•India is the world’s 3rd largest automotive market, only behind China and the USA, with Passenger Vehicles (PVs) domestic sales of ~4 mn units and exports of ~0.7 mn units in FY24. The total production output across segments was ~29 mn units in the same year.
•The industry plays a pivotal role in the nation’s economic landscape, contributes 6% to India’s GDP.
•This industry serves as a significant driver of employment generating employment to nearly 32 mn people in India.
Trends Shaping the Automotive Industry in India
•The rising disposable income of a growing middle class, combined with a market that has a low automotive penetration rate is driving demand for premium and feature rich automotive models in both 2 Wheelers (2W) and 4 Wheelers (4W) segment.
•India’s strategic initiatives including the longstanding “Make in India” campaign and other supporting policy initiatives such as Automotive Mission Plan 2026 and the National Electric Mobility Mission Plan 2030 to enhance its manufacturing capabilities.
•Favorable government policies and initiatives such as Product Linked Incentive (PLI) scheme launched in 2020 across 14 industries and with a total outlay of $~34 bn which provide benefits including subsidies and tax rebates to incentivize companies to invest in EV production.
•India’s expanding position as the Global R&D Hub is a key facilitator of advancement in automotive technologies and auto components manufacturing.
Automotives: Growth & Segmentation
•The automotive industry is expected to clock 4.5-6.5% CAGR between FY24 to FY29 period to reach 5.2-5.7 mn domestic vehicle sales.
•In tandem with the expansion of the automotive market, the auto component segment is expected to grow from $70 bn in FY23 to $200 bn by FY26. About $30 bn (~15%) of this is expected to be generated from exports.
•India had 26 cars per 1,000 people as of FY24. a significantly lower penetration than developed nations and even emerging nations like Brazil (214), Russia (389), and Mexico (358). This provides significant headroom for growth, given the expected increase in disposable incomes, faster economic growth, younger population, and increased focus from international OEMs.
Market Segmentation
•The automotive sector is split into four segments i.e., 2W, 3W, Passenger Vehicles (PV) and Commercial Vehicles (CV), each having few market leaders.
•In FY23, 2Ws and PVs held a market share of 75.4% and 17.7%, respectively. India is the largest 2W market in the world, given their low ticket size compared to PVs, however there is a clear rise observed in market share of PVs in the post covid recovery of automotive sales.
•Within PV segment. there is a clear shift in consumer preferences observed with increasing preference for Utility Vehicles over Hatchbacks and Sedans which is attracting international OEMs to bring more premium models to the Indian market
•Furthermore, a premiumization trend is observed through consumer demand for vehicles with Enhanced Safety Features (Anti Braking systems, ADAS), Connected devices, Cutting edge Infotainment Systems, Sunroofs and Aesthetic interiors
Electric Vehicles: Current Landscape
•The Electric Vehicle (EV) market in India is expected to grow at a CAGR of 49% between 2022-2030 presenting a massive investment opportunity of over $ ~200 bn over the next 8-10 years.
•Factors driving electrification in India:
•Government Subsidy (e.g., FAME $ ~320 mn (FY24), Production Linked Incentives – $ ~6 bn for automotive industry)
•Awareness of Environmental Issues
•Expansion of Charging Infrastructure
•Availability of EVs at Competitive Prices
•Disruptor brands are currently dominating market share in both E2W (Ola & Ather) and E-PV (Tata Motors & Morris Garage).
•EV adoption in India is being led by E2Ws owing to strong supply, compact designs, limited range anxiety, smaller and lighter batteries and lower initial price difference. Premium E2Ws (priced ex-showroom >INR100,000/$1,250) had a penetration of ~75% in H1FY24.
•With the projected decline in E2W prices (led by drop in battery price), consumers are likely to see a higher number of options across price ranges, driving greater adoption in the lower price bracket as well.
•India’s current ratio of charging stations to cars is approximately 1 charging station per 135 EVs which is significantly lower than the global ratio of 1 charging station per 6 to 20 EVs.
•Furthermore, the charging infrastructure is unevenly distributed creating a significant discrepancy between the current number of EVs and the charging stations. For example, the state of Uttar Pradesh has 0.45 mn EVs, but 406 charging stations — only 1 station for every 1,103 EVs.
•To meet the government’s aim to have 30% of new private vehicles as EVs by FY30, India will need a total of 3.9 mn public and semi public charging stations for a ratio of 1 station per 20 vehicles.
•The under development of charging infrastructure is a key deterrent to EV adoption as drivers experience range anxiety while using EVs for long distance journeys or long hours of use in case of ride share and last mile delivery service players.
