EV Primer (Part One) | Blume Ventures | Ohm Mobility | Arpit Agarwal | Nikhil Nair

Nikhil Nair: Hi, my name is Nikhil Nair. I'm the founder and CEO of Ohm Mobility. Today, we are having the privilege of engaging with VM, Venkatesh Modi, and Arpit Agarwal from Blume who have done a phenomenal job putting together a report on the EV primer. It's a report that most people in the industry have referred to, have talked about, and has received a lot of appreciation. We thought it's a great opportunity to sit down with both of them and put this into a podcast format which a lot of people like consuming. Selfishly, I think there's a lot of value in consuming content like this through a video/audio format. So anyway, great to have you on and if you can just introduce yourself, Arpit.

Arpit Agarwal: Nikhil, thank you for coming up with this idea. It is fantastic to do this. We had been thinking of doing this, consolidate all the learnings from EV primer into a short video. I know this will also last long, but hoping this will be very useful. 

Thank you for taking the time out and building all these questions and doing this for everyone, all the audience all there. Audience, obviously, are startup founders. They could be people in auto industry, people who are interested in learning more about electric vehicles in general audience. It'd be fantastic.

As you know, my name is Arpit. I have been with startup ecosystem, engaging with startup ecosystem for the last 17 years. We started Headstart together back in 2007 in Bangalore. And worked as a volunteer with that organization for a long time. Parallelly also was an engineer and a salesperson. Then, I started a business called Academic Ventures.

Nikhil Nair: Sorry, what were you selling?

Arpit Agarwal: I was trying to sell supercomputing services as part of a Tata group company called CRL in Pune. It was very interesting sales team. I think everyone in the world should do sales team. We'll talk about that at some point.

Nikhil Nair: I agree.

Arpit Agarwal: But sales is a very important thing. Then, started a business wanted to really go deeper into commercialization of technology. India is producing a lot of interesting technology in my opinion, but not enough of seeing the light of the day. For example, the ecosystems in UK or US are far more developed on that count, and I thought we could do something like this. So, started Academic Ventures.

Nikhil Nair: One example of a technology that you are doing.

Arpit Agarwal: Recently, a company called IdeaForge got listed on NSE and BSE, on Indian stock exchanges, which is a fantastic outcome for a lab technology, which was commercialized by people who were working on the technology. It was a professor and PhD students, and then, that technology built a large business. That business raised money, and they became large enough to be able to list on a stock exchange. 

So it's a fantastic journey, although it's taken 15 years, but that's an example of commercialization of technology, which comes out of labs in an Indian university and goes. There are so many other examples, AVER Energy is an example, Unifor is an example, a company called SEDEMAC is an example, and many other things have come out of university technologies and then they've gone and become very large. Ati Motors is in our portfolio example of IISc technology, autonomy technology, which is being commercialized, although much smaller company right now. But such things have happened quite a lot in India over these years. Back then, back into 2010, not enough was happening.

Nikhil Nair: So the role that you were playing was what?

Arpit Agarwal: Was to help companies or technologies hit the market.

Nikhil Nair: Okay. So go-to-market, commercialization...

Arpit Agarwal: Licensing, startup activity, incubator management, all of that I was trying to do. However, it quickly became a services company. I didn't want to do that and shut that down and joined an incubator program of Times Internet called T Labs. In about 10 years back, I joined Blume Ventures. 

Deep tech was always a tag associated with me. I've always been interested in technology and I think the one thing that makes me really kick is how new technology impacts new businesses and how the new businesses are going to change all our lives. 

Today, you get everything around us. Someone did this at some point. It had been 40 years back, the camera, the lens that you're wearing, the shirt that you're wearing, the chair that we're sitting on, the table, these were lab technology at some point. And someone took the effort of making a commercial. Today, we don't think about it as new technology, think about it as usual business, but digital camera would have sounded like a figment of imagination, not too long back. But today every camera is digital camera. Film camera itself is like this. 

This is how technology works. That I think is the most exciting thing. You can talk to me about green hydrogen, talking about electric vehicles, talking about biotech. I don't claim to understand everything with enough depth, but this is what gets me going.

So, deep tech happened and deep tech happened in multiple shapes and form in Blume. Also, did health tech and medtech a little bit and then we started looking at electric vehicle space.

Nikhil Nair: So, Blume has been 10 years, you said.

Arpit Agarwal: I have been in Blume for 10 years and Blume had already invested into deep tech companies before I joined. There were companies like Carbon Clean Solutions which has become very large now. Gray Orange Robotics also become very large now. All these companies were already invested by Blume. 

Blume already had a track record of saying we will not wait for the market to invest behind things which we think makes sense. We haven't proven right to some extent. Then, when I came in, I took over from Karthik's largely doing this, applying his engineering mind and I took it over. Now, I handle all of this plus there is an additional angle of ClimateTech, which is becoming a very interesting focus for all of us in the world, but also in Blume, a lot of money is coming in. That's one important thing. 

More importantly, we want to be able to see new technology coming out, which can really mitigate carbon or remove carbon, if possible. Electric vehicles is one fantastic example where once you see the product-market fit in some sense, TCO being positive, suddenly the adoption takes off and we will talk more about this in the due course. 

Similar things would happen to every single industry. Think about construction, infrastructure, cement, steel all kind of industrial processes; our lives around what we wear, what we eat and everything that people see or do at this point of time will undergo a similar transformation over the next 15 to 20 years. 

Airline, for example, new electric planes would come up, hydrogen planes would come up and so on. Everything's going to undergo a transition because there is a clear preference and not necessarily because people care about clean air or carbon, but it also lead to a lot of efficiencies in the business, which is better and cheaper. This is why most people adopt technology. This is not going to be because it is going to be purely green. Yes, government will also incentivize in some way, nudge people in that direction. But that is only part of the puzzle, a bigger part of the puzzle that technology has to become better, cheaper and faster to be able to really get adopted.

Nikhil Nair: You're saying like EVs is happening to automobiles, there'll be clean energy or clean technology across multiple sectors.

Arpit Agarwal: Every single sector. And that's a very large 20 year theme or maybe 30 year theme. That we can invest our time and energy behind.

Nkhil Nair: Great. We should definitely talk about that.

Arpit Agarwal: We will talk about that.

Nikhil Nair: Since there is a lot of talk about that.

Arpit Agarwal: Thank you. And thank you for doing this, by the way.

Nikhil Nair: Superb. Excited. Venkatesh?

Venkatesh Modi: Thanks, Nikhil for having us be part of this. I think it has been a couple of years since we engaged with you and I have thoroughly enjoyed every conversation, every time we have met. I think outside of work, we have also had a lot of other topics to discuss about. So that's I think amazing. 

I'll just give a brief introduction about myself. While my name may be Tamilian or Gujarati, I'm actually neither. I think I just wanted to get that out. I was born in UP, a Marwari, brought up in Tamil Nadu, did my engineering there. Back in college, it's the last part of entrepreneurship cell and as a second year student, we were trying to promote entrepreneurship, not knowing what our entrepreneurship was itself and when I was graduating, I had an offer in hand from a company that came for campus placement. 

Between the time I graduated and the time I was supposed to join, I had a couple of months in hand and I thought, why not come to Bangalore, chill for a couple of months, do like an internship or something. So that's when I started looking at internship opportunities and started where I think easier entry point for internship as well. Then I started interviewing with a couple of companies and then there was one, which was actually looking for a full-time person. 

I think they liked me so much, they rolled out an offer. At that point in time, I looked back and said that, okay, I think I've been preaching about entrepreneurship. I've been preaching about startups so much. I think it's time for me to join one now. That's when I joined a startup, again, a Blume portfolio, was there for two years.

Nikhil Nair: What's it called?

Venkatesh Modi: I was at Locus.

Nikhil Nair: Okay. What do you do?

Venkatesh Modi: So they are a logistic SaaS company. They optimize any type of decision that is involved in the movement of people or goods between any two points on earth. So I spent two years there. 

First year, I was in the founder's office. I think that was like the cherry on top. First job, you are working at a startup. You are in the founder's office. You actually get to see the entire world and how business functions from the eyes of a founder and you're working so closely with them. So, you feel like you are actually impacting a lot. That went on for a year and at the end of year one, I realized that okay, I've been in general management for a year, but I was also very curious to I think pick up business skills or product skills. 

I moved to the business function. At that point in time Locus was actually expanding across Southeast Asia, and I don't know why they just thought that they should just let me go there for a project and contribute there. So, I did a trip in July 2019 to Indonesia and I spent a month there and I think people like me there, I like the country. And they told me that I think you can just be here for a couple of months. So then I was part of Southeast Asia team. 

I think this is an amazing thing. You are in a first job, first year is almost done. You're getting international experience and all that. I don't think many people are fortunate to get that. I was probably very lucky. 

That worked out very well and I spent eight months traveling between Bangalore, Vietnam and Indonesia. Unfortunately, COVID hit back in Feb 2020, and we all came back to India. We did not really think that we would never go back. We all left our luggage there. We thought okay, it's just like a couple of weeks until things go away, but then, we never went back. So that's then I completed two years at Locus.

I realized I was still, I think, looking out to work closely with more founders, interact with more people. That's when I started looking out for VC opportunities and then Blume happened. That's when I joined Blume in August 2020 and I've been part of the firm for the last three and a half years now. 

When I joined, I was working on SaaS, Agri, deep tech, healthcare, a lot of sectors. Then, at the end of year, I think EV landed on my plate. I think that was probably one of the best thing that happened because it really worked. I worked very closely with Arpit; and at that point in time, we had only invested into Euler and Yulu. We were just at the cusp of investing into BatterySmart. 

That was the first deal I worked on in the EV space, and I think BatterySmart again was an amazing company. They had their product-market fit. They just had to keep scaling up, and I could see that. What amazed me at that point was people talk about it, and that was probably the first time I was witnessing this first hand that a company who can actually be saving the planet, also be helping people earn more money – impact! Because BatterySmart does that. That was, I think, a big inspiration for me and I was like, okay, I'm getting to be part of this. 

That's how the EV journey started. Then, we invested into ElectricPe and Vecmocon. Then, we came up with a report as well. I think it's been an amazing journey. 

Now, I have made it official that I'm 100% committing my time towards ClimateTech and EVs. So, I think that's been my journey so far as well. I thoroughly enjoy working on all things climate. I think I relate to it on some level as well.

Nikhil Nair: Absolutely. I think you've also built a lot of credibility in the space, you and Arpit both together, where your names keep coming up when it's to do with climate or EV. You definitely built a good niche focusing on a very promising area. Maybe a time for me to introduce myself, what I've done before. 

I grew up in Hyderabad, went to Christ College in Bangalore and then spent 13 years in different solar companies. The first company I worked for was in the Middle East. They were selling solar cells and panels to Europe. So, this is when solar was about $5 a watt at a panel level. So it was still quite expensive and it was a manufacturing setup. 

