EV fear: Are days numbered for MSMEs making parts of internal combustion engine?

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October 15, 2021 9:00 AM

Ease of Doing Business for MSMEs: The government had last month also approved the PLI scheme for auto and auto components businesses focusing on electric and hydrogen fuel cell vehicles. Over 5 lakh EVs have been registered in India since 2018.

The EV market in India was worth $5 billion in 2020 and is likely to reach $47 billion by 2026, registering a CAGR of over 44 per cent. (Representative image)

Ease of Doing Business for MSMEs: Automakers worldwide have gradually been gearing up for switching to electric vehicles (EVs) from convention automobiles that have been powered by internal combustion engines (ICEs) for more than a century. The shift, which could potentially render ICEs obsolete in just a few decades, is expected to pick up pace as governments globally focus on tightened emission regulations, low-cost charging infrastructure, reliable electricity access, and incentivised EV adoption, along with a global reckoning about climate change. But along with the engines, the dawn of EVs risks wiping out an entire industry, dominated by MSMEs, of ICE parts or components manufacturing and supplying.

The EV market in India was worth $5 billion in 2020 and is likely to reach $47 billion by 2026, registering a compound annual growth rate of over 44 per cent, as per Mordor Intelligence. However, this growth might come at the cost of MSMEs in the conventional automotive supply chain and particularly those into manufacturing ICE parts for two-wheelers, four-wheelers, and larger vehicles.

“ICE parts makers will definitely have an impact. If MSMEs don’t look for other products and areas of manufacturing goods, then certainly within seven-10 years, as EV penetration improves, it will be difficult for them to sustain as they currently have the infrastructure for ICE. If ICE itself won’t exist then it is a question of survival. Few businesses might have to shut down while others would have to pivot to other industries. Since the penetration of EVs would be in a phased manner, MSMEs would have time to evolve while possibly working on lower capacity and profits due to lower volume. MSMEs catering to two-wheelers will have to take the decision faster as two-wheeler adoption will be the fastest,” a senior member at a prominent body representing MSMEs, other businesses into auto parts manufacturing told Financial Express Online.

The impact is expected to be profound also because manufacturing an EV with only 20 moving parts is relatively simpler than making an ICE vehicle with around 2,000 moving parts. Hence, the supplier and manufacturer ecosystem of ICE vehicles would be disrupted as their addressable market size would shrink along with impact in the aftermarket including vehicle repairs or servicing. Consequently, it would be imperative for MSMEs to invest in new capacity building and infrastructure overhaul.

Also read: Over 1 lakh MSMEs disbursed $1 billion loans in six years: Lendingkart

Here, while original equipment manufacturers (OEMs) and large suppliers might still be able to absorb the impact but MSMEs could be hit drastically. Not just this, MSMEs might also face more competition from new-age technology-enabled enterprises and battery makers entering the EV ecosystem. Importantly, since about half of the value of an EV rests in its battery, it would leave only the remaining 50 per cent of the EV value for ICE MSMEs and manufacturers of all other parts to operate in as ICE and its parts’ manufacturing is completely unrelated to an EV battery manufacturing.

“EV battery is a completely different technology from ICE. The EV adoption is a classic case of technology disruption. The fate of the ICE segment looks similar to how the cathode-ray tube industry was shut after flat-screen televisions came in. Hence, it is very critical for ICE parts makers to look at this strategically and work collaboratively while there would be common parts in ICE and conventional vehicles such as windscreen, seats, steering, etc,” Vinay Piparsania, Automotive Expert, and CEO, IIT Delhi Endowment Management Foundation told Financial Express Online.

So, manufacturers will have to start their strategic journey early enough to make the transition to whatever diverse industry or do necessary research and development, collaboration and acquisition, if they want to continue in the sector, Piparsania added.

Hence, the ICE and its parts manufacturing MSMEs would have to work on adjusting their product portfolios to EV manufacturing even as there would be an opportunity in areas such as microprocessors, controllers, motors, etc. For batteries, “MSMEs may get associated with battery manufacturers as sub-suppliers. The content of components in EVs is less by 30-40 per cent in comparison to ICE vehicles,” added Poddar. 

Haryana-based Nitin Madan who manufactures diesel engine parts using casting and supplies them said the impact on engine parts manufacturers with EV adoption would be severe. The company is beginning to focus on expanding use cases of its existing manufacturing facility to other industries.

“The impact might not seem very sudden at the moment but it depends on the government policy. The first impact will be from OEMs as they would stop taking parts of ICE from us. So, our supplies will be useless. Then there would be an impact on the aftermarket that sells parts and components. The decline of the ICE parts manufacturing and supplying market will begin once the government norms come in,” Madan, Managing Director, Grindlays Engine Parts told Financial Express Online.

The impact would also be on employment, Madan said as he has already started looking into other components required for an EV vehicle such as gear and brake components. “In household components, construction-related equipment, we can provide casting-based products by utilising our existing infrastructure and investment. There will be a sure-shot impact on employment.”

The Ministry of Heavy Industries had formulated a scheme called Faster Adoption and Manufacturing of Hybrid and Electric Vehicles in India (FAME India) in 2015 to boost the adoption of electric and hybrid vehicles in the country. The second phase of the scheme was implemented for five years since April 2019 with budgetary support of Rs 10,000 crores.

The phase focuses on backing electrification of public and shared transportation. It had targeted to support 7,090 electric buses, 5 lakh electric three-wheelers, 55,000 electric cars, and 10 lakh electric two-wheelers through subsidies, according to the data by the ministry shared in August this year. Moreover, 38 OEMs including Hero Electric, Ather Energy, TVS Motor Company, Mahindra Electric Mobility, Tata Motors, Avon Cycles, etc., have been registered as of August 9, 2021.

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The government had last month also approved the production-linked incentive (PLI) scheme for auto and auto components businesses focusing on electric and hydrogen fuel cell vehicles. The scheme is expected to attract fresh investments of over Rs 42,500 crore in the auto and auto component sector along with an incremental production of over Rs 2.3 lakh crore and over 7.5 lakh job creation in the coming five years, the Ministry of Heavy Industries had said in a statement. As of July 19, 2021, 5.17 lakh EVs were registered in India since 2018. 

“With MSMEs being crucial contributors of the supply chain of automotive parts and components that PLI scheme is targeted at, the expected capital push will mobilise the MSME ecosystem with the expansion of supplier base within the MSME sector. As a natural consequence, we are likely to see an increase in employment opportunities in the sector as well,” Ritika Ganju, Partner, Phoenix Legal had Financial Express Online. However, this means little for ICE parts manufacturers.

Piparsania said it would be important to watch trends around customer preference as well. “Customer preference is based on economics. While there is this whole thing to support the environment, but the decision to buy an EV is taken from the cost of mobility standpoint. As long as the cost of mobility is not significant, customers might remain with the status quo. Earlier people thought CNG vehicles would be the preferred vehicle type but we never saw it becoming very popular.”

Despite the second Covid wave, the auto component industry is expected to witness 20-23 per cent revenue growth in FY2022 on the back of a recovery in the domestic automobile industry and robust exports. The pass-through of inflationary trend in commodity prices will also aid revenue growth,” credit rating agency ICRA had said in a release in August 2021. However, as per the data from the Society of Indian Automobile Manufacturers (SIAM), domestic sales in September recorded a 19.7 per cent decline vis-a-vis the year-ago period while passenger vehicles saw a 41.1 per cent decline.

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