By Saket Mehra
As the world re-surged from the pandemic and economic activity gradually picked up in 2022, India has an opportunity to enhance its global participation while maintaining focus on addressing the urgency of achieving net zero targets and reducing carbon emissions, in alignment with the United Nations Sustainable Development Goals. These factors were key in shaping the objectives of the COP 27 summit, aimed at reducing global CNG and carbon emissions, and will be vital in shaping the theme of India’s G20 presidency, which revolves around inclusive, balanced, and sustainable growth: prompting positive disruptions in the automotive sector, by extension.
India is currently the fourth-largest automotive market and is expected to be the world’s third-largest in terms of sales volume by FY26. The industry has been through ebbs and flows over the last two years. The pandemic, coupled with an acute semiconductor shortage, altered the growth trajectory for both vehicle demand and supply. 2022 has been a pivotal year for the industry, with the sector resurging from the pandemic, amidst global macroeconomic disturbances.
With almost twice as many EVs registered in 2022 vis-à-vis 2021, we witnessed exponential growth in the EV Industry. In line with the recent launches and a plethora of options set to be launched soon, this trend is good news for EV manufacturers. Another key trend in 2022 was an increased preference towards Utility Vehicles, led by the compact UV sub-segment. Compact UVs are gradually taking over the premium hatchback segment, with a 28% market share (as of September 2022), which is a steep rise from 4.6% in 2016. Additionally, the government’s thrust on infrastructure development and growth in e-commerce resulted in sustained growth in C.V. demand. These factors had a cascading impact on the auto-components industry, witnessing a 23% Y-o-Y growth in FY22, and registering approximately USD 56.5 billion in sales.
We also witnessed a tremendous emphasis on vehicle safety in 2022. With the Bharat NCAP ratings aimed at enhancing transparency around vehicle safety, Indian carmakers today are focused on aligning vehicle production with global benchmarks.
As we are ready to delve into 2023, the dynamics of vehicle purchase behaviour and customer perceptions are changing. Additionally, with the Union Budget 2023 expected to introduce initiatives aimed at supporting India’s transition to clean energy, will be led by a sharp focus on creating synergies around sustainable mobility.
Evolution of EV value chain
The EV adoption in India is expected to grow at an exponential rate in the next 2-3 years, propelled by factors such as EVs becoming more price competitive gradually, ever-enhancing charging infrastructure within the country, investments towards research and development, government-backed incentives and policies, coupled with consumers’ willingness to move to more sustainable mobility solutions. Additionally, Electric Vehicles are bringing disruptive business models, (such as Battery-as-a-Service) across the value chain, to the forefront with technology as an enabler.
The EV ecosystem is a nexus of a multitude of stakeholders, such as fleet operators, aggregator service providers, energy operators, and e-commerce. Aided by government push (such as the Energy Conservation Bill 2022, aimed at putting in place the provisions to make use of clean energy) and private investments – strategic alliances among these stakeholders are projected to create synergies and drive value.
As the ecosystem further develops, the demand and need for battery recycling and reducing carbon footprint attributable to EV batteries is vital, paving way for substantial demand for battery recycling. Under the new Battery
Waste Management Rules, 2022, the producers (including battery importers) will be responsible for the collection and recycling of waste batteries, to further aid the growth of the battery recycling market in the country. Battery recycling accelerates the development of circular economy solutions, which will help in reducing production costs for countries (such as India) heavily dependent on importing metals for manufacturing lithium-ion batteries.
Premiumisation of the two-wheeler market
Though the entry-level two-wheeler segment is facing headwinds, resulting from sustained increases in the price of entry-level two-wheelers, attributed to fluctuation in raw material prices and rise in vehicle cost to ensure compliance with emission rules, the sales for premium models (engine capacity over 500 cc) are gradually foraying towards pre-covid levels, due to enhanced interest in this segment. With the bike riding ecosystem spawning up as a younger demographic shows interest in biking clubs and travel expeditions, the premium segment is expected to grow.
Major OEMs are venturing into the premium segment, either through joint ventures or by launching newer models to gauge short to near-term demands.
Gradual shift from Ownership to Mobility-as-a-Service (MaaS)
Ride-hailing penetration is 0.3% in India, which is one-tenth the penetration numbers in developed markets, such as the US, signalling immense scope for growth (the fastest growing sectors being motorbikes and autorickshaws) and space for multiple players to provide services. Additionally, other Shared Mobility Solutions, such as Subscription Models in India are gradually picking up and are likely to witness a CAGR of 5-6% in the next five years. As we move from ownership to MaaS (Mobility as a Service), there are avenues for smart business models- creating synergies between technology and mobility. As per GT Bharat’s recent festive season survey report, 39% of respondents indicated that they would consider alternate sources of ownership such as vehicle subscription and leasing.
Growing affinity towards safer and connected cars
In India, connected car technology is still in its infancy, with only 5% of vehicles equipped with infotainment systems and digital cockpits. Connectivity is primarily limited to smartphones and in-car infotainment systems. However, customer preference for connected software solutions in passenger vehicles is expected to grow significantly in the coming years, and vehicle manufacturers are aligning their strategies to capitalise on this evolution in the automotive ecosystem.
In terms of technologies, AI, blockchain, 5G, IoT, and vehicle data will be key drivers, enabling more customised services that customers value, as well as a heightened focus on vehicle cybersecurity, which will determine customer acceptance.
Commercial Vehicle Segment likely to witness growth
The Commercial Vehicle segment, which recorded around 30% growth in sales in FY22, and an impressive 60% Y-o-Y growth in H1FY23, is driven by improved economic activities as we leave the pandemic behind. Strong tailwinds such as infrastructure development aided by the government (with a plan to enhance focus on infrastructure growth in the coming Union Budget by allocating 30% more funds for the road ministry to expedite development), private investment, and a continued boom in e-commerce will propel the CV Industry to maintain growth this year.
Even though the sector is privy to headwinds such as increased cost of vehicle ownership (as the repo rate increases by 37 basis points to 6.25%, leading to higher vehicle EMIs), augmented vehicle prices (to balance out rising input costs while adhering to stricter emission standards), and a projected decline in exports (owing to global recessionary outlook), these trends, coupled with the growth-oriented approach expected to be adopted in the Union Budget 2023, will be key towards sustaining growth and attracting major investments across the automotive value chain.
(Saket Mehra is partner and auto sector leader at Grant Thornton Bharat. The views expressed are author’s own.)