I was very intrigued by technology. I was like, this is great. I can have a paying job and is going to be renewable energy and somewhere it is net good. I think I was still figuring out exactly what that meant, but it felt like a great position to be in. 

Then, I spent three years at a company called Selco, which is a very celebrated social enterprise based in Bangalore. They do a lot of work in rural electrification. So, finding interesting models on how to make solar energy affordable to rural households, because the problem statement at that point was there were about 18 million households in India, roughly 300 million people that did not have access to electricity. It had kerosene, candles, etc. So, there are many companies that were in the space, but Selco was one of the pioneers. They started in 1997. 

That was quite life changing because I was traveling about 20 days a month to villages, to rural areas in Karnataka, in Tamil Nadu understanding how we can make energy affordable. How do you convince the banks? How do work with microfinance? Because the asset itself is more expensive. Solar energy product was about 15,000 rupees, but you have to make it affordable to somebody who's earning 3000-4000 a month. Finance was a key intervention there. We were able to couple that. So it was a fascinating three years. I was very hardcore then, and I was passionate about that space, and I wanted to stay in that space. But I wanted to see scale.

While I was seeing business model, innovation, impacting, I was like this is a drop in the ocean. It'll take me multiple lifetimes to make a dent in the larger problem. In pursuit of scale, I decided to study. So, I was a year at Oxford and after that is where I did a short project in the Bay Area and got a sense of the Silicon Valley hype and actually Silicon Valley, two of the episode had also just released, very timely we were watching what is happening with the episode and also meeting a lot of great people. 

Then, I spent five years in Kenya working for a company called M-Kopa, which is a fascinating company founded by the guys who created M-Pesa. So, M-Pesa is the world's first mobile money transfer service started in 2005. So, predates the smartphone and people are actually SMSing money to people in 2005, 2006, 2007. So that team came together and said if I can actually transfer money, what are the other products and services I can build at the back of a payment system, kind of what India has done 10 years later? Now that there's UPI, what are the new business models on top of that? 

So they put a SIM card inside the battery that would turn on and turn off the solar system based on how people paid for it. So that was a large industry that got created called Solar Pay As You Go. And I spent five years there. It was a young company about commercial launch at about 50,000 customers when I started. When I finished, about five years later, we were a million households in East Africa. It was a lot of fun. It was a lot of intersection of technology, financing, social impact, all of them converging into a beautiful business model. 

Then, in 2020 is when I felt I want to obsess with something for the next 15 years of my life. Solar had gone from $5 a watt to 0.40 cents a watt to 0.30 cents a watt and those cost curves had looked quite promising. It has largely a commoditized kind of space.

Electric vehicles seem like one that, I could resonate a lot with a lot of parallels between there's an energy asset, there is a hardware piece, a financing piece that is critical. In 2020s, when I started Ohm Mobility. Ohm Mobility is an EV financing platform where we want to simplify the way borrowers get access to capital. We do a lot of work in B2B businesses looking for leasing products, looking for financing, but we're also exploring some really exciting opportunities in B2C where we can bring a platform play for easier access to capital for EVs for retail customers, in two wheelers, three wheelers, etc. So that's a little bit about me and the journey.

EVs, I want to understand in terms of timing, why is this a great time to think about EVs? Because what I understand is from an entrepreneur standpoint, from an investor standpoint, timing is very critical. I think one of the questions that many investors have also asked is why now? So, why now for EVs?

Arpit Agarwal: I will want Venkatesh to add to this. See what has happened is that there was a point of time when the technology or the new kind of electric vehicle power train was expensive. The technology also keeps getting developed, cell supply keeps getting better, it becomes cheaper and cheaper. And we've seen the cell prices going down like a secular trend over the period of time. 

What is definitely happening, therefore, is that at one point you will see that buying ICE vehicle versus EV start making sense in favor of EVs. We call this what is called as TCO, Total Cost of Ownership. The moment you see TCO positive happening in case of electric vehicles, which is very strong for three wheeler and four wheeler cargos, very strong for fleet use case of two wheelers, e-rickshaws of course are entirely electric in nature. Suddenly, it starts making commercial sense for individuals and average people like you and me to make the decision in favor of EVs which creates this why now.

Venkatesh Modi: I think additionally because of what is happening globally, Tesla coming up 10-15 years ago, a lot of EVs coming up in China and government, I think, realized that the energy transition has to happen right now. The FAME II policies and subsidies that came up, I think they acted as amazing tailwinds. What Arpit talked about TCO, it was actually not positive for a lot of vehicle segments and because of these subsidies, it became positive. I think tailwinds also are a big factor. A lot of people talk about, I think, PLG in SaaS.

I want to use the same terms PLG, but instead of product-led growth, it's policy-led growth. I think that is probably one of the biggest reasons why EVs have had the kind of adoption they have over the last couple of years.

Nikhil Nair: So, the driving factor is largely cost and policy. You'd say in a matter of time, even the vehicle quality. That is I think, coming up as well.

Arpit Agarwal: _____ becomes better and better. That's right.

Nikhil Nair: I remember you making a point in one of your early talks about how 15 years ago one would buy a scooty that would say it's only for two people, but five people are sitting on that. It works all right.

Arpit Agarwal: It works all right. Yes. So, very interesting point. If you look at it from an OEM or a new vehicle perspective, the important thing is that a new vehicle will get adopted when the vehicle quality goes above a bar. Now the challenge with vehicle quality or the product quality is that product quality requires a certain amount of investment. 

Now, people who are making that investment will not make that investment if they don't see returns out of it. If returns, which is consumers buying the vehicle is not happening, investment won't go in. It is a classic cold start problem or what we call is Catch-22 problem. 

Therefore, slowly, first some venture capital would have gone into a company like Aether and Ola Electric and Tata's would have decided to invest into their own electric power trains. And so many other companies would have come up. Slowly more and more quality vehicles get into the market. Once consumers get a lot more confidence, they start buying more and therefore, more investment flows in. So, we have solved this Catch-22 situation where good quality vehicles exist, good quality products are coming out, new products are coming out. We know exactly what to expect and I think this having a very important, very new product gets solved for itself.

One important thing you should notice here is an Indian consumer is a very demanding consumer from a vehicle perspective. We expect the vehicles to work on roads. Our Indian roads across our country are not great. Our temperature is almost always high. We are a hot country mostly. The expectation of vehicles to last very long, to last 10 years at least. 

Our expectation of cost also is very finicky. It has to also make sense. Such high amount of expectations are probably unique in the world or maybe it's symptomatic of all developing countries. 

However, what we also have in India is that we have a very large mass of people willing to buy these. So, it's a very large market, which requires very stringent requirements for the product and hence, it makes sense for companies to invest into new products here as compared to, let's say this for argument's sake, a country in Africa, which may not be as large. We'll not see new products coming out of that country for themselves. It will probably be imported from a larger country like India or from a technology advanced country, let's say, Germany or Japan.

Nikhil Nair: Very true. In fact, the largest selling two wheeler on the continent is Bajaj Boxer. Everywhere we would go, people would swear by a Bajaj Boxer in Africa, in East Africa. So that is the go to and they actually think it's an African product because it's so prevalent.

Arpit Agarwal: I'm not surprised. It was built for the conditions, hot country, bad road conditions, very bad supply. Everything has to just work and consumers expect the vehicle to do everything. They will take their kids to school. They will take their girlfriends to college. They will take… whatever, it will have a four people sitting on a bike. It has to work and it has to work in road conditions and rainy conditions and hot conditions. It's crazy of what we expect of our vehicles to do and magically, these vehicles really perform. 

You look at old vehicles like for example, Honda Activa or look at Maruti Alto. These vehicles are so robust. At the price point that it's actually surprising how they're able to put together that price point and that kind of ecosystem service network and people really trust this. It is fantastic what auto companies are able to pull off and that is the opportunity for young startup also to be able to prove that vehicle which really outlasts themselves.

Nikhil Nair: Absolutely. In fact, I think this is the biggest ask that I have of the ecosystem. Whenever people ask me, what would you like to change? Definitely FAME is helpful and the policy is a big part. But if we can magically create amazing products that are super robust, I think entrepreneurs will fix a lot of things, otherwise. The confidence that financiers don't have on the product, that even customers don't have the leasing also. People are saying, I want leasing because I don't know about the product quality. If we can have a couple of killer products in each category at a price point, that makes sense, I think that will really change that and I think it's also come a long way. I would say in three years we've come a long way.

Arpit Agarwal: Very interesting. What is going to happen and Venkatesh you talk about more of this. What is going to happen is a product may not be very robust or a single product may not be very robust because the only way to build a robust product is to launch it in the market? So you understand it's a cycle. Some products have to go to the market, then they have to get tested, then improvement will happen. Then you have to go test it again and improvements will happen. So only after a lot of cycles, you'll see robustness. Honda Activa did not become Honda Activa, Hero Splendor did not become Hero Splendor on first or second year. It took a long time. But if you could do this in a matter of kit, which is what Venkatesh works closely with a company called Vecmocon is able to do. Talk about it.

Venkatesh Modi: I think along these lines if you want to talk about Vecmocon, this is a company which is operating in the vehicle intelligence space. What they typically do is they are building the next generation of intelligent components, such as VMS, VCU, motor controller, charger, instrument cluster. 

I think this is something which we should talk about in EV Primer also and why we probably have never invested into a two wheeler OEM is that when we started looking at two wheeler OEM, there were just too many of them. 

Everybody had a very consistent pitch. Everybody had the best BMS. Everybody had not launched their products. Everybody wanted to raise $10 million. And we're like, okay, everyone's so good. So that's when we're like, okay, let's take a step back. And that's when we looked at the entire valuation, we realized that actually if you can go up on the valuation upstream, you can probably choose to invest into a company which is going to supply all components. 

Because see, ultimately, we all know that the future is going to be electric. We can all debate whether it's going to be 20, 30, 40, 50, 60, 70. Everybody have their own numbers. But the future is going to be electric. Government has pushed so much. There's so much investments that have gone into it. Electric vehicles are going to be on the road. There are going to be components which are going to be on the road. And if a company like Vecmocon can potentially take over and build good components. And if you have good components, market will adopt because most of the components are bad out there. So that was the rationale for us to invest into it. We're going to come back to what Vecmocon actually does.

They have categorized themselves as a vehicle intelligence company. They are making kits. And what this means is using Vecmocon's component, anyone like you, Arpit, or me, we can take those kits and we can actually assemble them and we can have an EV brand for ourselves. And what that means is right now there are 300, 400 brands out there. So anybody who wants to actually rebrand themselves or anybody who wants to migrate to a better vehicle or a different vehicle type itself, because what EVs also allows because of the customization, you can actually have a different type of vehicle for college going students, for school students, for teachers, for blue collar workers, for plumbers, for carpenters and all that. And the market is very fragmented. With a kit like what Vecmocon will provide, you actually have the ability to completely cater to a different segments of the market with a different vehicle. So, I think that is the kind of power which EVs are also allowing people to do.