•While private sector players such as Tata Power, Jio–BP Charge Zone, Exicom, Finland’s Fortnum (Glida) are making significant investments in developing the infrastructure to achieve the desired ratio of stations, innovative models like battery swapping and smart charging will also improve affordability and convenience for EV owners.
Sources: SMEV, VAHAN, EV Auto, Reuters, YourStory, Bolt.Earth, Note: 1. Financial Year in India is from March to April.
Electric Vehicles: The Road Ahead
•While EVs have emerged as the leading alternative powertrain to Internal Combustion Engine (ICE) vehicles, the overall EV penetration rate (~4.4%) in India is still quite low compared to China (~40%) and the USA (~12.5%).
•In India, OEMs are adopting a multi powertrain approach by introducing new models across ICE, EV, Hybrid (Combination of ICE and EV) and Compressed Natural Gas (CNG).
•Hybrid cars popularized by OEMs such as Toyota, Honda and Maruti Suzuki are becoming a popular alternative to EVs as they solve for two main deterrents to EVs – range anxiety and limited charging infrastructure.
Case for Hybrid Vehicles: A combination of EV and ICE
•In India, Hybrids are being seen as a stepping stone to new technology bringing down apprehensions about transitioning to a full EV.
•Their reliability (no range anxiety, no faulty battery concerns), affordability (in comparison to EVs) and lesser maintenance costs (in comparison to ICE vehicles) are making them favorites amongst both OEMs and customers.
•Hybrids are seen as a viable option, in addition to EVs to support India’s COP26 goals for reduction of carbon footprint because:
•They reduce CO2 emissions by at least 30% and increase energy efficiency up to 44% in comparison to ICE Vehicles.
•Given limitations in development of charging infrastructure, shift to Hybrids from ICE will be critical in reducing emissions
•As of FY24, EVs and Hybrids have a similar market penetration in India. However globally there has been a downward trend in EV sales, while Hybrid demand is picking up. Automotive players are becoming increasingly bullish on Hybrids
•BYD, the largest global EV player currently has also increased its guidance for Hybrid sales.
•Maruti, India’s largest OEM, expects 25% of PV sales to be from Hybrids by 2030
•Toyota plans to convert most, and eventually all of its Toyota and Lexus line up to hybrid only models for its US market.
Battery Swapping : Solution for EV Charging & Battery life Concerns?
•Even though the total lifecycle cost of EVs is lower than ICE vehicles, they have a high upfront cost.
•Large proportion (35-40%) of the upfront cost is attributed to the Battery Pack. China’s Nio has successfully demonstrated that battery swapping can solve for these challenges through following strategies:
•Bring down the cost of owning EVs by offering a subscription based Battery-as-a-service (BaaS) model.
•Reduce risk of owning a faulty battery as the batteries are regularly inspected and maintained by the company.
•Users get to upgrade to the latest generation of technology without worrying about end of life hassles.
Sources: HBS, Redseeder Research, CRISIL MI&A, Economic Times, Fortune India, Note: 1. Financial Year in India is from March to April. FY24 YTD refers to Apr 2023 – Feb 2024 period.
M&A Trends and Recent Deals
M&A Activity Drivers
•In FY23, the manufacturing sector had one of the highest growth rates in M&A activity amid general market suppression, with a rise in M&A deal value in the sector by 33% and deal volume increase of 22% compared to previous year.
•The automotive sector has been a magnet for foreign direct investment (FDI), with a cumulative equity FDI inflow of about $35 bn between April 2000 and September 2023.
•There’s a noticeable interest in eco-friendly solutions and technological advancements, particularly within EV and Mobility as a Service sub-sectors.
•Emerging interest areas such as Auto Tech and Auto components indicate new opportunities for technological enhancements and market expansion.
•In Q2 2024, Domestic consolidations continued to lead M&A volumes with a 60% share while inbound activity continued to lead the values contributing to 65% of overall M&A values.
Conclusion
The automotive industry is currently being disrupted by several alternative fuel technologies – right from EV, Hybrid, Ethanol and Green Hydrogen based fuels. However, with India’s rapidly growing economy, the industry is expected to boom, irrespective of the powertrain technology, as an increase in per capita income translates to a higher vehicle penetration. In tandem, India’s strong position in both automotives and auto components, will give further impetus to companies manufacturing in and selling to India.
Opportunities exist for global companies to invest in India by providing technological expertise or by leveraging India’s manufacturing capabilities to outsource production of high quality cost competitive products. Some emerging areas of interest are battery cell manufacturing and management systems, charging infrastructure, electrical and electronics systems, infotainment systems and emission control devices.