Electric three-wheelers are all set to become the first EV category to achieve self-sustainability without subsidies. What lies behind this success?
29 Nov 2024 | 12674 Views | By Prerna Lidhoo
Once reliant on financial incentives to build momentum, the electric three-wheeler sector has grown rapidly— with over half of all three-wheelers sold now electric. As government support under the PM E-Drive scheme begins to taper off, industry heavyweights are voicing confidence in a subsidy-free future. Giving them assurance ...
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Once reliant on financial incentives to build momentum, the electric three-wheeler sector has grown rapidly— with over half of all three-wheelers sold now electric. As government support under the PM E-Drive scheme begins to taper off, industry heavyweights are voicing confidence in a subsidy-free future. Giving them assurance are technological advancements, growing demand, and strategic investments from major players.
Anish Shah, President of the Federation of Indian Chambers of Commerce and Industry (FICCI) and Group CEO and MD of Mahindra Group, expressed confidence that the electric three-wheeler industry would no longer require government subsidies beyond FY26. According to Shah, the sector is rapidly approaching a level of self-sufficiency due to increasing production volumes and cost efficiencies. "The subsidy has come down as increased volume and scale has driven down costs. The subsidy will continue until the end of FY26. Beyond FY26, it will not be required, because we will reach the scale where the industry can fund themselves," he said.
This comes after the government extended demand incentives for electric three-wheelers for the current financial year, albeit at reduced rates. This extension follows the exhaustion of the allocated subsidies for FY25 earlier this month, reflecting the rapid uptake of electric three-wheelers. For FY25, the government aimed to incentivise 80,546 electric three-wheelers at a subsidy of ₹5,000 per kWh, capped at ₹50,000 per vehicle. This target was achieved by the first week of November. The incentives for electric three-wheelers which were earlier applicable for 1.25 lakh units for 2025-26, starting from April next year will be applicable now. They will be eligible for subsidies at a reduced rate of Rs 2,500 per kWh with a cap of Rs 25,000 per vehicle. These changes align with the government's strategy to phase out subsidies.
Post-Subsidy Era
As India sets its sights on achieving 30% EV penetration by 2030, three-wheelers are expected to account for 70-75% of this market. Despite challenges like subsidy reductions and high financing costs, the future of electric three-wheelers looks promising, according to Sulajja Firodia Motwani, Founder and CEO of Kinetic Green. "The three-wheeler opportunity is very large, because it is the lowest hanging fruit in electrification," she says. Motwani believes the market will grow to Rs 40,000 crore (putting L3 and L5 together) over the next five years as the sector nears 70% EV penetration. "There's a big opportunity for conversion from the unorganised space into a good, organised, well-designed product," she adds. The company aims to produce about 1 lakh electric three-wheelers in the coming years, with a target of 15,000 units in the current year alone. By 2030, Kinetic Green expects its three-wheeler business to contribute around 35-40% to its overall revenue, making it a crucial part of the company's future growth. The company's ambition is to secure a 10% overall market share, with specific targets of 12-15% in the L3 segment and 7-8% in L5. "We are also working on fast charging as a very unique offering, we think it has a lot of legs, and with our experience in B2B, fast charging can really enhance the attractiveness of moving to an electric vehicle for an ICE customer," she adds.
With subsidies tapering off, some still have questions about the sector's long-term viability without this financial support. The industry acknowledges that the reduction in subsidies is inevitable, and is preparing for a future where subsidies will be minimal or absent. Suman Mishra, MD and CEO of Mahindra LMM, echoes these sentiments, stressing the importance of policy continuity rather than subsidies.
"We've understood that the subsidies will taper off, but we need consistent support. The challenge lies in operational issues rather than lack of policy direction. Over the past months, operational challenges like changes from ex-showroom to ex-factory pricing and adjustments in subsidy frameworks under FAME and PM e-Drive schemes have posed hurdles," Mishra notes. While the subsidy cut in March reduced support by half, demand has remained robust. However, Mishra warns against further changes in the near future. "If the subsidy goes away tomorrow, there will be a sharp de-growth in the market. OEMs have already absorbed the first cut, but there's no more room to take additional hits."