Nikhil Nair: In terms of timing, we're saying technology is there, policy is coming about and it's almost one in a hundred year shift. The last shift, we saw was horseback carriages to motor cars and that famous image I think we've all seen that. New York Street has all these horseback carriages and then literally 14 years later, there's all cars and one horse back carriage and this is a hundred years ago. 

I'm sure that's going to be the case. In fact I was parking in one of the large parking lots, I was seeing a few EVs here and there and I would bet that in 10 years, I would see most of them being EVs where we are like, Oh, I can see an ICE vehicle just because it's better, cheaper, and the quality of the product is going to be far superior and also intelligent. 

I think your report talked about how intelligence is going to provide better customer experience, because right now it's a not smart vehicle with limited capability, but as functionality improves and the world gets digital, there's many more applications there. 

I wanted to get the VC view on how you're looking at this space, because there is an industry that is ready to take off, but how are investors looking at this? Is this venture backable at an early stage, medium stage? How does your community look at this?

Arpit Agarwal: There are multiple different business models here, 20 different things that companies can do. If you look at it from an OEM perspective, people who are going to make these vehicles. The one important thing about an OEM is that you cannot become an OEM without caring about manufacturing and manufacturing will require a higher amount of CapEx. 

Typically, venture capital is not able to support businesses which require very heavy CapEx in the starting and if you don't make that CapEx, you are not able to show any growth. The challenge with venture capital is that it is not the right kind of funding mechanism for most EV companies. Some EV companies will somehow scrape through and will probably make sense. And maybe at some point in time, there will be enough infrastructure available that manufacturing will not need to be set up. But till that doesn't happen in India, it will be hard for venture capital to invest into electric vehicle companies, which is why we haven't seen a lot of early stage investments happening into two wheeler space or three wheeler space or four wheeler. There are probably a handful of companies that have raised money.

Nikhil Nair: You mean OEMs?

Arpit Agarwal: The OEMs. A very handful of companies. Companies, of course, Aether has raised money, Ola Electric has raised money. There is also Euler motors. There's Altigreen and a few other people have raised money. Otherwise, it's not happened too often and number of brands are too many. I don't think venture capital fits there.

But if you look at it from other investors perspective, let us say a strategic investor. Today, everyone knows that electric is the future. So let's say if there is a power circuit company or a cable company, for them it makes natural sense to invest into an electric company and you can find those entrepreneurs who are doing this business, build some decent product and you can put your distribution behind it. Give them some degree of understanding of the market and allow them to build a fantastic product. I think it's a fantastic proposition. 

From a perspective of debt providers, whether they're NBFCs and bank providers, obviously, they will come at a later stage of time when the company has some degree of cash flows, etc., but there is a very large need for such investor, debt investor, especially to invest into CapEx, to invest into the logistics arm of these companies, or invest into leasing businesses that a company may create, or in general, also help their customers buy the vehicle. It's a very large need for debt investors to come into. It probably is not a good fit for VC, but it's on the OEM side.

Nikhil Nair: So what about the other pieces in the evaluation? What is more VC?

Arpit Agarwal: Broadly, there are four pieces is how we have looked at it. 

One is an energy company. It could be a swapping on or a charging company. A lot of investments have already gone into swapping and charging company. We have a company called BatterySmart and ElectricPe in this space. I think there is a lot of need for such things to happen. More investments may happen in this space. We also know that mobility companies have raised a bunch of money. Companies like Yulu, companies like, for example, Magenta Mobility, Zip Electric, and so on, have raised venture capital. I think a lot more will probably happen in this space as well. 

There is a lot of investment that is going to happen in the EV financing space. Where companies like VidyutTech or Turno and a few other companies have raised venture capital, have scaled up businesses and I think it's a good business to be built out there. 

So, yes, venture capital investors are interested. It is only the OEM which doesn't work typically, but everything else is definitely an area that VC is interested. It may so happen that because now enough investments in companies have grown they may be looking at investing into niche, much more narrower niches as compared to what has happened so far.

Nikhil Nair: I've been talking to a lot of different EV companies across different value chains because all of them are looking for debt. Many of them aspire to raise venture capital money. So the question on behalf of many of them is going to be, what is it that you're looking for when you are evaluating some of these companies? OEM I've understood, but if you're a fleet operator, you're a battery manufacturer. You are a battery technology company or a swap station company. What is it that a VC typically wants to look at? Is it growth? Is it maturity?

Arpit Agarwal: Let us give a very quick background of what venture capital is able to do. See what typically happens, Nikhil and you are not a stranger to this. What typically happens in venture capital is a very specialized kind of funding instrument. It was built and customized for people for an era where technology was going to change the world. Literally, and it has changed the world. 

For example, the first success stories of venture capital were Apple computers and Microsoft and Intel and these companies were created with the help of venture capital and really took off because they were fundamentally innovations of some nature and the idea is that when fundamental innovation comes to market, the market will quickly adopt it and the companies will grow very, very fast. Some of these companies have grown probably 1000X in 10 years. 

Venture capital typically works for companies, which in a span of five to seven years, have a visibility of going to 200X of where they are. Now, it is an unnatural kind of growth to think about growth of 200X at entry point, is just difficult to imagine, but there are so many companies in our portfolio, which actually have done the job. So where venture capital is probably at the right fit. 

In many of the cases in electric vehicle space, you will realize that such a high growth is not possible anymore and hence venture capital will struggle to enter those companies.

Nikhil Nair: So if I'm a business, let's say doing a million dollars of revenue, and I come to you and I say, I'm looking for capital, and the question you might ask is, can you become a hundred million dollar revenue business?

Arpit Agarwal: Can you do a hundred million dollar revenue company?

Nikhil Nair: So what if I say I can?

Arpit Agarwal: In five to seven years.

Nikhil Nair: In five to seven years, if I say I can be a ten million dollar company, less exciting for you?

Arpit Agarwal:  It is much less exciting to me. Yes. Venture capital typically works for high growth scenario. The counterpoint of high growth scenario is that obviously some of the companies will fail because you are betting on a technology, you are also betting on a new kind of business model to emerge. It may or may not work out. And that is fine. And therefore, we are, the early stage venture capital, for example, budgets for some degree of mortality as well. And that's okay. Happens too. It's part of our business. 

But if it goes well, it can go really, really well. For example, just yesterday we had IPO of a company called Honasa Consumer, which runs Mama Earth and other brands. This company has grown from zero to maybe 1,500 crores in seven years. That's the kind of business which makes sense of venture capital. Everything else will not be favored. Anywhere we can convince a venture capital investor, that this kind of growth is possible. Ultimately, it is your view versus mine. But if you're able to convince a person, then it is possible to raise venture capital. Who will invest, what will get invested in, what valuation you will get is something that the market will eventually decide. That's a different matter. 

Nikhil Nair: So, as an EV entrepreneur, founder, etc., the high level piece has to make sense, which is how I'm building a 100X business in this. And then all the checkbooks have happened, team, execution, ability, traction, product and luck. Yeah, luck. Serendipity as a market.

Venkatesh Modi: Market has to play for you.

Arpit Agarwal: And luck, and policy. And hundreds of other things have to align. It's very hard for people to really build that businesses. We call them unicorn for a reason.

Venkatesh Modi: Because they don't exist. They're hard to find.

Arpit Agarwal: Because they are mythical creatures.

Nikhil Nair: That's really insightful. Thanks for sharing that.

Venkatesh Modi: But I think on that note which is also important to clear out that I think a lot of times people expect that, okay, if I change this, if I do this, I'll probably be able to get venture capital funding. People should also realize that VC probably contributes to only 1% or less than 1% of the amount of money that is available out there. It's probably the most glorified kind of money that is available for people to use for their business. But I think there are multiple other instruments as well. And people should always be open to that. 

Depending on what kind of organization you're building and what kind of growth you expect and how much you want to be plugged in and what kind of a personality you have, I think it is very important for people to be true to themselves and then seek out venture capital because it is totally okay. You can choose to not be part of a glorified club. I think there is a lot of FOMO also that happens that, Oh, I know someone who actually picked up VC funding. 

I know that I'm better than them. How could I not pick up VC funding? But maybe there are lots of other things and factors that come in. This is something which a lot of people should realize that VC represents probably the highest risk capital pool available, less than 1% of the world capital is VC and people should always be open to experimenting on other pools of capital as well.

Nikhil Nair: Thanks. My personal view has been I think for most businesses at a very early stage, and we are still, I would say at least seeds kind of stage, somewhere in between that. Our pursuit has been to find something that is repeatable and scalable. Finding product-market fit and figure out which of them can be 100x because we've evolved a lot. We have done different things and every time it seems like it can be 100x business, but four months in here sometimes I don't think this is 100x with the moat. 

Our journey also has been trying to figure out what we can do in that and I think you're right I think capital is available. I think people need to figure out how it aligns with their business and how it complements that exactly grow and is that the best capital?

So ClimateTech has been a new and large topic, several investors, lot of capital going into ClimateTech. Can you help demystify what ClimateTech actually means? What does it cover?

Arpit Agarwal: Venkatesh, you want to take this.

Venkatesh Modi: Actually, we started looking at EVs from 2018 and we invested in 5 EV companies and that's when we realized actually EVs is just like a subsector of the larger ClimateTech space. A lot of people have different definitions for ClimateTech. I think one definition which is probably globally accepted is any kind of company or technology which can help reduce emissions can be categorized as ClimateTech. 

In this case, EVs are a part of ClimateTech because you are not using ICE vehicles and you're using electric vehicles and they do not give out emissions compared to the ICE vehicles. Obviously, you can always argue that EVs, the energy is being powered by thermal, coal plants and all that and they will give out emissions. But then I think there are arguments against that as well. 

Broadly, I think within ClimateTech, there is EVs, there is NewHydrogen, there is BatteryTech, there is Circular Economy. There is Agroforestry, Agritech and anything and everything which you can build on to reduce emissions or prevent emissions into the environment is probably can be considered as climate tech. 

Arpit Agarwal: Very similar. ClimateTech, what is happening, Nikhil, is that it is going to be a collection how ClimateTech will actually happen. And you have been a solar entrepreneur, so you know. Solar is an example of ClimateTech. You are basically creating a carbon efficient or carbon neutral or carbon negative way of generating energy. Similarly, electric vehicles, a carbon negative way of generating of moving people or moving goods. Similarly, every other process that we see will adopt some of these new processes. 

All of this will have two parts. One is a new technology has to be created in every single segment, and then that technology has to scale up. Now, the creation of technology is happening and across the world people are looking at thousands of problems and scaling of technology has not happened in too many sectors except maybe solar or EVs or maybe a couple of others, but maybe other 50 problems that remain to be solved. 

For us, ClimateTech is an opportunity to really see the world being changed with the anchor and the pivot being carbon neutral, carbon efficient technology; however, actually delivering business value in terms of being faster, cleaner, better, and cheaper maybe. And that is the way in which businesses and consumers are going to adopt completely new ways of being and this is the opportunity that ClimateTech presented. It's going to be all encompassing in some sense.

