The endangered seven on India’s EV road

Think of Hero Electric and Okinawa Autotech. The two were leading the market till 2021. Then there is Greaves Electric Mobility, a subsidiary of Greaves Cotton, a listed entity, and is backed by Saudi Arabian investor Abdul Latif Jameel. There is also Revolt Motors, currently the country’s biggest electric motorcycle maker. Founded by Micromax’s Rahul Sharma, it is currently owned by RattanIndia, a group that has diversified interests in the energy infrastructure space. Benling India, AMO Mobility and Lohia Auto are the remaining three in the group of seven endangered EV players.

All of them have been penalized by the Indian government for not adequately fulfilling the criteria for claiming subsidies on electric scooters. To qualify for the sops under the government’s Faster Adoption and Manufacturing of Electric Vehicles (FAME) scheme, companies need to localize production of scooters in India in a phased manner. Under this phased manufacturing programme (PMP), 18 components have to be localize

A probe conducted by the government for over six months, starting September 2022, found the seven firms guilty of violating the guidelines. This led to the government imposing a ₹469 crore penalty on the companies—in effect a rollback of the subsidies paid to them between 1 April 2019 and 31 March 2022. They are also debarred from availing subsidies in the future. Additionally, the group of seven stands to lose out on the subsidies for the period between 1 April 2022 and 30 November 2022, which the government had withheld for the duration of the investigations.

“We are in dire-straits. Last year, we had over 200 people working for us which is now down to just about 50," said a senior executive from one of the EV firms. “The decision of the government is too harsh. If they don’t soften the blow, I don’t think we would be able to survive." The executive did not want to be identified.

The companies contest the government’s claims but are running out of options. Without the subsidies, they have been forced to increase the prices of their products and cannot compete with subsidized rivals. This has impacted their sales. Since the start of the year, monthly sales of the seven companies have more than halved as of August. Hero Electric sold 10,479 two-wheelers in August 2022. This August, it could only sell 783 units. From a dominant market share of over 20% in August last year, the auto maker’s share was a minuscule 1% this August.

Realizing the need for stronger advocacy with the government, the Society of Manufacturers of Electric Vehicles (SMEV) roped in Sanjay Kaul, a former spokesperson of the Bharatiya Janata Party, as its chief evangelist.

“Through the course of these 18 months, the manufacturers have been sufficiently penalized and any further delay on resumption in business would drive them to bankruptcy," Kaul said. “The manufacturers are not contesting the government’s claims (of not adhering to PMP guidelines) even though they believe they have a case there as well, since a long litigation process is not in anybody’s interest. Instead, we are trying to find common ground through reasonably negotiated arbitration," he added.

The violations

The industry’s appeals for arbitration notwithstanding, the government is in no mood to relent.

Broadly, there were two allegations made against EV companies. Under the FAME scheme, only scooters with an ex-showroom price of less than ₹1.5 lakh were eligible for subsidies. To circumvent this, companies like Ola Electric, Ather Energy, Hero MotoCorp and TVS Motor had billed customers separately for chargers. After being pulled up by the government, the companies decided to refund the money they had charged to the customers.

The second problem involves inadequate localization of parts. Like we mentioned earlier, the PMP has a list of 18 critical components used in the making of EVs and these are supposed to be manufactured or assembled locally. The parts include the battery pack, traction motor and controller, vehicle control unit, on-board charger and instrument panel, among others.

Lax supervision meant that the violations were not detected on time. A whistleblower, who identified himself simply as ‘Akash Shah, CFA and CA’ (in some emails, the surname is Sharma), started making allegations around the violations in a series of emails beginning April 2022. The government woke up. As the violations were retrospective in nature, the government wants the seven companies to refund the subsidy from the start of the FAME scheme itself.

“There has been no obfuscation of subsidy and the end consumer has benefitted from it. So, the government’s endeavour to boost transition to EVs has happened. Asking manufacturers to reach out to consumers to refund the subsidy is neither tenable nor desirable," Kaul said.

Besides Revolt, which paid back ₹50 crore to the government last month, none of the other companies have made any payment yet. And while the government is willing to give the companies more time, there are no indications of any other financial reprieve for now.

“We’ll give them a few weeks more. Still giving them two-three chances in case they want to furnish some documents (to prove they met PMP guidelines). Otherwise, we will initiate legal proceedings," said Hanif Qureshi, joint secretary, ministry of heavy industries.

Blame covid?

The question is what led to the violations. The seven companies say it wasn’t intentional. While they do not deny that the norms were flouted, they blame it on the pandemic, which disrupted the global supply chain. Many of the parts meant to be localized were simply not available to meet the demand and had to be imported.

“The government had announced PMP much in advance and a glide path was provided. Of Course, covid-19 hit and it became difficult as global supply chains got messed up and a few extensions were also given," said Hemal Thakkar, director—consulting, Crisil Market Intelligence and Analytics, a research outfit.

