Mint Explainer: Is the craze for electric two-wheelers dying out in India?

Selling on paper is happening fast. In the just-concluded 2022-23 financial year, sales grew by over 60% at around 8.5 lakh units. As has been the case in the past few years, the heavy lifting was done by high-speed electric-two-wheelers that are eligible for the government’s FAME-II subsidy. The size of the segment is set to almost triple to 7.27 lakh units in the current financial year (2022-23) from 2.5 lakh units in the previous financial year.

Still, things are not particularly rosy. Even with this growth, the industry is down 27% from an estimated one million unit sales for the fiscal year. Ominously, actual sales lagged behind projected sales in every month of the year, indicating a deeper malaise and not a fluke like a price hike or interest rate revision.

There are two major factors at play here. One, the government’s decision to freeze subsidies to companies pending investigation into allegations of under-invoicing and not meeting localization requirements. After the festive season in October, it started having an impact on sales. Even on a month-on-month basis, the industry’s performance was dire with sales at less than 70,000 units, while they should have been closer to 100,000.

At the heart of the confusion is whether producers meet or violate localization norms to avail the FAME subsidy. There is also the question of whether the norms were previously too stringent and therefore too difficult or even impossible to follow. This is not impossible as the allegations are against almost all companies, including the big five – Ola Electric, Ather, Hero Electric, Okinawa and Ampere.

There is no easy solution to this and it will take time to solve if the government is strict. Meanwhile, due to suspension of subsidy, some companies are facing shortage of working capital. The funding winter has also dampened enthusiasm in the startup ecosystem. These are major headwinds.

The other major factor is a slew of consolidation that is widespread in the industry. The slicing and dicing data for February 2023 vs 2022 shows the extent of this. While the total number of players in the market has increased from 93 last year to 173 this year, the number of companies selling more than 1,000 units in a month has dropped from 10 to 7. Moreover, the share of the top five players has increased from 67% to 79% of total sales this year. This indicates that larger players are growing and taking a bigger share of the pie while smaller players are left to fight for the leftovers. This is not a sign of a healthy, profitable industry.

The number of companies with sales between 100 and 1,000 units fell from 18 to 24, suggesting the inability of some players to grow substantially. The effects of the funding winter are at play here. Companies with sales of less than 100 units also increased from 65 to 142, accounting for most of the new entrants.

This consolidation isn’t entirely unexpected. Experts always believed that the two-wheeler market in India could support only about a dozen mass-market players in the long term. However, consolidation was expected to happen after 2025, following the expiry of the FAME-II subsidy.

What does this mean for electric two-wheeler sales? EV penetration in India, at a little over 5%, is still in its infancy and offers tremendous room for growth. Older players like Hero MotoCorp, TVS, Honda and Bajaj will be more aggressive with their EV two-wheelers over the next few quarters. This will certainly expand the market, although some of it will come at the expense of smaller startups.

On a lower base of less than a million units – the total two-wheeler industry volume is 16 million in comparison – sales are bound to grow at a slower pace. But on the evidence for 2022-23 and churn already underway, even the most pessimistic NITI Aayog estimate of 72% penetration by 2031-32 seems off the charts.