E-vehicle push risks costly overhaul
The government’s policy push in favour of electric vehicles has come at a time when automobile and oil industries are investing over ~88,000 crore to meet the fuel emission norms. Automobile firms are also gearing up to comply with the fuel efficiency norms, bringing into question the viability of these investments if electric vehicles are the way forward.
The future of investment in oil refineries — whether it’s their upgrade to meet the fuel quality standards or expansion — is bleaker than that in automobile companies.
“The worry is that if the automotive fuel market is not expanding, what happens to the investment being put in refineries. They will have to increasingly depend on petrochemicals,” said B Mukherjee, former director (finance), Hindustan Petroleum Corporation.
Diesel, at 76 million tonnes, constitutes 40 per cent of the total petroleum consumption in the country. Petrol is another 23 million tonnes, taking the share of the two fuels to almost 52 per cent.
The government-controlled Indian Oil Corporation, Hindustan Petroleum Corporation and Bharat Petroleum Corporation are investing ~28,750 crore for meeting the BS-VI emission norms for fuels. Automobile companies are also planning huge investments to comply with the auto fuel policy under which the intermediate BS-V level is to be skipped, and automakers and fuel suppliers are expected to leapfrog to the BS-VI norms by April 1, 2020. According to the estimates of the Society of Indian Automobile Manufacturers (Siam), this would cost the industry ~60,000-70,000 crore.
“At this stage, vehicle manufacturers need to allocate their financial resources across new products, electrification of existing platforms, new electric vehicle platforms, and BS-VI compliance. They will need to prioritise the investment based on compliance needs, customer requirement, competition and newmarket opportunities in the form of e-vehicles,” said Rakesh Batra, partner and national leader of automotive, EY.
According to Mukherjee, refineries usually take about five to six years to recover investment in quality improvement. For automobile manufacturers, the returns on investment depend on volumes. “The Indian automobile market is fragmented. There are only two to three players that have substantial economies of scale. It could take three to five years to recoup investment made in a technology, depending on the production volumes," said Sugato Sen, deputy directorgeneral, Siam. It took Mahindra some seven years to come out with another vehicle after it launched Scorpio in 2002, since it could not gather enough volumes initially. Automobile companies now also bank on export volumes to recover their investment.
R C Bhargava, chairman, Maruti Suzuki, the largest automobile manufacturer in the country, however, said the companies would be able to amortise the new investment in six to seven years. “Still, how the market eventually absorbs the cost would largely depend on consumers and the pace at which electrification takes place,” he said. If the government makes shift to electric vehicles mandatory from 2030, it would make all the investment made in vehicle technology redundant within 10 years from meeting the BS-VI deadline. There is no commercially available BS-VI technology in the world for the small category of vehicles used, especially in rural India for transportation of goods and passengers, as these vehicles are unique to India. These technologies are under development from the scratch and would take considerable time to develop. The time frame of three years available with the industry is itself very challenging, according to Siam. “The migration from BS-IV to BS-VI is a huge technological challenge. Under the original Auto Fuel Policy document of the government of India, we were to move to BS-V in 2020 and BS-VI by 2025, but it was decided to skip BS-V altogether and advance BS-VI to 2020. As a responsible industry, we accepted the challenge in the national interest. This is the first time the auto industry is doing such leapfrogging anywhere in the world,” said Sen.