EV gameplan: Strategic tie-ups, fund raising, the way forward

Klaus Zellmer, the global CEO of Skoda Auto, has visited India thrice in the past 18 months. For the global head of an international automaker to devote so much time to one market may seem unusual, but for the Czech brand — that has been around in India for 20 years — the stakes in this country have never been higher.

While India continues to remain an outlier at present, it is expected to remain among the fastest growing auto markets in the coming decade, having already become one of the top three markets in the world for Skoda Auto. In this context, Zellmer’s frequent trips underline the country’s importance for future growth.

Skoda not only leads Europe’s largest car maker Volkswagen Group’s operations in India, it also steers the low-cost vehicle architecture projects, for both internal combustion engines (ICEs) and electric vehicles (EVs). In this context, the CEO’s visits to India are aimed at defining the blueprint that would be pivotal for future-proofing the automotive behemoth, if the EV transition were to face headwinds.

During his last visit, Zellmer is understood to have engaged with multiple potential partners — Mahindra & Mahindra (M&M), and the JSW Group — to set up an alliance in the country. And the genesis behind this thought: Share significant investments needed to transition to zero-emission vehicles and build scale in the face of uncertainty over the penetration of EVs.

Alliances and tie-ups critical for survival

According to industry sources, passenger vehicle makers in India will need a minimum investment of Rs 1.5 lakh crore to Rs 2 lakh crore to shift to a zero-emission future. The estimated domestic volume for electric cars by the end of the decade is around one million units, which is a small fraction of that of China, a cost champion in the EV game. Given the sub-optimal scale and sizeable investments needed, it’s clear that automakers won’t be able to do it on their own.

The Volkswagen Group has already invested over a billion euros as part of its India 2.0 plan, and the return on that investment has taken longer than anticipated. As India 3.0 beckons — it would include transitioning to EV architectures — the shift will call for another billion euros for Skoda Auto Volkswagen India.

For VW, the potential volumes to cater to in the future is still suboptimal. This is why the group is open to selling equity and also on-boarding a partner, to share both investments and risks. And this wouldn’t be the first time: in the past, the Volkswagen Group has engaged in alliance conversations with Tata Motors and Mahindra & Mahindra; now, the homegrown business of the JSW Group is on
its list.

Of late, the automotive industry has been abuzz with hearsay about potential alliances and partnerships — be it strategic, financial or even partnering with the public at large through an IPO, to fund the transition to the zero-emission space. In fact, manufacturers like Hyundai Motor India and Ola are looking to list and raise money through the sale of shares.

Moreover, the likes of Tata Motors and M&M have tapped private equity investors and green funds to raise money to invest in their EV arms. There are also speculative reports of Tata Passenger Electric Mobility looking to list on the stock exchanges, given the attractive valuations EV makers like Tesla, Rivian and VinFast have enjoyed around the world (despite the reality checks they were given recently, with valuations correcting).

The most feverish action on this front has been on sharing technology and collaborating. For instance, the JSW Group invested in MG Motor, as the British brand owned by China’s largest car maker, Shanghai Automotive Industry Corporation (SAIC), needed funds to diversify into the EV space.

Similarly, Suzuki and Toyota have partnered with a successful platform sharing strategy, whilst the Hyundai Motor Group is leveraging the combined scale of Hyundai and Kia, by sharing vehicle architectures and powertrains. Also, alliances such as Renault-Nissan, Skoda-VW and Jeep-Citroen are splitting the huge capital outlay needed to build scale.

ICE breaks even, but EV is a mountain to climb

Interestingly, the requirements to transition to the EV space in India come at a time when MNCs have just managed to get their act right in building viable operations for conventional ICEs. Growing volumes for petrol- and diesel-run vehicles and improving cost structures has meant that the majority of them have broken into profits over the past few years. However, the urgent need to meet emission requirements and Corporate Average Fuel Economy (CAFE) targets is compelling automakers to look at an EV future more aggressively.

Piyush Arora, Managing Director and CEO of Skoda Auto Volkswagen India, told Autocar Professional that going by the current market trends, the electrification of the passenger car segment is expected to gain significant momentum in the coming years. Industry experts anticipate that in 2030, about half of all new vehicles will be fully electric in certain markets.

 “To fully explore the country’s growth potential especially in the e-mobility sector, we are always considering new business opportunities and are evaluating various options to implement our e-mobility strategy in India,” Arora said. “We cannot comment on specific names and ongoing discussions [at the moment].”

Forging a new path to electrification

Thanks to an early start and a decent EV portfolio in its R&D kitchen, Tata Motors was the first to raise USD 1 billion from private equity major TPG, to fund its ambitious electrification gameplan. With its early lead in this space and a vision to launch 10 EVs by 2026, the maker of India’s popular Nexon EV was able to fetch a whopping valuation of USD 9.1 billion in 2021.

“I’m delighted to have TPG Rise Climate join us in our journey to create a market-shaping electric passenger mobility business in India,” N Chandrasekaran, Non Executive Director and Chairman, Tata Sons, had said following the fund infusion, “We will continue to proactively invest in exciting products that delight customers, while meticulously creating a synergistic ecosystem. We are committed to playing a leading role in the government’s vision to have a 30% EV penetration rate by 2030.”

Around 12 to 15 months before the deal was announced in 2020, Tata Motors had revealed that it was open to a strategic partnership in its passenger vehicle business, which may have led to equity dilution. In fact, the alliance conversation with Chinese car maker Chery had progressed to an advanced stage, but the pandemic changed the market dynamics and the investment didn’t arrive from our Eastern neighbour.

