How MSMEs manufacturing internal combustion engine parts would be affected due to the adoption of electric vehicles
Ease of doing business for MSMEs: Automakers around the world have been gradually preparing to switch to electric vehicles (EVs) from conventional automobiles powered by internal combustion engines (ICE) for more than a century. The change, which could potentially render ICEs obsolete in just a few decades, is expected to accelerate as governments around the world focus on tighter emissions regulations, low-cost charging infrastructure, access reliable electricity and an incentive for the adoption of electric vehicles, as well as a global calculation. on climate change. But with motors, the dawn of electric vehicles threatens to wipe out an entire industry, dominated by MSMEs, of manufacturing and supplying ICE parts or components.
India’s electric vehicle market was worth $ 5 billion in 2020 and is expected to reach $ 47 billion by 2026, recording a compound annual growth rate of over 44%, according to Mordor Intelligence. However, this growth could come at the expense of MSMEs in the conventional automotive supply chain and in particular those manufacturing ICE parts for two-wheelers, four-wheelers and larger vehicles.
“The manufacturers of ICE parts will definitely have an impact. If MSMEs do not pursue other products and areas of goods manufacturing, then certainly within seven to ten years, as the penetration of electric vehicles improves, it will be difficult for them to sustain themselves as they currently have infrastructure for ICE. If the ECI itself does not exist, then it is a matter of survival. Few companies may have to close while others will have to look to other industries. Since the penetration of electric vehicles would be gradual, MSMEs would have time to scale up while eventually working on lower capacity and profits due to lower volume. MSMEs who go to two-wheelers will have to make the decision faster, because the adoption of two-wheelers will be the fastest, ”a senior member of a prominent body representing MSMEs, told Financial Express Online. other auto parts manufacturing companies.
The impact is also expected to be profound because making an electric vehicle with only 20 moving parts is relatively simpler than making an ICE vehicle with around 2,000 moving parts. As a result, the ecosystem of ICE vehicle suppliers and manufacturers would be disrupted as the size of their addressable market would decrease as well as the impact on the aftermarket, including vehicle repairs or maintenance. Therefore, it would be imperative that MSMEs invest in further capacity building and infrastructure overhaul.
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Here, while original equipment manufacturers (OEMs) and major suppliers may still be able to absorb the impact, MSMEs could be hit hard. Not only that, MSMEs could also face increased competition from new age battery companies and manufacturers entering the EV ecosystem. Importantly, given that about half of the value of an EV sits in its battery, it would only leave the remaining 50% of the value of the EV for ICE MSMEs and manufacturers of all other parts to function as ICE. and the manufacture of its parts is completely unrelated to the manufacture of an EV battery.
“The EV battery is a completely different technology than the ICE. The adoption of EVs is a classic case of technological breakthrough. The fate of the ICE segment is similar to how the CRT industry was shut down after the arrival of flat screen TVs. Therefore, it is very important that ICE parts manufacturers consider this strategically and work together when there would be common parts in both ICE and conventional vehicles such as windshield, seats, steering, etc. Vinay Piparsania, automotive expert and CEO of IIT Delhi Endowment Management Foundation, told Financial Express Online.
Thus, manufacturers will need to begin their strategic journey early enough to transition to any diverse industry or perform the necessary research and development, collaboration and acquisition, if they are to continue in the industry, added Piparsania. .
Therefore, the ICE and its parts manufacturing MSMEs should work on adjusting their product portfolios to manufacture electric vehicles, even if there would be an opportunity in areas such as microprocessors, controllers, engines, etc. For batteries, “MSMEs can be associated with the battery manufacturers as subcontractors. The content of components in electric vehicles is 30-40% lower compared to ICE vehicles, ”Poddar added.
Haryana-based Nitin Madan, which manufactures and supplies diesel engine parts using molding, said the impact on engine part makers with the adoption of electric vehicles would be severe. The company is starting to focus on expanding the use cases from its existing manufacturing plant to other industries.
“The impact may not seem very sudden at the moment, but it depends on government policy. The first impact will come from the OEMs as they would stop taking ICE parts from us. So our supplies will be useless. Then there would be an impact on the aftermarket which sells parts and components. The decline in the market for manufacturing and supplying ICE parts will begin once government standards come into effect, ”said Madan, managing director of Grindlays Engine Parts at Financial Express Online.
The impact would also be on employment, Madan said, as he has already started researching other components required for an electric vehicle, such as gear and brake components. “In household components and construction related equipment, we can provide mold-based products using our existing infrastructure and investments. There will be a definite impact on employment.
The Ministry of Heavy Industries formulated a program called Faster Adoption and Manufacturing of Hybrid and Electric Vehicles in India (FAME India) in 2015 to boost the adoption of electric and hybrid vehicles in the country. The second phase of the program has been implemented for five years since April 2019 with budget support of Rs 10,000 crore.
The phase focuses on supporting the electrification of public and shared transport. It aimed to support 7,090 electric buses, 5 electric three-wheel lakhs, 55,000 electric cars and 10 electric two-wheel lakhs through grants, according to ministry data shared in August this year. Additionally, 38 OEMs including Hero Electric, Ather Energy, TVS Motor Company, Mahindra Electric Mobility, Tata Motors, Avon Cycles, etc. have been registered as of August 9, 2021.
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Last month, the government also approved the Production Incentive Program (PLI) for auto and auto component companies focused on electric and hydrogen fuel cell vehicles. The program is expected to attract new investment of over Rs 42,500 crore in the automotive and automotive components sector, as well as additional production of over Rs 2.3 lakh crore and over 7.5 lakh in creation. jobs over the next five years, the Heavy Industries Ministry said. in a report. As of July 19, 2021, 5.17 lakhs of electric vehicles have been registered in India since 2018.
“As MSMEs are critical contributors to the automotive parts and components supply chain targeted by the PLI program, the expected capital surge will mobilize the MSME ecosystem with the expansion of the supplier base within the MSME sector. . As a natural consequence, we are likely to see an increase in employment opportunities in the industry as well, ”said Ritika Ganju, Partner, Phoenix Legal, at Financial Express Online. However, that means little to the makers of ICE parts.
Piparsania said it would also be important to monitor trends in customer preferences. “Customer preference is based on economics. Of course, there is all of this to support the environment, but the decision to buy an EV is made from the perspective of the cost of mobility. As long as the cost of mobility is not significant, customers can stay with the status quo. People used to think CNG vehicles would be the preferred type of vehicle, but we never saw it become very popular. “
Despite the second wave of Covid, the auto components industry is expected to experience revenue growth of 20-23% in fiscal 2022 thanks to a recovery in the domestic auto industry and robust exports. The transmission of the inflationary trend in commodity prices will also contribute to revenue growth, ”the rating agency ICRA said in a statement in August 2021. However, according to data from the Society of Indian Automobile Manufacturers (SIAM) , domestic sales in September recorded a decline of 19.7 percent compared to the same period a year earlier, while passenger vehicles recorded a decline of 41.1 percent.