Electric powertrain is not a new technology. Some of the first vehicles made by mankind were electric. Due to a variety of factors, including prices of battery coming down and climate change, Electric vehicles are back in vogue and this time they are threatening the existence of the incumbent – the Internal Combustion Engine (ICE).
At Blume, we have been studying this market in India with keen interest over last 20 months and have met 30+ different startups active across the value chain. One of them is Euler Motors where we eventually led a Pre-Series A round earlier this year. Some of our learning is summarized below.
What is fundamentally innovative about EVs?
A. There are very few moving parts. Hence, you can do smaller manufacturing and it requires very little maintenance.
- Traditional OEMs leveraged their access to cheaper capital to build large assemble lines and ramped up production. At that quality it is not possible for smaller companies to match the pricing. Class manufacturing paradigm. EVs need smaller and less sophisticated assembly lines. Implying that there will be an explosion of brands in EV market. Almost every Tier 1 supplier will pivot to launch their own vehicles. In India, we see Bharat Forge and Sona having that ambition.
- Because it will require far less capital to attempt making an EV, hence custom use-cases will become far more visible. We won’t just have 200 car models, there will be 2000.
- Most OEMs make money when cars come for services. If there are few moving parts, cars will need less maintenance and we their business models will have to undergo a change as they won’t be able to make money on parts anymore.
B. They are fundamentally and electronic product, as opposed to traditional automobiles being mechanical first with electronics added as a top layer.
- As the paradigms of being Connected, Autonomous and Shared becomes more and more prevalent, Electric is a natural choice as it has a software heart and very few moving parts.
- A lot of work is expected to go in to ‘value-added’ services and will have to provide ‘value-added services’ like content, maps, charging etc. In many ways this is like Xiaomi business – make little money on selling phones but hope to recover via services.
- ‘Product’ business will start looking more and more like ‘service’ business. This will lead to fundamental re-invention or transformation of an auto OEM business.
C. Vehicle cost is higher but running costs are very low
- Battery is 50-70% of cost of a vehicle. And over last 10 years, this cost has come down more than 3x. This trend likely to hold in years in future, implying that the cost of vehicle is going to keep coming down.
- Already heavy utilization use-cases like fleet and delivery have become Total Cost of Ownership positive – but capex remains high. There’s an opportunity for fintech players to create products that help expand the market.
- Intra-city buses, e-rickshaws, last-mile delivery and 2-wheelers charged by subsidized residential electricity have already become TCO positive in India.
- Swapping, once it achieves a critical mass, is going to further reduce the cost of owning a vehicle and will end up accelerating the push towards electric.
Ecosystem considerations in India
While a lot of positives are coming our way, the ecosystem around EVs in India is far from mature. Here are some of the issues:
- How will a vehicle run if there are no charging points? But, why will anyone invest in charging points if there are no EVs? The only solution till that happens is to provide ‘closed-ecosystem’ like what DTC buses did when they converted to CNG. Not surprisingly, buses are a very strong use-case for EV adoption in India.
- Incumbent OEMs are facing a triple whammy of reducing demand due to slowdown in the economy, coupled with transition into BS-VI and a push by governments to adopt 100% EVs in 6 years in 2- and 3-wheeler categories. Hence, they are dragging their feet in committing any significant investment to EVs, although they have to talk about EVs for both PR and IR sake.
- Indian government, spearheaded by NITI Aayog, has shown a clear intent to push India towards EV adoption at least in 2- and 3-wheeler categories. They have also launched FAME-1 and FAME-2 set of incentives to promote EV manufacturing. But given that the OEMs are not moving as fast in this direction, their ideas are taking much longer to show fruition.
- EV requires a fundamental re-invention of business models, that means everyone in their organization will have to realign their goals, starting at the top. It is likely that 90% of them will fail to make a convincing pivot. Globally, there are very few examples of this happening. It is highly likely that Indian OEMs will also miss the EV bus.
Blume’s Investment Thesis
After meeting a large number of EV companies, we have concluded that it is hard for a small not-so-well-funded company to make a mark in building a consumer EV brand. This is because this startup, not unlike Ather Energy, will actually be spending a disproportionate amount of time selling the concept than vehicles. In absence of predictable cashflows, such companies will either end up entering B2B market half-heartedly or will simply shut down. Hence, a consumer focused company is probably not for a fund like Blume.
We did however identified two use-cases where we can make an impact. One, full-stack players servicing the B2B demand, like Euler Motors. Or, two, those players which are making technology that (global) OEMs want to buy. But we are well aware that each business will have its own challenge. For the full-stack player, working capital is an issue. While for the ancillary player, access to market and steady cashflow is the issue.
But one thing is clear – that electric revolution is bound to happen in India and we are intent on being at the center of it. If you are doing a startup in these two areas, please write to us.