BMI View : In the short-to medium term, we believe Japan will continue to be the indisputable Asian leader in the electric vehicle (EV) segment. Although India is trying to enact policies to move towards EVs to reduce the burden on its economy, we do not remain hopeful due to its history of policy shortcomings. While China has fallen short of its ambitious EV goals, we still believe it has the opportunity to catch up with its peers with the right policies, and be the world's biggest EV market in the long term.
India: Market Still Embryonic, Regulation Still Firming Up
India's Prime Minister Manmohan Singh announced a target to sell 6-7mn xEVs (this includes pure EVs and hybrids) by 2020 when he officially launched the National Electric Mobility Mission Plan 2020 (NEMMP 2020) in January 2013. The government and the auto industry will split US$4.2bn in investments equally, to increase domestic manufacturing and incentivise sales of electric cars in India.
| Equal Responsibility |
|NEMMP 2020: Breakdown Of The US$4.2Bn|
Why It's Important For India To Push Towards Its NEMMP Plan
By 2020, the Indian government forecasts annual demand for passenger vehicles, commercial vehicles (CVs) and two-wheelers to be 10mn, 2.7mn and 34mn units, respectively. The current trajectory will cause a sharp rise in demand for fossil fuels and put undue pressure on India's current account deficit, due to the fact that it has to import more than 85% of its domestic crude oil consumption. Should the target of 6-7mn cumulative xEV sales be realised by 2020, 2.2-2.5mn tonnes in fuel would be saved.
Current Prospects Look Dim
As of now, the pure EV market is embryonic, with only Mahindra & Mahindra selling one model, the REVA. Should other automakers enter the Indian EV market, they would hardly face any competition. However, we do not believe the current prospects for selling EVs domestically are attractive. While the Indian consumer is tech-savvy and would enjoy the experience of driving an EV (according to surveys), it is likely that EV original equipment manufacturers (OEMs) would need to see the cost of EVs fall drastically, before they are able to provide consumers a price point that is close to that of an internal combustion engine (ICE) vehicle, for there to be mass adoption. The REVA, costing about US$10,000, is still beyond the reach of many people, given that the average per-capita income in the country is still lower compared with some emerging markets.
Two-wheelers remain the most affordable mode of transport for Indians and in that vein, we see electric motorbikes as having better prospects compared with electric cars, currently. Sales of electric bikes/scooters have been much stronger than other categories of EVs and we see foreign automakers with expertise in this segment as having the opportunity to enter this market. A Hero electric scooter, costs about INR38,000 (US$710). Such a price is more palatable for the Indian consumer and given their affinity for two-wheelers, it is no surprise that electric two-wheeler sales are doing relatively well in the country.
While the goal of selling 6-7mn xEVs by 2020 is commendable, we remain sceptical about the feasibility of such a target, not least due to the current policy shortcomings of the government. A radical overhaul of the industry and the dismantling of self-interest groups will be required if the target is to be achieved.
Opportunities For EV Component Manufacturers
We believe a better proposition for global firms in the EV space would be to take advantage of India's low manufacturing cost to build up local production of EV components and subsequently export them to other parts of the world. Tech parks in Bangalore and Chennai would be able to provide the skilled labour, and the bustling ports of Chennai and Gujarat would be able to export these auto components.
Furthermore, for local EV production to enjoy attractive government rebates under the NEMMP plan, localisation requirements under the current proposal increase gradually over the years. This would increase demand for locally sourced EV components and we see suppliers being in a sweet spot to tap this future demand.
| Go Local To Be Eligible |
|Minimum Local Component Value To Qualify For Incentives- Pure EV Production (LHS); Electric 2W Production (RHS)|
South Korea: Lack Of Strong Government Support Reduces Near-Term Prospects
We see the South Korean government's hesitation in increasing pure EV subsidies for car buyers (reportedly due to rising demand for hybrids and diesel cars), as well as its slow progress in building charging stations, as an impediment for carmakers' EV prospects in the near-term. Seoul provides tax benefits of KRW4.2mn (US$3,870) per EV purchase, far smaller than the US$10,000 provided by the French and Japanese governments.
In 2012, the Finance Ministry rejected a request from the Environment Ministry to provide electric car subsidies for consumers, citing insufficient demand. While, the government has earmarked KRW27.6bn (US$25.4mn) for purchases of electric cars by public organisations in 2013, we believe the quantities are insufficient to spark sustained strong growth in the domestic EV market. Automakers such as Hyundai and BMW appear to agree with us and have stated the possibility of rolling back their plans to introduce new EV models in 2013, should the government fail to increase purchase subsidies.
While the lack of consumer demand might be a valid concern, we believe it is imperative for governments to break the chicken and egg cycle by providing larger subsidies for EVs, so as to help consumers overcome the cost barrier, and create demand. Given South Korea's advanced automotive technology together with its tech-savvy consumers, we see the weak current efforts of the government as a wasted opportunity to tap the potential of the domestic EV market.
While hybrid car sales hit 27,000 units for 11M12, up 85.4% year-on-year (y-o-y), we believe they are still low when compared with markets such as Japan and the US. We believe prospects for all types of electric cars (hybrids, plug-ins and pure EVs) remain lacklustre in the near-term until the government tweaks its policies.
