levels of 40%-50% by 2030. These two segments can achieve TCO (total cost of ownership over the lifetime) breakeven at current levels, with the payback (on higher upfront capex for e-buses) period ranging between 2 and 5 years.
The mode of contracting for STU buses, by aggregating the demand through CESL and the Gross Cost Contract (GCC) mechanism, is touted to be a game-changer for the demand. The success of the GCC mechanism will determine the course in the coming years and the demand associated with the government’s target of deploying 50,000 e-buses for the next 5 to 7 years. This massive demand implies that the OEMs have to arrange for the funding worth USD 6 billion to USD7 billion, through asset financing partnerships. This would remain as an important factor to watch out for.
Other prominent segments that include school, office and special purpose buses are likely to reach penetration levels between 10% and 20%, depending on the bus size and duty cycle of the bus.
The existing e-bus market, though nascent, is dominated by a few major players having a sizable portion of the current demand pie. However, this is still early days and the evolution of market shares in the e-bus market, which has recently seen the emergence of many new players, will depend on the battery technology, product innovation, and overall execution strategy of these players.
Almost every player has announced aggressive plans to ramp up capacities, which could add up to 30,000 to 35,000 units a year over the next 18 to 24 months.
The biggest challenge for e-bus sector expansion revolves around financing as banks have been concerned about the EV battery life and the residual value of e-buses. They are still sceptical about lending to the EV sector.~
Challenges still persist
While the e-bus market appears to be buoyant, there are certain specific factors which may impact the EV adoption curve and remain to be addressed. The biggest challenge revolves around financing EVs as banks have been concerned about the EV battery life and the residual value of e-buses. Hence they are sceptical about lending to the EV sector.
There are two key issues here:— a.) The GCC mode of bidding, which entails the bidder to supply the e-buses on cost per km basis, is emerging as the preferred way for the governments to procure e-buses for STUs. This implies OEMs will have to partner with financial institutions to raise USD 6 billion to USD 7 billion over the next 5-7 years; and b.) In the non-STU segment, banks and NBFCs are slowly gearing-up to financing EVs, but at interest rates that are 200-300 bps higher and at LTV (Loan to value ratio) based on customer profile which is 5-10 percentage points lower than the financing for traditional ICE vehicles. Over the next 2-3 years, as the initial set of EV vehicles deliver actual performance, as EV technology matures and issues such as battery life get addressed through evidence from on-ground operations, this gap in financing terms is expected to bridge.
The other key factors
The other major factors that will play a role in EV adoption are the expansion of the charging infrastructure and continuing government subsidies for EVs. The charging infrastructure in India is still developing. Already 1,800 public charging stations are installed. The projected requirement by 2030 is estimated to be 46,000 stations. The pace of charging infrastructure creation, particularly outside of big cities, will play a big role in driving adoption.
While the current government subsidies are playing a material role in driving initial e-bus adoption in the STU segment, the TCO for e-buses is already lower (vis-à-vis ICE buses) even without subsidies, though with a higher payback period. Subsidies will become less relevant with the likely fall in battery prices (expected to fall by 15%-20% over the next 2-3 years) leading to expected payback period of 4-6 years by 2025. The recently-announced PLI scheme for battery and cell manufacturing has received overwhelming interest from industry behemoths.
The bus segment is entering exciting times. The pieces of the puzzle are likely to fall in place; what remains to be seen is the execution from OEMs, financers, and most importantly the government with its continued resolve to drive the transition to environment-friendly mobility.
(Disclaimer: Srihari Mulgund is New Age Mobility Partner, EY-Parthenon, and Deepak Mittal is Value Creation Partner, EY-Parthenon. Views are personal)