Nikhil Nair:  I understand. So even if I'm, let's say a cloth manufacturer, and if I find more energy efficient ways to produce that, that will also be considered in climate.

Arpit Agarwal: Absolutely. Yeah, so there could be a cloth manufacturer trying to do energy efficient technology. It could be a cement plant making, emitting less CO2. It could be steel manufacturer trying to do less CO2 emission. It could be oil companies trying to find out ways of using less oil inside oil, for example, you say ethanol. Then, it could be some consumer using a new technology which reduces use of plastic, for example, by using disposable bags or using less cloth, by using bamboo fiber or people using recycled pet-based polyester based T-shirts and trousers because it is recycled and therefore reduces plastic on the planet. All of these things cover the ClimateTech.

Nikhil Nair: Got it. And I also was looking at some data and it showed that broadly, the big buckets for emissions are agriculture, manufacturing, and transportation, Iron steel, and buildings.

Arpit Agarwal: Iron and steel and buildings. Yes. Iron and steel is very large as well. So all of these areas where we are emitting gigatons of CO2 every year across the world are going to be becoming a lot more carbon efficient, maybe carbon negative. 

Nikhil Nair: So all of them are about 20-25% of the mix and there's another slice of I think 5-7% that is everything else. So these are the big...

Arpit Agarwal: Agriculture is a large area where there are a lot of CO2 is emitted by, for example, poultry or dairy farming or even agriculture versus otherwise, all of this can undergo a significant change.

Nikhil Nair: So, EVs is a subset of the broader theme of ClimateTech and therefore when people talk of money in India and globally into ClimateTech. You can be a small component manufacturer of EV, you could qualify under ClimateTech.

Arpit Agarwal: You could be an automotive, you could be an efficient way of transporting goods on the factory floor which is also ClimateTech because it's an efficient way of transporting something. Similarly, you could do a green hydrogen company, could also be ClimateTech. You could also be a consumer company selling disposable bags, also a ClimateTech.

Nikhil Nair: So we also from where we sit from a debt perspective, we are seeing a lot of interest into climate debt, which is it going for net neutral or carbon positive projects and banks and larger institutions are looking at how they can set up funds exclusively for this, including customer deposit. If I tell you, you can get 7% for something, or you can get 6.8 or the same percent, but it'll only go to clean energy. You might want to pick that. So, that's going to change the way capital also get deployed, not just in venture capital, but also in just regular debt.

Arpit Agarwal: On the capital side, it has already become a very large trend where a lot of capital is now differentiated between green and non-green areas of deployment, but the downstream companies which can take that capital and grow are not very large yet. At this point, it feels as if there's a lot more capital chasing fewer projects, but I'm sure projects will come and grow and eventually, we will have a balance.

Nikhil Nair: That's a good message to people listening. I think there's a lot of capital chasing good ideas, good problems, and good opportunities. So it's a great time to consider...

Arpit Agarwal: Being a ClimateTech entrepreneur. 

Nikhil Nair:  Absolutely. That's a great message. 

Related to that you spoke Venkatesh about emissions, there is this much talked about subject, is EV actually clean or is it not? I think you should unpack that and try and provide as much color as you can on this topic. The question that people ask is “when I buy an EV, is it truly green? Because the energy coming from the EV is actually not clean. It could be coming from coal. It could be coming from fossil fuel.” So help us unpack that.

Venkatesh Modi: I think this is a very much debated topic and a question which everybody asks. So the thing is, see when you are dealing with a gasoline vehicle. There are millions of gasoline vehicles out there on the road. They are all emitting emissions every day, every time they are being run. Not many of them have the capability to reduce the emissions on an individual basis, so you see a fragmented chain of emissions in the entire city. 

Whereas in the case of EVs, while they're not actually emitting any kind of emissions, while they're on the road, most of the emissions may be coming from the electricity they use and this electricity is probably produced by thermal power plants. But the good part is in these thermal power plants you can actually deploy carbon capture solutions. So in a lot of ways you can actually reduce the entire cumulative emissions at one point. I'm not saying you can make that zero, you can reduce that. So in a lot of ways you can control it. 

EVs are definitely cleaner than ICE vehicles, is what the stance is. Hopefully, obviously, we know that government is investing so much, the Indian government has committed that 50% of the energy produced by 2030 will be renewable from renewable power. 

In that case probably slowly, steadily, but surely I think most of the EVs will migrate towards using renewable energy. Right now in India, I don't think we as consumers have the ability to do even have a choice key I'm going to use green energy or not. Whatever does it is come out here and they control their monopoly and they control what source it comes from. So, probably in future when there is more I think power given to discoms or private companies come up, it may be possible to choose whether you want to use green energy or not. And I think that is where we are headed to people argue about timelines. I think the future is clean and green, but timelines are still unclear.

Nikhil Nair: So, it is my takeaway that it is definitely better off than what the current is, but it's not solving all the emissions. So, it's not zero emissions yet in terms of life cycle, but it is way better than what we had.

Venkatesh Modi: Exactly. Because you also need to consider the kind of emissions that would have gone into making the vehicles or transporting it. What if it was made at a factory and then a gasoline truck was used to transport it. Would you not use the electric vehicle? No, you'd still go ahead and use it. Components, like a lot of times batteries and cells, they are mined. A lot of energy is being spent on that. Ultimately, I think energy plays a big role and hopefully, in the future, next couple of decades, a lot of them will be moved from fossil fuels towards renewable energy and I think that'll solve for a major portion of the emissions.

Nikhil Nair: On India's energy mix, I think Venkatesh you talked about it, I think it's been a phenomenal story on us moving to renewables. So actually stats show that about 44% of installed capacity in India today is renewables. So about 416 gigawatts is India's energy installed capacity today out of which about 178 of it is from renewables, solar being 66 gigawatts, hydro being 46, wind being 42, and some of the other things like biomass, waste to energy, small hydro being a small percentage. 

In terms of energy generation, it's been a huge step forward because looking at this data from about 10 years ago, India was at about 200 gigawatts of total capacity with roughly 50 to 60 gigawatts of renewables about which 30 to 40 was hydro. So, solar was about 1 gigawatt and solar has gone from 1 to 66 gigawatts in a decade. So, it's quite a step forward that we have doubled our energy generation.

Arpit Agarwal: Ánd still doubled.

Nikhil Nair: Exactly, still done very well on renewable energy. For India to be kind of power sufficent, we need to get to about a 1000 gigawatts of power generation. In that, if you can get to 50, 60, 70 percent of mix, and I think India is quite conscious of wanting to do that, given that we want our dependency to reduce on coal or fuel. There is solar and wind, etc, are more indigenous, you can control supply chain, lesser trade deficits, etc. So, I think it's a really exciting time to see that also shifts. In a matter of time, we should be able to have solar power that charges my EV that has zero tailpipe emissions and solves for pollution.

Arpit Agarwal: Hopefully, in our lifetimes.

Nikhil Nair: And I also think tailpipe emissions play a big role in city pollution and different stats have shown different numbers, anything between 40%-70% of city's pollution is just through emissions from vehicles. If that becomes zero, that itself will save a lot of cities.

Venkatesh Modi: Exactly. Look at Delhi. At one point, I think Kejriwal or the Delhi government actually banned use of vehicles alternatively. Odd/even scheme and they rolled out. So, that was obviously intended to reduce the amount of pollution that exists in the city, which directly correlates to what you just said, tailpipe emissions actually contribute probably the most to city pollutions. 

Nikhil Nair: Absolutely. So I think the future is quite optimistic. So the argument is it is not a 100% there yet, but it's a huge step forward from the current technology that we have and therefore a cleaner path forward. 

I want to talk a little bit about ICE versus EVs. Core question is what is different and what's the cold start problem?

Arpit Agarwal: Nikhil, what happens very often, and people often ask this question, my friends ask me this question, what is the difference between EVs and ICE? They are, you interact with them very similarly. There are similar controls. There's a steering wheel. There's a brake. There's no clutch pad, of course, like an automatic vehicle, but that's all, everything else looks the same. 

Most people don't realize that an electric vehicle is fundamentally different as compared to an ICE vehicle. What is fundamentally different? Everything is software controlled, is a very important piece of difference. When everything is software controlled, you could program it in a way that you could want, one; you could learn a lot more about everything and therefore, the same hardware will perform very differently. 

For example, your and my phone, even if they have same spec, actually will perform very differently because they have learned over a period of time that usage that I have and usage that you have. Therefore, it keeps optimizing fit. We don't realize it, of course, but it keeps happening. 

Similarly, in case of electric vehicles, because there's so many parameters to be considered, we will be able to optimize the performance much better. It is not just about optimization, you could optimize the car tuning also. It is also about the data that you collect. It is also about the software that is written. Therefore, the software upgrades can happen. 

For example, I was reading many years back, one fine day Tesla buyers realize that they can now drive their Tesla autonomously and such things do not happen in ICE vehicle. The hardware does not get upgraded over a period of time and maybe the software does get upgraded slowly, but it happens very, very slowly. So software is a very important piece.

Second, it is much less moving parts. If it is much less moving parts, it actually changes the entire business of repair of automotive. There is no engine oil to be replaced. There is no air filter to be cleaned. There is nothing like that. There are only few moving parts. There is a motor, there is a transmission, and then there are wheels. Of course, breaks will go wear and tear. Of course, tyres will go wear and tear, but everything else will not require any maintenance. As a consequence, people who are invested in maintenance companies, car service companies expect the business to go down because in the EV space this won't happen.

The third very important difference. It is not going to use a specific outlet to get the energy from. So, you don't have to go to the nearby, CNG station or petrol station to get your car. It can happen at your home. It can happen in office. It can happen everywhere that you are. Such a distributed nature of energy has not been experienced in the ICE world. It fundamentally changes the way energy companies think about where business is. 

The companies who distribute energy and oil companies, therefore are obviously concerned that the business is under threat because now oil companies and power companies are in the same market, who would have thought this would happen. Who would have thought that Tata Power has a role to play in automotive businesses? 

What we should realize that it is fundamentally different and hence, it has to be considered and completely different class of vehicle. Hence everything changes, the kind of supply chain changes, the kind of vendors change, the kind of assembly line is required changes. The kind of skill that is required to build these vehicle changes.

The largest and the toughest challenge today is to hire the software engineers which can write the right kind of code for their electric vehicles. It is not possible. Then the Euler Motors and Bajaj Auto will face the same challenge. Because it is just, we haven't developed enough people. 

Another big challenge is, how do you develop battery engineers? Battery engineers did not get produced from our universities. The best quality battery engineers will probably be sitting in the U.S. And they are going to be equally hard to get for any company in India. And if you don't get the kind of battery engineers, how do you optimize the performance of the vehicle? It is not counting upon the decades of work that mechanical design or engine design has gone through. It is completely new and everything is still being discovered. 

It's a fantastic change that people often don't realize.

