Electric two-wheeler sales may drop by 17% in FY2021: ICRA

The demand and volumes of electric two-wheelers have witnessed a very lackadaisical growth in recent years despite the government’s thrust on adoption of electric vehicles. Ratings agency ICRA says that despite an unprecedented demand shock caused by the pandemic, its outlook for the e-2W remains largely unchanged in FY2021 due to a low-base.

The ratings agency says as per the findings of a nationwide survey of 16 e-2W dealerships in November, the stringent eligibility criteria set for claiming the subsidy under the second phase of Faster Adoption and Manufacturing of Hybrid and Electric Vehicles (FAME-II), have been a deterrent – mainly due to a minimum localisation requirement and exclusion of lead-acid based e-2W for subsidy. In addition, lack of consumer awareness (regarding the government subsidy), low acceptability led by lack of product knowledge and after-sales service concerns have been dominant reasons for the scheme’s lacklustre performance.

ICRA says the FAME-II, scheme aimed to push faster EV adoption crossed the halfway mark of its three-year tenure (FY2020-FY2022), on September 30, 2020. However, it has managed to achieve only 2 percent of its target (out of covering 10 lakh e-2Ws) sales during the period.

Shamsher Dewan, VP, ICRA said, “The e-2Ws segment was expected to witness faster penetration among all segments of the automobile market, given the favourable economics and limited reliance on a widespread charging infrastructure. However, e-2W sales vis-a-vis targets set under FAME II have been tepid so far, with the same constituting less than 1% of total two-wheelers sold in FY2020 in India. While the e-2W sales reported a 21% YoY growth to 1.5 lakh units in FY2020 (first year of scheme) the number of e-2Ws which availed FAME-II subsidy plummeted.”

The company’s research was done to understand the ground realities regarding the current challenges and possible drivers for faster e-2W penetration. The key findings were as under:

• Nearly 50% of the dealers mentioned that e-2W sales had declined post FAME-II, as the number of models eligible for subsidy under FAME II have declined, indicating the impact of stringent qualifying criteria). Only e-2W with advanced (i.e. lithium-ion battery based) are eligible, resulting in all lead-acid battery-based e-2W sales (constituting 70% of models available in the market today) being excluded from claiming any demand incentives. Further, the requirement for meeting a minimum 50 percent localised content criterion in a phased manner is tough as lithium-ion battery accounts for 40-50 percent of the overall cost of the EV and is the most expensive component in EVs. Due to lack of adequate domestic supply, most of the OEMs are importing the same which could be a possible reason for their ineligibility for claiming the subsidy.
• A third of the walk-in customers lack awareness about the financial incentives offered by the government on e-2W, while the rest have limited understanding. Apart from higher upfront cost of an e-2W, the potential customers are also concerned about their durability and after sales services; the government and the OEMs need to step up and invest in creating customer awareness towards EV technology, tax benefits and financing options among others.
• Over 80% dealers in the survey indicated that dominant e-2W customers are those who are looking for a second 2W for the household, mainly for kids and women. With schools and colleges shut because of the pandemic and limited non-essential movement, it stands to reason then, that purchase of a second vehicle has been deferred in the current fiscal.
• Most consumers continue to prefer low cost-low range lead-acid battery powered e-2Ws even when FAME-II demand incentives are available only for advanced battery based (i.e lithium-ion) e-2Ws. Low-speed lead-battery based e-2W are exempted from RTO registration, driving licence and helmet requirements; this adds to their appeal. However, lead-acid batteries have limited life, and lack proper end of life recycling facilities (which is not environment-friendly); leading to the government’s decision to dis-incentivise the same.
• Nearly 60% of the customers are opting for lead-acid based e-2W, because of lower upfront costs vis-a-vis lithium-ion powered e-2Ws. Significant upfront cost savings in lead-acid based e-2W attract the price sensitive Indian consumers. Consumers lack awareness that running costs of e-2Ws yield significant savings over ownership period. Also, a considerable increase (>30%) in ICE ownership cost over past 2 years has reduced the upfront cost differential with lithium-ion based e-2W.
• 44% respondents believed that improvement in battery technology and presence of more participants (and models) has helped in expanding the e-2W market.  This is a promising trend.
• Nearly 80% of the dealers also believed that more financing options could drive faster adoption. Dealers reported that 20-30% of their e-2W sales are currently financed; this is lower than 40-50% financing enjoyed by conventional 2Ws in India. Greater financing avenues and rise in consumer awareness could propel faster adoption.
• Around 50% of the respondents said interest in e-2W increased after announcement of the EV policies by select states, which sweetened the deal in select markets, like Delhi. Demand incentives are currently crucial to sway customers to e-2Ws and hence, the financial incentives under the state EV policies provide incremental impetus for faster EV adoption. Most of the state EV policies have focused on demand creation through reduction in upfront cost of ownership by offering a combination of subsidies, registration tax and road tax waivers among others, and clear transition dates for e-2W migration for delivery services/ e-commerce players.
• Overall response indicates that most dealers (80%) expect flattish to moderate growth in e-2W sales in FY2021, albeit on a low base. While interest in e-2W amid the pandemic has increased, conversion into sales remains to be seen.

“In H1 FY2021, the high-speed e-2W reported a 25% Y-o-Y decline, primarily a result of the pandemic-led lockdowns. However, the sales data released by SMEV for the month of September 2020, which reported a 72% Y-o-Y increase in sales of high-speed e-2W, augments the positive expectations of the dealers. The industry is banking on pent-up demand from H1 FY2021, to get realised in the festive season. Announcement of EV policies by states and union territories like – Delhi, Telangana, and the central government’s decision to allow sale of EVs without battery, could push growth in the near-to-medium term. However, ICRA expects 15-17% YoY contraction in domestic 2W volumes in FY2021, amid an evolving pandemic situation, persisting health concerns and economic uncertainties. In H1 FY2021, the actual 2W wholesale sales volumes were 38% lower on a Y-o-Y basis,” concluded Dewan.

ICRA notes that while the practicality behind the FAME-II policy target of a million electric two-wheelers by FY2022 could be debated at this juncture, the Covid-19 pandemic has been an unpredictable variable which has altered all the best laid out plans. Although the increased preference for personal mobility, to ensure social distancing, bodes well for two-wheeler sales in the near-term, the demand for e-2Ws could be impaired as consumers face income uncertainties.

Nonetheless, the government’s thrust on the adoption of EVs, increasing awareness towards public health and clean energy continue to favour EV adoption in the long run. Multi-level policy support (demand incentives) and policy push (firm transition date) will be imperative for the same.