“Unlike in ICE (internal combustion engines), the dependence on global supply chain in EVs for batteries and controllers is more. So, it may seem a bit harsh but then you have to push the industry to increase localization levels," he added.

The government wanted to bring down prices through subsidies and increase demand in the market and that did happen, said Sushant Kumar, managing director, AMO Mobility. “We did not keep the subsidies for ourselves. The issue of non-compliance with PMP is not that big. It could have been handled in a more mature manner. The government could show some leniency as the violations were not intentional," he added.

Nonetheless, not everyone agrees supply chain bottlenecks were at the heart of the violations. If that was the case, companies beyond this group of seven would have been impacted too. Companies such as Ola Electric, Ather Energy, TVS Motor and Bajaj Auto were able to meet the localization norms.

“The PMP guidelines are common for the industry and have been adhered to by many players despite the supply chain issues. There were certain manufacturers who took advantage of the scheme to claim subsidies without making investments in local manufacturing," said Arti Roy, associate director, CareEdge Ratings, a ratings company.

The breakdown

While there are arguments on both sides, what’s clear is a complete breakdown of communication between the government and the industry. The chasm is big, Kaul realized soon after joining SMEV.

“My job is to restore it (the breakdown in communication) and bring them back to the table," Kaul told Mint. “This is a sunrise industry and I am certain the government doesn’t want it to suffer. If these companies are grounded, then the consumers will be impacted. Violations, if at all, were marginal in nature and not intentional or substantial and the role of these manufacturers in scaling up the industry and developing the market should be taken into account," he added.

Meanwhile, the EV industry is also divided—that doesn’t help.

While Kaul, under the aegis of SMEV, is trying to break the deadlock, Greaves has chosen to do it alone—the company is not party to the industry body’s negotiations. Greaves could be open to a resolution through the courts, some believe. That’s a route the other companies want to avoid.

“We are working with the government to better understand their concern and we have made a detailed representation. We are committed to helping realize India’s ambitions to be a world leader in developing, engineering, and manufacturing electric vehicles," Sanjay Behl, chief executive officer and executive director, Greaves Electric Mobility, said in a statement to Mint.

The decision by Revolt to pay the penalty to the government also came as a surprise to the others.

“I don’t know what prompted them to do that. The government knows we are under pressure and this sends the message that eventually everybody will pay to save their skin," said an executive from one of the seven companies. He did not want to be identified either.

Growth jolted

With the fate of the seven companies hanging in the balance, the industry is going through a period of churn. Meanwhile, the government has also reduced the subsidy on electric two- wheelers.

Earlier, manufacturers could claim a subsidy of ₹15,000 per kilowatt hour (size of the battery). However, there was a cap on the claim—it was limited to 40% of the ex-factory price of the vehicle. From 1 June this year, the subsidy has been slashed to ₹10,000 per kilowatt hour and the cap is reduced to up to 15% of the vehicle’s price.

This has impacted sales. It is down from a high 105,518 units in May to 62,343 units in August (see graphic).

“Sales are expected to gradually recover. Customers are expected to take time in absorbing the price hikes. Over the medium term, benefits from economies of scale and value engineering initiatives will help lower the upfront price and aid adoption," said Rohan Gupta, vice president, corporate sector ratings at ICRA, a credit rating agency.

The second phase of the FAME scheme, for five years, came into effect on 1 April 2019 with a corpus of ₹10,000 crore. The scheme has to fund a range of EVs, from buses to two-wheelers. The target for two-wheelers was one million vehicles.

As on 20 July, 740,000 electric two-wheelers have benefitted from the scheme. It is unlikely that the target of one million units will be met by March 2024. Now, the reduction of subsidies has raised doubts on whether the scheme would be extended in the current form. The two-wheeler market is highly sensitive to prices. Therefore, analysts believe that extending the subsidies could be crucial to boost adoption.

Should the seven companies go out of business, would it tar the image of the industry and dissuade potential investors? Unlikely, experts said. “India is the only big market that offers good potential for growth. No investor can ignore us. The government is cognizant of this and so can mandate local production with an iron hand," said Thakkar of Crisil.

The industry is at the cusp of a consolidation phase and that’s not a bad thing. “The EV space remains in the early stages of its growth and its promise has attracted a large number of players," Gagandeep Sidhu, director, CEEW Centre for Energy Finance, said. “As this market matures over the next few years, it would be natural to see some consolidation." CEEW is a non-profit research institution.

Where does that leave the seven companies? The deal breaker will be not getting any subsidy in the future.

“The vehicles are now fully compliant with PMP norms and the government should allow them to be sold in the market (with subsidy). If an arbitration award is decided, give some time to the companies to pay back any penalties," said Kaul. “This is what was done with the four other companies (charger violations), and offering the same deal to the others is only fair," he added.

Just like the identity of Akash Shah—the anonymous whistleblower—the fate of the seven companies, right now, remains unknown.