Nikhil Nair: Do you feel that this is going to be separate where OEM is good at manufacturing and they will hire a company that does tech and R&D or you feel it's going to be a full stack solution where who can like a Tesla equivalent or do you see...

Arpit Agarwal: Very good question. In my mind, I would like Venkatesh to also add auto is a product business and a product business will require you to have very tight control on everything together. For example, you should have your own software, you should have your mechanical engineering, you should have your electrical engineering, you should have your battery engineering, all put together in a single box. If you do not control any of these, you are going to be struggling to be able to make the best quality vehicle, at the right price. If you don't produce a vehicle at the right price and good quality, then you're not going to get adopted. 

I think what works for auto industry today is that they have very tight control on their supplier, probably will continue to work. However, because the supply chain has a very large component called battery, it will probably make sense for them to have access to battery cell manufacturers. Battery making can happen inside or could be third party, but cell manufacturing supply is very important to be set up and it will be probably required for them to have the software in house because there are not enough good quality software providers currently available. And as a consequence, it has to be built all entirely by hand. Those things will probably… 

Therefore, we will see a future where an auto company in ICE and an auto company in EV will look very different because they have different capabilities. They have different kind of people who work there, and certain things cannot be outsourced and therefore we'll have to have it in themselves.

Nikhil Nair: Interesting. So DNA of these companies could change. 

Arpit Agarwal: Very well. I think the DNA of an EV company looks like a software company. What do you think, Venkatesh?

Venkatesh Modi: I think that's fair. Right now, I think all permutations and combination exist. Lots of companies have full stack models, vertically integrated models. Some of them are co-developing, let's say, motors or battery packs. Some of them are just procuring from people, but I think in the future, like Arpit mentioned, control is something which a lot of OEMs will want to warrant. And for that, they will end up probably acquiring these companies or investing into them or probably making sure that they have bought 100% of their order book for the next 10 years. That may end up being like a sole company, not being a subsidiary, but then that is like a complete dependence on the OEM itself. So all this model will exist and I think that's fair to say that control is one of the single most driving factors. 

Additionally, I think a lot of typically, and this is where we can bring in the VC point as well. VCs are used to investing into software first business, and that's why we don't see a lot of VCs also investing into EVs first. Because, all the EV companies we have invested in, there is a hardware component. There is no going away from that. You have to deal with hardware. Hardware involves logistics, hardware involves probably lower gross margins and all of that. 

From that perspective, I think a lot of people out there think that they might probably want to build like a software first business for EVs. I think they may want to probably look at the value chain and truly understand where can this fit in. Even if it can fit in a particular part of the value chain. Why will anybody who owns the hardware actually allow the software player to come in because the margins are already thin. 

People are already fighting to, I think, find their own space between the value chains and trying to create space for themselves. So I think truly for software first companies without truly having ground experience or ground expertise may not probably survive as well. I may be wrong about it, obviously. But yeah, I think this is something which I think a lot of people out there who just want to probably build in the EV space should also be aware of. Without actually dealing with hardware, there is no point of like actually being in the EV space.

Arpit Agarwal: Two things that do not change, of course, is that one automotive product has to be very, very, very robust. Even consumer grade products, forget military grade products have to be very robust. Our vehicles will undergo so many stresses over their lifetime that if it is not robust, it is not going to survive and therefore thoroughly tested. Which does not change. 

The other thing that does not change is that you will still need to have distribution, whether owned or third party, but you still want to have distribution and ensure that there's a touch point for the consumer to be able to test out, to be able to buy, to be able to make a decision, get financing, etc. Those things don't change. 

That probably has a natural advantage for a company in the older school, all the incumbents in the market as compared to new companies. But then, because of the product challenge, I think the new age companies like Ola and Euler will probably continue to have a significant market share, if not majority market share.

Nikhil Nair: EV sales, just want to see what that has looked like over the last few years. And we have some fascinating data. It basically shows that in 2013, we had about 2400 electric vehicles sold in the country; 2016 was 48,000; 2019 was 162,000; and 2020 took a dip of about 1.2 lac or 120,000. Then it's been 3x since. So 2020, 120,000; 2021, 320,000; 2022, a million. So that's 3x from this one. This year we should be at about 1.5, roundabout there. So the sales is finally looking promising. 

As I like to say that enthusiasm of EVs has finally met with good numbers. Because there was enthusiasm for a long period of time that EVs are going to take off. But I think sales was still quite modest. Like in 2019, the number of four wheelers sold was 847 across the country, which is what two dealerships do in, I don't know, honor here, right? So, therefore the numbers were not there. Therefore, building businesses around an opportunity at that small probably didn't make sense, but that has changed now. 

So want to just get your thoughts on EV sales and you'll have done a lot of work on projecting that out. So, if you can lay some thoughts that'd be great?

Arpit Agarwal: So Nikhil, we, Venkatesh and I, are probably the most biggest EV bulls that you can find. But what is beautiful about what has happened in the market is that we haven't proven right. Last year, we had predicted about 750k sales in high speed two wheelers and in that last 12 month period, it was about 690K or something and we had predicted about a million sales this year and likely to catch up as well. It has been wild, I would say. 

The idea that TCO makes so much difference in people's lives has been quite wild and it's exploding at a fantastic pace. In case of three wheeler, Venkatesh has the data. It has also been amazing. What is the data Venkatesh?

Venkatesh Modi: I think three wheeler last year, we predicted that 25,000 three wheeler across cargo and passenger, L5 category would be sold. The actual number was 24,130. So almost there.

Nikhil Nair: How accurate can you get on your report?

Arpit Agarwal: Yeah. It really took us by surprise, I would say. What is clear is that if people did not realize this so far, and if they needed any more realization, the time for EV has come. It cannot be reversed. If a company who was dependent on auto industry so far was not thinking of EV so far, you will be really unlucky or stupid person to not think of EV so far. But if you are, by the way, not looking at it, today, you should absolutely drop everything and start looking at EVs because this is only the starting point. We are hoping that we will see 15-17 million EVs or two wheeler EVs alone being sold by 2030. What's the number that we are projecting?

Nikhil Nair: Let's just look at the numbers that you'll have projected. 

Arpit Agarwal: We are predicting that 12 million, 1.2 crore, which is 10 lakh vehicles a month high speed two wheelers will be sold in just 2030, which is like seven years from now. I don't know if it's possible, but if it happens, even if half as much happens, the world will be a different place. India will be completely different place and imagine what ecosystem will that build. There'll be financing, there'll be charging, there'll be swapping, there'll be component manufacturer, there'll be subsidy, there'll be service. All of that has to fall into place, by then this happens.

Nikhil Nair: Yeah, I completely believe that. Of course, I'm an EV enterprenuer. So I invested my life behind this, and I believe that's going to happen. And there are trends like in China. So China sells about 40 million 2 wheelers a year, out of which 50% of them are electric. So, they sell 20 million electric vehicles a year already.

Arpit Agarwal: So China does a little extreme. When we went to China in 2017, we could see that the Chinese government does not allow ICE vehicles to ply in Beijing and Shanghai. they said no more ICE vehicles and suddenly everyone has to buy electric. So, it's a little extreme, but of course those were mostly light vehicles and mostly driven by lead acid batteries. But that shift had already happened when we went to China in 2017, and obviously, it has become translated into a lot of car sales. Cars didn't have that restriction till then. It has probably now come into place. But, yes, I think the same trend is probably going to happen to India as well.

Nikhil Nair: On EV sales two trends that are looking quite promising to me is the total cost of ownership, looking positive and second is vehicle ownership in India. So, let's just talk about a total cost of ownership. I know you'll have done a detailed job of that, linked it to an Excel sheet by segment, etc. So, can you just help us understand what is TCO? And where is it positive across segments?

Venkatesh Modi: TCO actually is probably the single most driving factor for the adoption of vehicles. We'll probably take an example and walk you through what are the components of a TCO. 

In the case of, let's say, any two wheeler scooter, you can compare an Ather versus an Activa. So, the first component obviously is the ex-showroom cost. In case of EVs, the government has been giving FAME subsidies. Now, there are two types of subsidies that are available that one is the central subsidy, which is the FAME subsidy, and then there is a state subsidy. So, from the total cost of owners, actually the ex-showroom cost, you subtract the FAME II subsidy and the state subsidy. Then you get the costless subsidy, which is applicable for the electric vehicle. Now, you also add road tax and registration costs, which is almost nil for most EVs across the country. Some states have a minimal amount for it. So, this is on the upfront cost of vehicle. 

Outside of this, if you are taking a loan, there is the down payment of the vehicle, which actually is a different component. Then, there is a financing cost, which is the interest that you pay over the next two years, three years or something.

On top of this, there is insurance, which is obviously you have to avail in the country. And then there is energy cost. So energy cost is nothing but the fuel cost. Now, this energy could be electricity or a regular petrol or a diesel. 

In this case, this is the biggest difference where EVs actually take a big leap where the energy cost is very, very, very low for an EV compared to an ICE. And this is where most of the difference also comes in. Maintenance is fairly similar, I would say. EVs are much lower compared to ICE right now. The last one is the salvage value. Salvage value is nothing but what would happen if I were to sell my vehicle five years down the line. So, add all of this and subtract the salvage value. That gives you the total cost of ownership. 

So now at any point in time, if the total cost of ownership is higher for a vehicle that means that if I were to choose to migrate to that vehicle, I would end up paying more. But in case of EVs, it's much lower and that is why the option has been super high. So, this is how we would break down TCO. Post our analysis, we realized that actually TCO is positive for all segments except buses right now in the country.

Nikhil Nair: Even four wheelers?

Venkatesh Modi: Yeah.

Arpit Agarwal: Including subsidy.

Venkatesh Modi: Yeah, which is including subsidy.

Arpit Agarwal: If there's no subsidy, then...

Nikhil Nair: This is in June or now?

Venkatesh Modi: This June.

Nikhil Nair: The pre June. So till the FAME II subsidy applied. It was positive across segments, which is two wheelers, three wheelers, four wheelers, except buses. Now once FAME is gone, I think your report says that it still is favorable for a two wheeler. Because you end up paying about 40% to 50% more as upfront cost, but you quickly recover it in your running costs because the per kilometer is about 1/10th or 1/20th or 1/5th of what the cost per kilometer is if you are doing petrol or diesel.

Venkatesh Modi: I think on the two wheeler side, it is actually a positive without the subsidy as well. So that is very interesting. And so one component is the subsidy and when subsidies also go away and at some point when probably the upfront cost of an electric vehicle is lower than that or equal to that of an ICE vehicle, probably that is when the adoption will be the highest because post that the consumer has no doubt but to actually choose electric vehicle because he is paying lower money to buy it upfront and the TCO also works out very well.

Arpit Agarwal: Some countries, what they have done is they have input lot more tax on diesel or petrol cars. For example, in Norway, the petrol car is actually more expensive than an EV car. Since they have done that over the four or five year period, the EV sales have gone up to 80% or 90% of all cars sold which is one way of doing this. It is a little bit brutal on the industry. 

