Automobile

industry
Managerial Economics Project Group 5
Contents
Introduction and motivation...........................................2
Problem statement:.........................................................2
Data and analysis:..........................................................2
Conclusion.....................................................................6
References......................................................................7

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Introduction and motivation
Automobile industry is one of the core industries of our economy because of its linkage with
multiple other industries in the country. It is one of the major drivers for growth of economy.
It contributes 21% to country’s excise collections & 22% to manufacturing GDP. 75% of the
total vehicles sold in Indian automobile industry are 2 wheelers. It is currently 1 93 billion $ in
India and 850 billion$ globally2, producing3 25 million units per annum in India and is
expected to grow at 15% annually4. It has the potential to create 65 million additional jobs5
and contribute 12% to economy5. Due to the advent of technology, there have been
continuous disruptions in various sectors and automobile is no exception. The Automobile
industry globally is passing through a paradigm shift. Conventional vehicles are dependent on
fossil fuels, whereas the electric vehicles run on electricity. To curb emissions and reduce
dependency on depleting non-renewable energy sources, a shift from conventional vehicles to
electric vehicles has become very important for the automobile industry.

Problem statement:
Electric cars have posed great threat to the operations of the conventional automobile
manufacturers. Electric cars have dual advantage, primarily it is less costly in terms of overall
cost of ownership, since it is run on electrical energy instead of conventional petroleum based
fuels and secondly it is environment friendly which makes it most desirable in a world which
is getting increasingly concerned about the environment. To make electric cars feasible, there
will have to be vast government intervention, accompanied by changes in demand and supply
structure of the same. In the current report, we have tried to analyse various factors which
will affect the demand and supply of electric vehicles, enabling government of India to
achieve the target set for electric mobility in the country.

Data and analysis:

Government of India has undertaken an ambitious initiative for promoting the adoption of
hybrid and electric mobility in India – The National Electric Mobility Mission Plan
(NEMMP) 20206. The mission targets to create demand for 5-7 million electric/hybrid
vehicles by 2020. The Government has also introduced FAME India Scheme 7 (Faster
Adoption and Manufacturing of (Hybrid &) Electric Vehicles in India), with the primary
objective of developing market for hybrid & electric vehicles along with supporting the
ecosystem for manufacturing.

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The current and desired (2020) demand supply scenario for the electric vehicles in Indian
market can be depicted as below:

Figure 1:

Required shift in demand and supply

Price
S1 S2

D1
D2

Quantity
1.5 lakh 60 lakhs*

Supply curve Demand curve

*Target set by NEMMP for units of electric vehicles to be sold by 2020

To achieve the desired objective of the NEMMP Mission, there needs to be a drastic increase
in demand and supply in the market.

Factors which will cause an increase in the demand are:

1. Tax reduction:
Taxation on electric cars have been reduced from 20.5% to 12%, a reduction of 7.5%
under GST. Reduction of tax levied on electric cars will make them cheaper hence
shifting their demand curve to the right. Under GST hybrid cars are taxed at 43%
(28% + 15% cess) up from 30.3%, an increase of 12.7%. Increased taxes on hybrid is
not recommended as they will be instrumental in ensuring a smoother transition
towards electric vehicles. GST on ICE vehicles have been set in range of 29% to 43%.
Reduction in the SUV category is the highest, 12%8. Given that there are no readily
available substitutes to ICE vehicles, these measures will boost the automobile
industry. But in the long run government should aim to increase taxes on ICE vehicles
and impose stricter Green Tax to increase conversion to EVs.
2. Charging Infrastructure:

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 A major consumer concern hindering the adoption of EVs is the absence of
infrastructure for ‘refuelling’. Improving the infrastructure of charging pods will
address consumer concerns of running out of charge in the middle of the road. India’s
largest power conglomerate NTPC Ltd. has been provided with the task of designing
blueprint for setting up charging pods9. Other energy public sector undertakings are
tasked to setup charging infrastructure in major metros. The pilot project in Nagpur by
cab aggregator Ola and solar power developer ACME Group has shown the feasibility
of charging stations10. Upcoming start-ups like PlugInIndia have identified business
opportunities in the charging infrastructure gaps with their community charging
station concept11.
3. Battery Technology:
Batteries used in EVs available in India today have an average charging period of 8
hours. They also have a low driving range of 100-140 km on full charge and their top
speed is limited to 80 kph12. Comparing this to the minimal time of 5 mins spent at a
refuelling station and the ability to traverse ~600 km in a single refill, and a top speed
bordering 180 kph, consumers do not find value in changing from ICE vehicles to
EVs. Research dedicated towards reduction in the battery charging time to intervals
comparable to the refuel time in a petrol pump and increasing the range per unit
amount of charge should attract more demand for EVs.
4. Government subsidy:
Government has undertaken number of incentivized programs to increase demand.
Alternate Fuels for Surface Transportation (AFSTP) provided incentives worth INR
95cr between ‘10 and ’12 to Original Equipment Manufacturers. In addition, state
governments provide 15% subsidy on base price, 12.5% exemption on VAT, refund of
road tax and registration charges6. Unpredictable durations and budget of such
schemes disables building of confidence for large investments. There is a lot of scope
for improvement in these schemes and consumer awareness is still a long way off
mark.

