The Automotive Optimism

The EV boom is set to grip India soon. But what exactly is driving the optimism around the automotive sector?

The automotive industry writes McKinsey & Co., “is on the cusp of changes not seen since the Model T Ford rolled off the production line in the early 1900s”.

New technologies, consumer preferences, and regulations have birthed the need for companies, both new and old, to transform their products and business models. In fact, since 2010, as much as $280 billion has been funneled into automotive software and hardware solutions. Although the industry has typically relied on traditional internal-combustion engines (ICE) for much of its growth, of this, almost half, or about $120 billion, has gone exclusively towards the building and innovation of the electric vehicle (EV) industry.

This trend has proved to be rather rewarding within global markets as well. McKinsey reports, “With a weighted average total shareholder return (TSR) of 79 percent from March 2020 through January 2022, traditional OEMs and component suppliers outperformed companies in many other thriving sectors, including high tech and chemicals. The results were even more impressive for the relatively new kids on the block, such as NIO, Tesla, and other EV start-ups, whose weighted average TSR of 278 percent topped the list.”

Overall vehicle sales are set to grow at an average 2% CAGR through 2025, and may even decline through the rest of the decade. Outlook on shareholder returns, however, are still considered optimistic, especially surrounding the use and adoption of new technologies and services. Although EVs now represent a rather small percentage of the vehicles sold, they are at a ‘tipping point’ and are responsible for much of the optimism surrounding growth in the sector. McKinsey projections estimate the demand for EVs to grow almost sixfold from 2021 to 2030, with annual unit sales rising from 6.5 million to about 40 million. 

The optimism, however, comes with some major caveats, such as difficulties in sourcing raw materials such as nickel, cobalt or lithium used in batteries; insufficiencies in the number of giga-factories producing the batteries (as well as low productivity in existing factories); and perhaps most importantly, adequate public charging infrastructure to keep pace with the number of electric vehicles on the road.

Although many of the larger companies may increase their raw material access, most automotive firms currently lack said option. What the overall industry can tackle, however, is growing giga-factories and investing more in charging infrastructure. McKinsey writes, “Taking quick action will be key to extending the momentum in EVs and may even help to accelerate the adoption of autonomous vehicles (AVs), through which OEMs will find even more opportunities in services and life cycle revenues from such things as over-the-air software updates, mapping services, and in-vehicle entertainment.”

To this end, the Society of Manufacturers of Electric Vehicles (SMEV) hosted its first-ever conference under the theme ‘EV Industry @ 2030: Future Roadmap’, discussing initiatives such as the manufacturing ecosystem, standardizing EV charging infrastructure, EV financing elaborating on challenges and other opportunities for the sector.

Government officials from the Union Ministry spoke about India’s net-zero mission program, and how the EV industry should be instrumental in leading the change. One of the major difficulties standing in the way of this would be to convince the 60% of Indians who found EVs to be beyond their budget. On the need to streamline charging facilities, building a plug-and-play charging system that provides a recycling ecosystem would have to produce positive pilot results before receiving additional government support such as tax concessions or assistance to larger manufacturing, according to officials.

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