In California state, in the U.S., a similar regime applies where the cost of a similar equivalent vehicle in ICE world is higher than the cost of let's say a Tesla Model 3. Therefore, it is a very obvious decision to make. There are tax breaks. They do income tax breaks, and they do a bunch of things, which is why a lot of friends, I'm sure you have friends also, buy a Tesla in the U.S. and that continues. At some point of time, the industry will become mature, the cost will come down, without subsidy also it'll start making sense.

Nikhil Nair: Absolutely. We've seen this again in commercial vehicle applications, especially whether it is autos, two wheeler, the amount of saving that you have, it's cashflow positive from day one. So if you just take a two wheeler and let's say a gig worker, about 8-9 million in the country. They buy a two wheeler. They pay about 2800 to 3000 rupees for the vehicle. And then they spend anything between 150 to 200 a day on fuel. That's another 5000 to 6000 rupees. 

If you take EVs, best case you're spending 1000 rupees a month on fuel. So straight up while you're EMI might be ...

Arpit Agarwal: Upfront cost will be higher.

Nikhil Nair: Probably 3000, it will be 4000, 4500. But you're straight up saving, another 3000-4000 there. So somebody's income at 22,000 suddenly becomes 25,000 now just by doing EV from month one. So it's quite a no brainer there. I think the biggest hesitation that we have seen is people feeling comfortable about the vehicle because that is still new. 

Therefore, I think a lot of people are renting out an EV, attaching themselves to a fleet operator because they're like, Hey, this vehicle makes sense. I'm happy to use it. And I think in a matter of time, they will all want to own it. If I use an EV for one year by renting it out from a fleet operator, I see it's making me money. There's no problem in maintenance. Tomorrow is Diwali and I want to buy a vehicle. I will consider this. Why not? So I think fleet operators are doing a good job to seed the familiarity with EVs, because otherwise it would have been hard for them to get. 

And same thing with auto drivers also. They spend a huge amount of money on petrol. So for them, the moment the product is ready, I think this transition is irreversible because the cost makes sense. The product is there and if the infra around it supports it with financing also easing it, it is…

Arpit Agarwal: Very interesting insight once came to me, I was speaking to a founder of a financing company and he had been working in auto industry for a long time. And he said, you underestimate the benefit that EVs have on the driver. There is no changing of gears. The three wheeler auto and a three wheeler EV is a massive difference. There is no changing of clutch. There is no gear changing. Pickup is very smooth. And all of these things contribute dramatically to the driver's energy, of course, and therefore driver's satisfaction.

And for a fleet operator, driver's satisfaction matters. You and I may not realize this, but that is a very important reason why some people prefer EVs because the drivers are happy. I didn't think it would matter.

Nikhil Nair: In fact, for the first time I've seen women auto drivers doing EVs as well. Whenever I see them, I of course stop and want to chat and understand what happened. They just said, look, I can be a house help. I'll probably make 6,000-5,000, two houses, maybe 10k, something like that.

But in EVs, I can straight make 25K to 30K and it's good. I can turn it off when I don't want to. My timing is flexible. Yet to see how that will pan out. But the fact that is not physically exerting for them and that opens up quite a promising opportunity in EVs for them.

I think there's another trend happening in vehicle ownership, which is underestimated, which number of vehicles is owned per thousand population across different countries. So I found this quite fascinating that India has about 122 wheelers per thousand, same number for Vietnam is 350, same number for Thailand is 290, same number for Indonesia is 280. So the growth opportunity, because sometimes when I look at India selling 16-20 million two wheelers, I'm like, roads are already busy. Is there an opportunity to do that? 

But look at these numbers, it seems like aspiration for owning vehicles or the market is going to grow. So people buying two wheelers is going to happen and a report recently showed that the vehicle sales of two wheelers is going to go from roughly 16-17 million last year to about 28-30 million by end of this decade. So the total vehicle sales is going to happen. 

The moment I looked at the report, I said, hard to believe that it's going to double. But when I looked at ownership per thousand, absolutely makes sense. 

The same thing with cars. Cars, India is only at about 30-40 per thousand. U.S is at 800, between 800 and 900. Countries, even like Indonesia are at 70. Countries like Thailand are at 150 cars per thousand. So the potential for or at least the world trends indicate that need for mobility is going to be very strong. 

Therefore, if you combine total cost of ownership with people wanting to have mobility and the tailwinds around this, it is just massive, absolutely massive.

I want to call out a couple of interesting trends, penetration wise. So, two wheelers today, we are seeing 5% penetration which was sub 1% just a couple of years ago, like three years, four years ago, we were talking of 1% of market. We were below 1% and we were like, we have touched 1.

Arpit Agarwal: Now it's 5% already. Million out of 20 million. Yes.

Nikhil Nair: And cargo three wheelers is at 40%. Three wheeler passenger is at 50% already. So, for every EV sold, there is an equivalent sold. So that means the TCO is playing out really well. The supply, the entire value chain is adding value. Cars are still at 2%. So I think that is still to come, but also new models are coming about. We've seen in the last, I think, we spoke when you went to the Auto Show. And you called and said, this is an EV show because a lot of launches that have happened are only EVs.

Venkatesh Modi: Exactly.

Arpit Agarwal: And no one is launching a petrol car anymore. It's at least hybrid.

Nikhil Nair: Exactly. So I think that is quite promising. And I have to say, someone who's looked at this for a couple of years now, it has happened quite rapidly. 2022 January, number of financiers for EVs, non e-rickshaw market, I could literally maybe a dozen at best. 

Today, I can name at least 20 companies, including the large ones like IDFC, L&T, all of the Bajaj, Kotak, Access. There's no large bank that does two wheeler financing that is not in EVs already. So those trends are also helping the market grow quite a bit with this. 

In terms of percentages, we see something interesting also. Earlier, there were many players, top 10, if you take top 10, top 20, everybody would have 5%, 2%, it would be quite fragmented with one or two people at the top, but that's starting to get a little more consolidated now. 

So brand one to four, I used to have about 65% of market share that has become 75 in October. So last December, 2022, top 4 brands at 65, now it's 75 and brand 5 to 10 used to have about 25% of market share, now it's about 15. So basically the top 10 brands are about 90% of market today, which is again, going a little more towards, people valuing quality, brand recognition is happening.

Arpit Agarwal: There is a network effect at play. Absolutely.

Nikhil Nair: And I think some of the larger players like Ola have come in and in a short period of time has been able to create a large distribution with about thousand deals.

Arpit Agarwal: Pricing plays a role. Financing also plays a role, obviously ecosystem has to be managed and ecosystem has to be orchestrated. So all of this is starting to play a role. People who have figured out charging, financing, service are obviously going to get sales a lot more, even if they have similar amount of distribution and existing OEM, for example, a Bajaj or a TVS already had a lot of depth in terms of distribution that is definitely helping them grow as well.

Nikhil Nair: Absolutely. And I think financing is also coming a long way. Today in EVs we see between 40 to 50% of all retail sales getting financing. In the ICE world, it's about 65% to 70%. So the moment financing eases out, the potential to push that up and sales is going to happen. Again, with so much of interest coming, it's just a matter of time like even a pessimist would say, it's a matter of time. 

OEM businesses and opportunities, I think a big part of the EV value chain is the OEM. So let's just do a small role play. So let's say we rewind five years ago, 2018, you're on the board or you're managing directors of an ICE incumbent, pick any name, and somebody's come to you and say, Hey, EVs is this thing. What should we do about it? How would you have reacted if you were in 2018 looking at your current market versus what is potentially an upcoming trend? Numbers are still very modest.

Arpit Agarwal: Only about a few hundred vehicles have gotten sold last year. It's a very interesting question, Nikhil, and let's see what happens. 

Please don't forget and a very important thing that was happening in 2018 was that everyone in the industry had committed, government had pushed them and committed to Bharat BS6, which means at that point of time, all of them were busy changing their power trains and fuel systems so that it can comply with that regulation. And by 2018, the impact of shared mobility, Ola and Uber was starting to be felt. So, the sales were not growing as fast as it used to grow. While economic cycles keep happening, but sales were already starting to go down because there was less need of a second car. Today, most people don't have a second car in India because you can always use an Ola and Uber or sort of BluSmart and so on. 

From their perspective, the strategic choices definitely had EV, but it was not the top choice. They were probably thinking that, we have to solve for our core business. For them, the core business is to make sure that they have whatever leadership position or whatever market share in the core ICE business. Which means, if they were to launch a new product, ICE has to get priority. If they were to launch a new variant or they have to protect vehicle from a regulation like BS6, then also ICE and that particular product have to take a priority because ultimately, all companies are thinking of capital allocation. So you have to say, my business is throwing this much cash, where do I allocate this cash? Which business do I allocate the cash to? Obviously, the business which is going to be a bread and butter is going to get a lot more love as compared to business which is futuristic. And at that point of time, I wouldn't blame them to say to not focus on electric vehicles because there was no electric vehicles demand and the only electric vehicles we sold, we just discussed the numbers, were in few hundreds, if not few thousands, very early.

Nikhil Nair: So, in context we had about 15 million two wheelers sold and about 16,000 electric vehicles in the entire country.

Arpit Agarwal: That's like 0.1%. So why would people want to make a change. I'm not questioning anyone's part. They're very smart people, very capable people. People who have grown in industry for 30 years, very, very good people. I am sure they knew this was going to happen. Their R&D people were already working on it, but the production people and the manufacturing people and the distribution people said they can't touch the core business. What also happened is that they were also able to convince the government to say that the subsidies and the regulation should also be easier on the ICE business as compared to when government had so many choices, it could have gone Norway way, they could have gone US way at least, but they chose to become a lot more nicer to the ICE businesses, must have been some logic, but that also allowed them to have a little more breathing space. 

What actually should have happened is that if they had allowed themselves to sit on the burning platform in 2018, I'm arguing that some of them would have been far better prepared. As compared to where some of them find themselves today. Now, again, these things keep changing, but we only see companies like Ola being on a top in two wheeler space today. But then TVS, and Bajaj with Chetak is very close and they are in the top three, top four already, and probably will continue to be. 

However, many other players would have fallen by the wayside and it is likely that when this core EV business will grow, they would have fallen by the wayside. So, the strategic choices made in 2018 reflect where they are in 2023. The strategy choices made today will actually reflect where they will be 2028 or 2030.

Nikhil Nair: Next question. So if you are the same board member or managing director of a large OEM today of ICE industry, what is your discussion today?

Arpit Agarwal: Very interesting. We recently did the same analysis and in conjunction with Bain and Company. We have come up with a report and we will send you the link to everyone to use where we were talking about what are the prerogatives. What are the ways in which the ICE incumbent can now leverage the EV space? 

One of the key recommendation that we are making is that you should think of yourself as a service company, not product company, because your relationship with the customer is actually quite long. You are doing software upgrade for a long time and your revenue will start getting impacted and probably have a lot more revenue coming from services after the sales because service has no revenue anymore or much less revenue from now on and you should focus on that.