There was a similar story brewing around the same time between Mahindra & Mahindra and Ford Motor Company for a potential alliance for their ICE and EV portfolio. But the proposed joint venture between them collapsed post-pandemic, with total industry volumes taking a plunge the world over. 

A year later, Tata Motors raised money from TPG, and Mahindra & Mahindra, too, partnered British International Investment (BII) to raise USD 250 million at a slightly higher valuation, even though there was no major play from the maker of Scorpio and XUV in the EV space.

PEs and green funds in vogue

Explaining the rationale of infusing money into M&M’s EV business endeavour, Samir Abhyankar, Managing Director and Head of Direct Private Equity, British International Investment, had said the decision was “in line with their decarbonisation strategy and focus of supporting sustainable business models that create new jobs, particularly for women,” at a time when climate change is the world’s biggest challenge.

“We are delighted to be backing Mahindra to execute on their compelling EV strategy and ambition and crowd in other like-minded investors in the future,” he added.

With the promise of a future in the EV business, M&M had been making rapid strides in the mainstream SUV market. A strong bounce back in the volume market share — led by the XUV 700, Scorpio N and Thar — and claiming the top spot in revenue share in the SUV segment earned M&M a second marque investor from Singapore, Temasek, in 2023.

Rajesh Jejurikar, Executive Director and CEO of M&M’s automotive and farm equipment business, explained that when an investor is looking at a company’s valuation, they examine the strength of the existing brands under the firm that they can electrify, in addition to adding value to those.

“So it’s a bunch of very successful brands that are likely to get electrified and have value infused into their brands in the future,” Jejurikar had said after the company’s Q3 FY24 earnings call. The Mumbai headquartered offroad specialist has also finalised its commercial agreement with Volkswagen to source batteries and motors to power its EVs in the coming years.

Between 2021 and 2024, following a strong market comeback post Covid-19, and an intense thrust towards EVs from the Indian government, investors made a beeline for nearly every automaker in India — right from Bajaj Auto and TVS Motor to Ashok Leyland — to tap into their EV arm. While the momentum appears to have eased, there are numerous green funds that continue to scout for opportunities to invest in major automakers’ sustainable ventures.

The transforming mobility landscape

The shift to EV powertrains is a transformational change for the mobility sector, which is developing in congruence with the government’s determination to cut greenhouse gas emissions. The industry is at crossroads with this fast-evolving mobility landscape, which is witnessing asymmetrical competition from new-age disruptors like Tesla, Apple and Google, as well as Chinese OEMs. The latter have a massive scale advantage that has compelled legacy players around the world to cough up disproportionate investments in R&D to keep pace. This is not only to hold on to their bread-and-butter ICE segment, but also to pivot towards greener alternatives that call for a massive investment like never seen before.

VG Ramakrishnan, Managing Partner and Domain lead, Automotive, at Avanteum Advisors, said these changes, at a fundamental level of propulsion, are bringing in new companies from different industries to create an ecosystem that’s striving for viability and simultaneously eyeing sustainability for consumers, manufacturers, governments and the society at large.  

This fresh energy source transformation also requires heavy investments across the value chain, with new companies having little understanding of the customer ecosystem, unlike the traditional fossil-fuel-driven industry that’s developed over multiple decades with multibillion-dollar investments and a legacy of known customer behaviour.

“This poses an additional risk to EV companies against their well-entrenched fossil fuel counterparts. EV companies are increasingly collaborating with competitors to share development costs, to primarily lower risk investment as well as improve cost economics by achieving scale,” explained Ramakrishnan.

The skewed market shares in India also present a unique challenge for strong local players. The passenger vehicle space is dominated by five companies, three of them of Indian origin or Indian-owned — Maruti Suzuki, Tata Motors and Mahindra & Mahindra.

“These three companies combined have a market share of over 70%; India is predominantly their market. These firms don’t have global scale and de-risking options,” he added. 

Maruti Suzuki’s case is quite unique, as its global parent is an insignificant player in international markets and India is its top overseas market. While Tata Motors and Mahindra are homegrown companies, all three need large risk capital through strategic investors or global partnerships. For instance, Maruti Suzuki's parent’s alliance with Toyota provides them strategic depth, and Mahindra is exploring partnerships with global OEMs, with a possible tie up with Volkswagen to diversify risks.

Tata Motors, however, has chosen to separate its EV business and has inducted strategic investment partners to fund its growth through risk capital.

The low market share of the remaining OEMs in the mass market space makes it tough for them to survive. Also, with many of them being foreign brands, they look for investments and products from their global headquarters.

Chinese companies — the most successful, globally in the EV space — are facing their own set of problems, created primarily through their geopolitic policies vis-à-vis India.

As an economic measure, the Government of India has severely restricted China’s ability to invest in India and expand their share — a feat they achieved effortlessly in other markets with brands like BYD being the largest exporter of EVs. These companies have adopted strategic divestiture to Indian companies to retain their foothold in the country.

Beyond the huge capital requirement, vehicle makers around the world need an EV portfolio in a short period of time to meet the expectations of curbing global warming, and this requires high risk-taking ability. The Chinese manufacturing and technology prowess in the EV market, in tandem with their robust supply chain, is moving the electric game to a binary of China versus the rest.

“Traditional OEMs, unsure of the technology path and evolving customer experience, are answerable to shareholders. They are taking a collaborative approach to investment and diversifying risks. The transition to EVs has upended their conventional pace of change — 100 years of evolution challenged by 10 years of revolution. Given these unique circumstances, sharing the risk seems to be the preferred strategy,” Ramakrishnan summed up.

This feature was first published in Autocar Professional's March 1, 2024 issue.