Possible hike in FAME III subsidies, Tesla’s expected entry may drive EV sales

An important bit of news that came out recently was that 23 countries have surpassed the 5% critical threshold in electric car sales. The threshold is an indicator of the critical mass needed for electric cars (or EVs in general) in a country to go through the next phase of the S-shaped sales curve. When this happens, reports suggest that the number of units sold suddenly undergoes a sharp expansion.

Fig. 1: The S-curve that is commonly followed by new technologies while gaining market share | Image: Ark Invest

The new countries that have joined the list include Thailand, Spain and Australia, with their median e-car sales rising by a whopping 55% year-on-year. The idea behind the sudden growth in sales is driven by the fact that it takes a long time — sometimes a few decades — for the technology to find enough of a footing in the market for its ecosystem to grow. But past the threshold, there is enough consumer interest and a surrounding ecosystem to drive market confidence.

For instance, the share of microwave ovens in the US was only about 10% for nearly two decades after their launch. However, reports indicate that around 1975, sold on the convenience of quick cooking, consumers rapidly moved to buying the technology and it became a common purchase soon after.

Fig. 2: The sales of microwave ovens in the US fro, 1978- 2015 | Image: US EIA

Electric cars are still a pricey proposition for the Indian market though. The average cost of a unit is around Rs. 8 lacs at the moment (for entry-level models) and the vehicles’ market share currently only amounts to about 2%. Yet, this is likely to accelerate soon because of the following factors:

  • Tesla’s entry
    Elon Musk said recently that Tesla was looking to enter the Indian market “as soon as humanly possible”. While the logistics of its entry remain unclear, Tesla is incredibly popular amongst EV enthusiasts and it enjoys an unrivaled brand recognition. Tesla’s cars will very likely boost e-car sales in the highest price brackets and the Indian OEMs are bound to follow suit with better products for the lower price points. Tesla’s Supercharger network, if installed in India, will also help with e-car charging issues and the chargers may be opened up to other OEMs as well.
  • FAME-III subsidies
    The next iteration of FAME (FAME III) is purported to expand the subsidies from anywhere between Rs. 40,000 - 50,000 crores. That’s an enormous jump from the Rs. 10,000 crores under FAME II, and a portion of this will be earmarked for electric car buyers. The vehicles’ market share is climbing, albeit at a rate much slower than e2Ws and e3Ws, but the expanded subsidy base should be helpful.
  • Maruti’s entry from 2024
    India’s largest car manufacturer is slated to release its first all-electric SUV — the eVX — in 2024. Maruti’s strong reputation for attractively priced, quality cars should translate to decent sales for the eVX, and the automaker plans to launch a new EV model every year through 2030. Maruti’s entry into the EV space is likely to significantly boost the vehicles’ acceptance with the masses as the automaker offers excellent after-sales support. Tata Motors too has plans to launch 10 new electric cars in the next five years and the added competition with Maruti should translate to better, more affordable options for the buyer.

    Fig. 3: The Maruti eVX will be the automaker’s first all-electric vehicle | Image: Autocar India

  • Battery recycling and PLI scheme
    India’s Production-linked Initiative (PLI) scheme for EV batteries and its support for battery recycling — both through the Battery Waste Management Rules, 2022 and the provisions under the draft FAME III proposal — are likely to bring down their costs. This is important as up to 50-60% of an EV’s cost can come from its battery pack alone, and replacing it after a service life of roughly 5-8 years is an expensive proposition. As battery prices fall, so will the cost of electric cars.

The overall market share for electric cars in India is thus expected to grow sharply after FAME III is announced — which may be before the end of 2023. Whether the uptick in e-car sales will be immediate remains to be seen — and access to charging infrastructure is still inadequate for most — but the market for the vehicles is heading towards the right combination of factors.