She highlights that while the demand for electric three-wheelers has continued to grow despite the subsidy cuts, the industry must be given time to adjust to lower subsidies and scale up production efficiently. Despite these issues, Mishra remains optimistic, highlighting the government's consistent vision of a gradual subsidy reduction. "The tapering down of subsidies is wise," she says. "The excellent part is that they've given us a timeline. This consistency allows us to plan for a future where subsidies are eventually zero. Operational challenges aside, we don't need extra support if we have stability…We need subsidies for at least two more years. By then, demand would reach scale, operating benefits would materialise, and products would become more affordable. A delicate and gradual transition is crucial," Mishra adds.
Globally, the EV narrative varies, but Mishra is unwavering in her belief in the Indian market's growth trajectory. "The fundamental value proposition of EVs will only improve with scale. Range and efficiency will increase, and customers will earn more through lower operational costs," she says. Despite challenges, the three-wheeler EV segment remains a resilient and promising market as players like Mahindra, Bajaj and Kinetic, etc. scale up their operations. "This category has seen consistent growth while other sectors have slowed. The demand is organic, and as financing improves and infrastructure develops, the future of electric three-wheelers is brighter than ever," she adds.
Financing: The key to unlocking growth
For the electric three-wheeler industry to truly take off, affordable financing remains a critical bottleneck. Mishra points out that high-interest rates on loans—sometimes upwards of 22-24% IRR—make it difficult for many customers to afford electric three-wheelers. "The cost of financing is expensive, and until it comes down, the demand will struggle to scale," she explains.
One potential solution, according to Mishra, is for the government to introduce priority sector lending for electric vehicles, especially to help make financing more accessible to lower-income buyers. With easier and more affordable financing options, more consumers would be able to adopt electric three-wheelers, further boosting demand.
Industry players say that the electric three-wheeler segment has the potential to become viable without subsidies in the medium term, provided the industry continues to scale efficiently. As Mishra puts it, "Anything that is 50% of a very large market will find a way to make itself viable. It is only about scale at this point."
The investment in production capacities, particularly with the support of the Production Linked Incentive (PLI) scheme, will help lower operating costs over time. As electric three-wheelers gain popularity and sales increase, economies of scale will kick in, making it more cost-effective for consumers. While the reduced incentives may present short-term challenges, the industry is optimistic about overcoming them. The combination of decreasing battery costs, improved vehicle efficiency, and growing consumer demand is expected to sustain growth, especially in the last-mile mobility segment. "The fundamental value proposition of electric three-wheelers will only get better as the scale increases, and with the right policy and infrastructure support, the growth will continue," Mishra says.
Experts say that affordable financing could be the game-changer that the industry needs to scale up to the next level without subsidy support. Mishra is confident about the long-term viability of the electric three-wheeler market, even without subsidies. "Today, customers are willing to pay a premium of ₹50,000 to ₹60,000 for an EV over an ICE vehicle. This reflects the cost-efficiency of EVs," she explains.
Mahindra LMM has embraced the government's PLI scheme to bolster local manufacturing. "We already produce battery packs in India, with only a few components like cells and semiconductors being imported. As domestic cell production ramps up, it will reduce geopolitical risks and enhance supply security," she says. This shift is vital for sustaining growth in a market heavily reliant on imported components. As suppliers scale up in India, the sector will benefit from cost savings and reduced dependency on global markets, industry players feel.
According to Kumar Rakesh, Associate Director, Equity Research, BNP Paribas, the customers of EV three-wheelers understand that running costs will be much lower than ICE variants and hence incentives will not play a major role in driving adoption in this segment. "Whether incentives are there or not may not dramatically change (the customer's) behaviour. Large players like Mahindra or Bajaj going pan-India is something which is needed. That will be a critical driver in pushing this penetration even higher from the level where it is already," he said.
Experts believe that the next leg of incremental adoption may not necessarily hinge on the incentives. "The reason being that the daily usage for this customer is for commercial purposes and is much higher than a retail two-wheeler or passenger vehicle customer. Hence, in their total cost of ownership, the running cost component becomes relatively higher and that is where EVs make sense. Plus, since three-wheelers have a much smaller battery as compared to other commercial vehicles like buses or LCVs, the cost differential may not be as high," he adds.
The gradual reduction of subsidies under the PM E-Drive scheme is a testament to the sector's progress and potential for self-sufficiency, experts say. They feel that the segment is well-positioned to lead India's journey toward sustainable transportation, even in the absence of financial incentives.