Second, focus on charging as a space. Focus on building narrower segments as a space. Because a narrow segment makes it possible with the EV, which is much fewer parts to get assembled and with kits becoming more and more popular, it'll become possible for a smaller brand to put together a very high quality vehicle for far less money. And they will probably do it for a narrower segment, it could be a regional segment, it could be a behavioral segment, it could also be an age segment. And you will then have to compete in that reality.

Another very important thing that's going to happen is that the future is going to become multi-brand. It is going to be very similar to what we today think of mobile phone distribution as compared to auto distribution, where you go to one shop, let's say Sangeeta Mobiles in Bangalore, and you get 10 different brands and 50 different variants. And how do people differentiate among themselves? Of course, people are educated enough, they'll figure these things out. And the salespeople have figured this out, the finance people figured this out, and consumer will be able to figure out what works for them, because there's so many different brands and so many different variants. And everyone is a market out there. It will become far more mature. 

Similarly, the sales and services, which is currently all put together in OEM business, will actually start getting deep covered. There'll probably be a lot more sales points and a lot fewer service points in a city, because obviously you need fewer services. Nothing goes wrong in an average mobile phone in a lifetime. Everything remains the same. Maybe the glass or screen gets broken for some people. It doesn't get broken too often. And that is how the world is going to be very different. 

For them, the strategic choices are far clearer today, but the urgency to take an action has also become very important today. When they make these choices today, I would have an impact for next five to seven years. It's a very exciting way to think about the business.

Nikhil Nair: So the way you describe it sounds like a lot of opportunities for companies to play a very specific role and say I will build this service really well. So whether you're a young startup building an OEM or an established company, you will want to work with me because this is the one service that I do. It could be things like roadside assistance or charging or technology for let's say operating system for etc. So you're saying there's a lot of opportunity being available.

Arpit Agarwal: Once you see the industry having established itself in a particular way, then you will see opportunities emerging in software, in tiny slice of service like RSA, in financing, dealer-based financing and so on you will see a lot of startups saying I will become very good at just this component. And that could be building a company because it's a company like motor is so important. Those things are going to happen once the ecosystem becomes a lot more mature.

Nikhil Nair: So from an EV OEM standpoint, can you help understand what are the different stakeholders in the value chain? 

Venkatesh Modi: So, I think as an EV OEM, I will have multiple people who are supplying different kinds of components or sources to me. I think one of them is the cell. The second is cells will probably most likely are coming from China. Then the second persona is the battery assembler. Someone has to actually assemble that. In some cases, I can choose to do it myself. I can choose to do it in house. In some cases I can choose to procure it from a good vendor. I can choose to partner with someone and co-design as well. 

Then, there are other components such as motor, the chassis and tyres and all of that like other components of the vehicle itself that are coming in. Post this, obviously once I have the vehicle assembled, I also need to make sure that this goes and start selling. So for that, I would need a sales and marketing function. So that is another persona within the OEM value chain, which people can choose to customize, have in house or partner with. Distribution is another one which people have different varieties. It could be online. It could be offline. It could be a multi-brand. It could be dedicated. 

Outside of that, because these are EVs and in the typical let's say ICE world, I would not be related to a petrol pump, but in the EV world, I am actually definitely going to be related to the charging network because if I cannot guarantee my customers charging, there is no way people will buy anything from me.

Financing is another one because EVs are a new breed of vehicle. In that case, I really need to have close relationship with finances as well, because if without good financing, nobody's going to buy my vehicle. So that is another one. And after service, that is probably one of the most important ones, which a lot of OEMs and customers also overlook. When building a vehicle or purchasing a vehicle because people assume that whatever vehicle exists right now it is shiny, it is nice. It is going to work amazingly, but then you take it out and stops working what do you do with it? You take it back to the showroom and he does not know what to do with it. 

So, I think after service is one of the largest components where a lot of OEMs are probably blinded. They don't know what to do about it and I think these are some of the larger personas that we see exist within the value chain. Ultimately, it all comes down to the vehicle owner. Without the vehicle owner, there is no need for an OEM to exist. So, broadly, these are some of the major categories of personas within the OEM value chain that we see exist.

Nikhil Nair: That's great! I just want to understand incumbents moving into EVs versus EV OEMs that are younger startups. There's a famous quote by Rahul Bajaj on champions eating oats for breakfast where he was referring to Ola, Ather, Torque and Smarty and a kind of jab back from Bhavesh saying that I have ICE in my whiskey or something like that, equivalent, but essentially I wanted to get your take on, do you feel this is a matter of time before the existing OEMs will realize that there's a huge potential and they will play a large role where the younger companies that do not have distribution or manufacturing capability will shrink? Do you feel that the existing companies, the existing large OEMs, some of them may not survive, they may not make it Nokia equivalent could happen in that space if they have not moved fast enough or a third world where both of them coexist, they collaborate, some specific markets, younger folks take some of them, existing incumbents take. What's your take on that?

Venkatesh Modi: I think that's a very interesting question. We can debate one way or another. I'm sure we have points or scenarios in our world where an OEM has won, a startup has won, or they all coexist. 

I think what it actually comes down to is what is the strategy right now that the OEM is adopting to actually win in the market. The market is what actually defines who is going to win. It is not the OEM. So in a lot of ways, how you react to market is probably what is going to define that. 

From that perspective, I think we have an idea in our heads that we like to call, let's say, the brand distribution and after service triangle. So as a light vehicle two wheeler OEM manufacturer which is like a scooter or a bike, if you are able to build a successful brand that is going to probably take care of a lot of marketing because that is probably going to lead to a lot of exponential growth. 

Now that is not going to sustain that growth without actually after service. So after service is probably the second component of that. If you have good after service, there will be lots of referral. People will be confident about buying your vehicle. Without distribution actually, you can try to sell online, but if people have to shut out 1, 1.5, 2 lakh rupees for a vehicle, there's no way you will be able to sell this completely online. So, I think these are the three levers on which OEMs success or failure is dependent on.

Now depending on how they implement this, whether that is existing OEMs or new age startups is probably, that'll decide whether they are successful or not. And the same can be applied to, let's say, heavy three wheeler and four wheeler OEMs as well. 

The only caveat here is the three levers are product, brand, and manufacturing. Without good manufacturing in place, you are going to run out of money. Without a good product, you will probably not be able to survive in the market itself, and without a good brand, nobody is going to buy it. I think these are the two different, let's say, structures that we have in place to identify whether OEM is going to win or not.

Nikhil Nair: Thanks. I actually agree. And I think there's a world where some of them will coexist. And I also feel OEMs have taken EVs much more seriously now. I'd say for a long time in the top five, apart from Hero Electric, there was not any present large automobile company. But today, if you look at the top five brands, it is Ola, TVS, Bajaj, Aether, and Hero. Hero Vida is inching up. They're not in the top five yet. So the existing incumbents, I think have certainly taken this quite seriously and accelerated a lot of their product, because I think the technology could have been better.

Arpit Agarwal: I would like to argue that, a lot of what we see are early trends. Like in case of election reporting, early trends are often misleading. 

Nikhil Nair: It is exit polls. 

Arpit Agarwal: It seems to be misleading because I fundamentally believe that, and again, this philosophy, that people who have not a 100% committed themselves to EV future are not going to win. And I think a lot of incumbents, people like TVS and people like Bajaj have not a 100% committed themselves to this. They still are hedging. And as long as you continue to hedge, you will lose your edge. Yes, a product is working, but what happens when the product has become mature? How do you launch a new product? How do you make sure that the edge in terms of technology continues to be relevant? And how do you make sure that you are at par with everything else a new startup is going to throw?

So I think that in the future, or where we will eventually settle, maybe turn on the decade 2030, we will see 50% to 70% sales in two wheelers coming out of the new age startups. And the incumbents would be much smaller is what I think, because there's so much headroom for growth. We are talking about less than a million vehicles sold this year to about 12 million vehicles being sold in 2030. There's so much room available for a startup to get a tax together and it is able to perform. Even if it gets launched in next two, three years, there's still such an impressive, very large runway ramp up available for them who are single-minded and very intentional about it. 

And please don't forget that while we are talking about high speed two wheeler, the numbers we have quoted in this video, there's also an equivalently large market for low speed two wheelers which none of the larger companies are part of, including Ola and TVS are not part of that. It is a two wheeler market. It's a large market and people are buying it and will continue to buy it. This option did not exist in the ICE world.

Nikhil Nair: It then goes back to the previous point you were mentioning where there is a subsection of people which are like, Hey, I need to use it 20 kilometers a week.

Arpit Agarwal: Yes. A week. That's it. Go to my coaching.

Nikhil Nair: Brother like somebody inhouse needed. And for that, I don't need to spend 1 lakh. I don't even need to spend 75,000. 

Arpit Agarwal: Absolutely. 

Nikhil Nair: I can get a vehicle at 50-60K, that serves my purpose.

Arpit Agarwal: Or I could lease it on a per day basis.

Nikhil Nair: This itself are interesting use cases, which in the traditional world was, Hey, one product fits it all. Delivery, family, young person. There's one for all. Sports. Whereas now we can actually see smaller sub markets within that and there's a right for some OEMs to win and be, Hey, we have the best product in deliveries.

Arpit Agarwal: Yes.

Arpit Agarwal: Like Yulu, for example, it's a great product for delivery vehicles. Consumers love it for the recreation use, but people don't use it on an everyday basis. Yeah. But people love it. That is what is bound to happen in EVs. I think eventually this is where the market is going to settle.

Nikhil Nair: Great. So I think maybe a promising insight for people watching, building EV OEMs. Don't be disheartened by modest numbers today which is 500, 1000, 2000, etc. There are a whole bunch of them. Due to the data, there are about 100 OEMs that make two wheelers. And even after 20 also, there is a long tail of people. So if you have modest numbers, I think the insight is stay extremely focused on a certain segment, build a killer product for that segment.

And you can actually be a winner in that segment while the larger companies will play in a broad based and they need the volume, you can be the go to in a certain segment.

Arpit Agarwal: Absolutely. And this bound to happen. I would think that companies which are in the top 20-25 today, some of those will get into top 10 and maybe top 5 in other 4, 5 years’ time. Because some of them could be just figuring out their product, the product is figured out and now they only need capital and resources to grow, which I'm sure they will get in the due course of time.

Nikhil Nair: So Arpit, building on that, do you see a large OEM wanting to partner with a younger early stage OEM and say, Hey, this is a segment that we don't know much about, but you're acing at it. We will bring our muscle and either co-brand or, live as existing brands. Do you see that happening?

Arpit Agarwal: The egos won't allow. I don't think that is going to happen. Maybe one odd case, exceptional cases may happen or there'll be a collaboration like Hero and Aether, where Hero's invested into Aether Energy and allowed that company to grow independently. I suspect it is going to be very hard for the managers or CEOs in a large company to swallow their pride and say that we cannot build a good product and therefore, we have to invest into this company. Therefore, it is a classic case of creative destruction, where they will probably miss out on very interesting consumer insights and all the strategic choices that may be available to them today because they are used to a certain way of doing business.