Factors which will positively impact the supply side of the market are:

1. Reduction in input costs due to advancements in technology:

Battery is the primary component of an electric vehicle, both in terms of its function
and its value. Currently the battery cost accounts for approximately 40-50% of the
manufacturing cost of BEV6. Extensive research is being currently carried out to

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 improve the overall performance of battery along with reduction its cost. During 2010
to 2016, the battery prices fell roughly 80%13 (Figure 2). Tesla has further claimed to
have reduce the cost of battery by 35%, suggesting the revised cost around $
125/kWh14 . Reduction in the Input costs, will reduce the manufacturing cost and will
lead to an increase in supply.

Figure 2:

2. Building In-house manufacturing capacity:

Current capabilities in domestic market for manufacturing of components and
equipment are quite low. In order to drive costs down, it is essential to build scale and
utilize the benefits of localization. The current investments from original equipment
manufacturer (OEM) are mediocre, predominantly due to uncertain demand. The
Government. should facilitate a conducive environment along with providing
necessary assurance in the terms of the following:
a. Certainty and steadiness of demand
b. Stable government policies
3. Entry of established foreign players in Indian market:
Since automobile industry has no big entry barriers, entry of foreign players in electric
car industry would be observed. Tesla15 has already shown its interest in entering
Indian market with its electric cars, however they are concerned about the current FDI
policy involving local sourcing. Since the benefits from Indian market are expected to
outweigh the compliance from FDI, accompanied with free entry and exit industry,
supply would increase till the time the industry reaches zero economic profit state.

Conclusion

The potential benefits from the use of electric vehicles to the consumers (overall cost of
ownership), government (deceased dependency on fossil fuels) as well as the environment
(reduction in vehicular pollution levels) in the long run make them highly desirable in the
current context. Government of India, has set an audacious goal for itself to increase the
electric mobility in our country. Though the current initiatives undertaken by the government
are admirable, there are still multiple roadblocks in terms of lack of Infrastructure, meagre
investments on the part of OEM(s) and ambiguous tax structure which makes it difficult to
improve the market penetration. This report analysed the key factors which might positively
influence the current demand and supply in the market. As emphasized upon, there needs to
be a substantial outward shift in the demand and supply curves for electric vehicles in order

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to achieve the ambitious target set by NEMMP to sell 60 lakh electric vehicles in the country
in the year 2020. Stability of government policies are required for long term plans in order to
create buy-in among the industry players leading to increase in supply.

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References

1-http://www.indiainfoline.com/article/news-top-story/the-93-billion-automotive-industry-
contributes-7-1-to-india%E2%80%99s-gdp-116112500195_1.html

2-https://globenewswire.com/news-release/2017/05/03/976221/0/en/Global-847-15-Billion-
Automotive-Aftermarket-Products-Market-By-Replacement-Parts-Regions-Market-Size-
Demand-Forecasts-Industry-Trends-and-Updates-2016-2022.html

3-http://www.siamindia.com/statistics.aspx?mpgid=8&pgidtrail=9

4-http://www.forbesindia.com/blog/business-strategy/indian-automotive-industry-the-road-
ahead/

5-https://www.ibef.org/industry/india-automobiles.aspx

6- http://www.dhi.nic.in/writereaddata/Content/NEMMP2020.pdf

7- http://www.fame-india.gov.in/

8-https://www.drivespark.com/four-wheelers/2017/gst-effect-hybrids-electric-cars-right-
move-022869.html

9-http://indianexpress.com/article/business/business-others/govt-push-for-e-vehicles-no-
permits-fast-charging-stations-4743406/

10-http://energy.economictimes.indiatimes.com/news/power/acme-launches-indias-first-
electric-vehicle-charging-station/58897254

11- http://www.pluginindia.com/charging.html

12- https://www.mahindrae2oplus.com/pages/buyers-guide/specifications

13-http://www.mckinsey.com/industries/automotive-and-assembly/our-insights/electrifying-
insights-how-automakers-can-drive-electrified-vehicle-sales-and-profitability

14-https://electrek.co/2017/02/18/tesla-battery-cost-gigafactory-model-3/

15-https://electrek.co/2017/05/23/tesla-india-factory-elon-musk/

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