Exports Will Continue To Outperform
However, we believe automakers will continue leveraging South Korea's EV manufacturing capabilities to export their electric cars. GM plans to commence domestic production of its all-electric Chevrolet Spark in 2013, and export its car mainly to the US and other markets ( see our online service, November 15 2012, 'GM Utilises South Korea's High-Tech Manufacturing Strengths').
Furthermore, we see ample opportunity for EV component manufacturers, especially battery suppliers, to manufacture locally. South Korea and Japan continue to be world leaders in lithium-ion battery technology. LG Chem, a subsidiary of Korea LG Group, is one of the world's largest producers of advanced electronic materials and a leading supplier of lithium-ion batteries. The company has a diversified customer base among international OEMs and BMI believes that other supplier firms can set-up shop in South Korea to be near these battery producers so as to exploit economies of agglomeration.
Japan: Still The Asian Leader
Japan remains the largest EV market in Asia, and is the world's largest EV market too, when we include combined 2012 sales of hybrids, plug-ins and pure EVs. In our opinion, it still offers the best short-to-medium term prospects for players in Asia. This can be narrowed down to three reasons:
Given that Japanese carmakers such as Nissan have made multi-billion dollar bets in the pure EV space, with its Nissan Leaf model, it is no surprise to see that Asian EV sales have gained the maximum traction in Japan over the past few years. Since December 2010, Nissan has sold about 50,000 Leaf vehicles globally, with almost half of them coming from Japan.
Toyota, the world leader in hybrid vehicles, sold over 1mn hybrids in 2012 globally, with about 580,000 units sold in Japan. The firm's cumulative hybrid sales have crossed 4.6mn globally, with 2mn of them being in Japan.
We see the government as having played a crucial supportive role to bolster the EV industry. When the Japan earthquake struck the country in 2011, the Japanese government was quick to increase purchase subsidies, to help the industry get back on its feet. These subsidies favoured eco-friendly cars such as EVs and hybrids, which helped to bolster their sales in 2012.
Also, the government together with the private sector has done a phenomenal job in building up the EV infrastructure in the country. Both have built up a few thousand charging stations ( see 'Fee-Based Charging System Could Increase EV Sales In The Long Term', November 8 2012), together with over 1,000 (CHAdeMo) fast-charging stations. This is in sharp contrast to South Korea, which has only 600 charging stations.
We believe the demographics of the Japanese consumer make it attractive for EV manufacturers to target them. The ageing profile of the society has led to initiatives such as the launch of mini-cars, which can seat 1-2 people and help baby-boomers to be more mobile ( see, 'Ultracompact Launch Likely To Shake-Up EV Market', September 17 2012). Also, the country's high per-capita income, as well as the savings of the retired generation, means affordability of EVs is not an issue for consumers. Japanese consumers love technology and are knowledgeable on the fuel-saving attributes of EVs. Firms hardly need to raise awareness for the take-up of new offerings.
In the short-to medium term, we see ample opportunities for both EV manufacturers as well as component manufacturers to tap into this market in Japan. While the Japanese EV market may not have the most long-term potential, due to saturation and its declining population, its position as the Asian EV market leader, appears incontestable in the short term.
China: Fell Short Of Initial Ambitions, But Potential To Pick Itself Up
While China had aimed to have a total of 500,000 and 5mn EVs (including plug-in hybrids) on the road by 2015 and 2020 respectively, its goals have fallen far short in the near term. This is due to affordability concerns, lack of strong government measures and technology issues. While Chinese wages have made impressive strides in recent years, the country's 2012 GDP per-capita of US$6,000 still puts the electric car out of reach for the average Chinese consumer. Furthermore, the Chinese government only offers purchase incentives to domestically produced EVs, which are few in number, and domestic brands still suffer from quality issues ( see, 'EV Trial A Positive Step', October 10 2012).
Given that China is the world's biggest automotive market and recently overtook the US, it is noteworthy to compare it with the US, in terms of EV sales. The chart below shows total annual sales of plug-in hybrids and pure EVs in the two countries respectively. Despite China's grandiose ambitions, the chart is a sobering reminder of how much more work the world's largest automotive market needs to do, if it also wants to take over the mantle of the world's biggest EV market.
| China Punching Below Its Weight |
|US & China- Total Annual Sales Of Pure EVs And Plug-In Hybrids, Units|
However, there is cause for optimism due to recent developments in the Chinese EV segment. Foreign automakers are starting to use EV joint ventures to circumvent the locally produced requirement to be eligible for subsidies ( see 'Nissan's Local Brand A Model For Japanese Automakers', November 27 2012). Also, Chinese firms are increasingly using technology transfers from their global peers as well as foreign acquisitions, to move up the EV/battery technology ladder ( see 'Wanxiang Win Shows Growing Chinese Clout', December 10 2012).
Although, we do not see foreign EV manufacturers rushing into China to set-up shop in the short term due to the nascent market, we believe a stronger commitment from the government and falling EV prices, could help the country become the world leader in this segment in the medium-to long term. Also, given that China is the world's largest market for electric bikes (a fleet of over 120mn units and annual sales of over 20mn units), consumers are likely to already have a taste of battery propulsion technology and would not need much persuasion to make the switch to electric cars, when their price point becomes more attractive in the future.