Nikhil Nair: As a younger OEM, how do I go about building the distribution because I do not have the might of a larger OEM? Do you feel they'll have to just build it the conventional way? I think your report talks about digital plus offline as well. 

Venkatesh Modi: On that point, Nikhil, just actually going back to what Arpit replied, probably traditional OEMs may not partner with smaller OEMs, but we just recently, I think a month back Acer has partnered with MUVI and they have launched the EV in Delhi. So, consumer electronics company is getting into EV space. And this is probably one of the opportunities also for those younger startups to probably prove that they have the best product. And if like Acer can do it, tomorrow it's going to be HP, then it's going to be Apple, then it's going to be Samsung, then it's all going to be electronics war, right? So, I think that is also something which we should never overlook. Ultimately, it also goes down to prove that EVs are actually a software first electronic good. 

Nikhil Nair: Software on wheels.

Venkatesh Modi: Exactly.

Nikhil Nair: Or a smartphone on wheels.

Venkatesh Modi: Exactly. So in that case, like I think all these electronics companies also have their eyes on the EV space. They are probably waiting for the right moment.

Arpit Agarwal: Xiaomi already has EVs in China. Yes, too.

Venkatesh Modi: So you might probably come across a scenario where probably I think all the incumbent of OEMs are there and it's all just larger companies. So I think that is also in other horizon and another parallel, which I did not expect.

Arpit Agarwal: Or it could be switch makers. It could be power companies. It could also be oil companies entering this space because it is adjacent to a lot of different... And it could also be, companies which are promoted by auto-company to companies, they all want to become downstream and they will probably want to launch their own brands as well.

Nikhil Nair: So, little bit easier to build, a lesser cost to build. And there are younger companies building specifics, whether it is Vecmocon or Equivalents, where they're supplying parts, where it becomes easier to put together.

Arpit Agarwal:  It becomes much easier to put something together. There's an edge for new software and in the new digital world, the sales are not that expensive. Many things are probably coming together in favor of startups. 

Nikhil Nair: By 2030, there could be three brands in the top 10 that we don't even know today.

Arpit Agarwal: I would think so. Yes. That's probably one in top five as well.

Nikhil Nair: Great. So let's watch this video a couple of years later and see. In fact, one of the things I think the risks of doing this video and putting it out as a document in the world is that we'll laugh at this, looking at this three years later, because so much is going to change so quickly. Exactly. And we're going to be like, wow, what were we thinking? This is our best guess knowing what we know now, but I hope we are wildly surprised. I think companies with some of them will get it wildly right. Some of them will get it wildly wrong. And I think that's the beauty of, such an early, exciting, but hugely promising space in the electric vehicles. 

So, one of the fascinating things in the report that I saw was a case study on Tesla compared to other OEMs in the US, talked about a couple of things gross margin, carbon credits. So, can you just help share some light on Tesla versus...

Venkatesh Modi: So I think in summary Tesla's gross margins are 27%. This is 2022 compared to 20% of Toyota versus 17% of Ford. When we actually started looking at why this is so, we came across some cost structures. Some of the prominent reasons which we could unpack were I think one of the major reasons is the low labor costs. If you look at Tesla, they have automated almost anything and everything that is possible. They've invested so much into machinery, which automate the movement of any particular part, any component and the car automatically just flows through. So I think that is a big, big, big reason. Talking exactly about numbers, Tesla labor cost is 2,670 per car. This is U.S. dollars. Ford is 2,823 and GM is 2,951. So, significantly lower. 

Another thing to note is Tesla has zero advertisement cost compared to Ford which spent 4.4 billion, GM which spent 3.8 billion. Now this is on, let's say, a revenue of 81 billion. It obviously reduces your gross margins as well.

Another interesting thing to note is Tesla actually earns billions every year in carbon credits. Now, carbon credits it is part of the larger ClimateTech space, and probably this is where a lot of subsectors within climate are intermingled as well. Carbon credits is nothing but something which the government or anybody pays you for avoiding or capturing one ton of carbon dioxide from the environment. 

So what Tesla does is because they are running an electric vehicle, they have built an electric vehicle, they make the customer sign a contract in which the customer is giving up on all future carbon credits that they would be entitled to because they own the car. So now Tesla, because again, EVs are software first companies, they are clocking in the amount of kilometers the car is running, converting that into carbon credits and selling it to other companies within California because of the California carbon credit system that exists. And this is amazing, right? 

In a lot of ways, our theory also is that there are lots of other companies, EV companies, who could potentially earn from this and the good part is this revenue is 100% gross margin. You actually don't have to spend anything on it. And a lot of other companies could potentially earn as well. I think BluSmart is already doing this. There are a couple of projects listed on Vera, which people can potentially look at if they are interested to know. But every EV company is a EV first company and which means they can actually own carbon credit as well.

Nikhil Nair: So on Tesla and I'll come to the carbon credits in a second. So you're basically saying that Tesla has invested so much in technology and they're far superior in terms of manufacturing capability and lower cost because of firstly, starting with the vehicle and a lesser moving parts, lower labor cost, automation where the dividends are showing in having a higher gross margin.

Venkatesh Modi: Exactly. Another thing actually is Tesla make their own cells as well.

Nikhil Nair: So they are the iOS equivalent in the EV world where they've done a fully integrated cell to distribution to a charging network. Is that something that anybody can pull off in India?

Venkatesh Modi: I think Ola and Aether are probably getting there. Hopefully, in the future, I think anybody who's determined to actually build probably the best vehicle out there will have to do everything in house. 

Arpit Agarwal: A lot has to do about the product. The Tesla's products were fundamentally different, if not superior to everything that was out there. And that really created a good brand pool. And of course they were able to navigate, I think the policy circle in California and US very well. That also contributed to it.

Nikhil Nair: Yeah. I agree. I think, the Tesla's product experience is 5x superior than the next, like when I sat in a Tesla car...

Arpit Agarwal: We haven't yet experienced that kind of difference in India EVs yet. I think there's a lot less you can do in scooters as compared to what you can do in... Also Tesla was, had always time in terms of innovative in terms of the removing a whole bunch of things and adding just a screen and so on and so forth. Which is very interesting and now it is, everyone can do it.

Nikhil Nair: No, I remember when we when I first sat in a Tesla, I really felt like extremely futuristic, it was 2014 or 15.

Arpit Agarwal: Yeah. Model X really has no steering wheel.

Nikhil Nair: And that beautiful screen, the iPad, and even the riding experience. Acceleration was like sitting in an aeroplane. It was so much better that it explains why you don't need a marketing cost because...

Venkatesh Modi: Exactly. And Elon Musk himself does a lot of that. Actually, interestingly, while we're discussing Tesla also, I think anybody who wants to actually learn more about Tesla, and this is probably, I recommend this to any EV enthusiast out there to truly understand Tesla and how EV companies are inherently built and how much struggle they actually go through. Tesla died multiple times before they actually became successful. There's this book called Power Play by Tim Higgins. It talks about Tesla, Elon Musk and how Tesla is the bet of the century. I think this is something which I totally recommend to any entrepreneur out there in the EV space whether they want to build OEM or not. I think this will clear a lot of myths. And even you may end up having like billions of dollars in your bank, but you may just die tomorrow.

Nikhil Nair: Yeah. So kind of what Arpit said you have to get so many things right and serendipity and timing to do that. On the carbon credits, I just wanted to understand Tesla has been able to gain carbon credits. But my understanding is that there are far and few companies that have been able to do that.  In India, you're saying that is BluSmart that has potentially clear carbon credits I've heard of one or two more. 

Do you see startups coming up in the space where they're saying we will be the carbon mediator or somebody who is able to help you claim carbon credits and is there potential?

Venkatesh Modi: Actually, that's a very good point. And that's probably one of the business models which will probably come up as well. There are a couple of consulting firms, not product first businesses, which are doing this. They come and tell you that Nikhil, Hey, because of you, let's say, you're producing a 100 carbon credits a month. Let me actually help you measure that. Let me list you on exchange and in exchange, what I will do is I'll take 30% cut. So you will get paid for 70 carbon credits. I get paid for 30 carbon credits. So this is like an arrangement, which a lot of companies are doing. Going forward, I think there is a potential for products to evolve for infrastructures and APIs and the entire system to come up as well.

Nikhil Nair: But I'm told that claiming is not straightforward and it's not easy, right? It's a lot of documentation, a lot of...

Venkatesh Modi: Yeah, all this, what you're talking about is the voluntary carbon markets in which if you are producing carbon credits and I like the method which you have used to actually produce this carbon credits, I will choose to buy it. And I can also forward buy your credits. So that is probably where a lot of issues come up, where people say that they are going to use a particular piece of land or do something to actually generate carbon credits, but then there's a lot of fraudulent transactions that are happening. And that's where there's a lot of greenwashing that is happening in the ClimateTech space as a people trying to be green and climate while they're actually not.

Nikhil Nair: Understand. So, is it easy today, if I'm a, let's say I'm an EV OEM or an EV player, can I just talk to one of these folks and do this?

Venkatesh Modi: It is possible. I wouldn't say it is very easy because in a lot of ways you actually have to measure data points.

Arpit Agarwal: Let's understand the economics behind it. A typical carbon credit is in the range of 20 or 30 dollars. And it represents, let's say a ton of CO2 saved in a year. So it is not a lot of money. It's only about 3000 rupees, right? The challenge with this limited amount of money is that this is bought by someone sitting in the US in a bulk and they don't know what exactly quality of credit is or whether it actually was being produced or it is only in paper. And therefore, there is a need for someone to spend a lot of money on auditing the trail. And therefore, it actually becomes very inefficient, if you can't depend on the buyer to represent the reality of the situation. Therefore, you need to spend money on third party to actually validate the credit. This is called the MRV industry. 

So the carbon credit market is very early at this point of time. I am hoping that over the next 5 to 10 years, we will see a lot more trends and clarity emerging. Today, it feels like it is still a bit of hard work plus the amount of money that you make for the hard work is not a lot.

Nikhil Nair: Understand. But it is possible that EVs will be able to do that impact, but you also have to be of a certain size where it justifies going through the process. But if startups are able to solve that and tokenize it, make it smaller, then that will become easier even for startups to play with.

Arpit and Venkatesh, that brings us to the end of part one of the video. It's been a fascinating chat covering so many areas and unpacking a lot of the details that were in the report and generally also jamming about a lot of our views. So thank you for sharing so many insights. I'm sure it's going to be extremely valuable for everybody listening to this.

Arpit Agarwal: Thank you Nikhil for doing a great job. I think you are an excellent host and great starting partner. Thank you.

Venkatesh Modi:  Thanks Nikhil, it's always fun interacting with you.

Nikhil Nair: Thank you.