How will EV adoption affect auto component makers?

In its quest to turn back the clock on environmental damage and build a greener tomorrow, the world is slowly but steadily turning its back on polluting machines. And automobiles -- which contribute over 24 per cent of the world's direct CO2 emissions -- are on the radar.

And that is the reason why electric-mobility is gaining traction across the world, and in India too. The electric vehicle market is projected to clock a compounded annual growth rate of 49 per cent between 2021-2030, and the annual sales are expected to cross 17 million by 2030, according to a report by India Energy Storage Alliance.

NITI Aayog has set a target of EV sales penetration at 70% for all commercial cars, 30% for private cars, 40% for buses and 80% for two and three-wheelers by 2030.

The message from the industry is clear. Automobile manufacturers, including the component makers, have lined up Rs 70,630 crore for EVs over the next five years, according to a Business Standard report.

But what about the companies and the ecosystem which thrived on vehicles which run on petrol and diesel gulping internal combustion engines or ICEs.

The thriving auto component industry is bracing for a paradigm shift. It accounts for just over 2% of India’s GDP. In FY22, it recorded its highest-ever turnover of $56.5 billion, rising over 23%, while exports grew 43% to $19 billion. According to the Automobile Component Manufacturers Association (ACMA), auto component exports are expected to touch $80 billion by 2026, and the industry aims to achieve $200 billion in revenue by 2026.

The transition to EVs presents both opportunities and challenges for the industry. For example, there will be a major shift from traditional ICE components to e-drive modules and systems.

Ratings agency CRISIL estimates that revenue of the electric vehicle components’ market in India is likely to rev up at a compound annual growth rate of 76% to Rs 72,500 crore by fiscal 2027. EV components such as batteries, drivetrains, electronics and others present an opportunity for auto component makers to diversify their revenue base beyond ICE vehicles. For makers of traditional auto components, about 75% revenue comes from parts which remain in EVs too. So, the growth is not a challenge for such companies, CRISIL said in a report earlier. It is the suppliers of the remaining 25% components, which are redundant in EVs, at risk.

At the same time, component makers who were traditionally reliant on engine parts for the bulk of the business and players in ICE powertrain business, catering only to ICE engines and transmission could face a threat due to transition to EVs. Also, the number of components in EV powertrains is smaller and this will affect the aftermarket business, leading to lower replacement revenue.
 

The turnover of the aftermarket in FY22 stood at $10 billion. There will also be some impact on the millions of existing and upcoming personnel in the industry. For instance, EV part makers require more tech people than in the traditional ICE component making firms. So, the skills needed for emerging supply chains will be very different and hence gradual upskilling of workers and understanding of the shift in nature of jobs will be critical.

[Byte of Sunjay J Kapur, Chairman, Sona Comstar and President, ACMA (Automotive Component Manufacturers Association of India)]

The auto components industry, on its part, is looking to diversify beyond ICE vehicles. They still have the time to do so and the companies have already begun investing in electric components for the existing ICE vehicle makers as well as for EV makers.

ICRA estimates that about 25-30 per cent of the total investments of auto component makers in FY23 and FY24 will be towards EV projects. Industry body ACMA recently said, 60 percent of its 800 members are ready to supply components to EV makers, which is a good sign. For instance, Uno Minda has already begun developing specific products for EVs.

Electric vehicles contributed 62% of the order book for another auto component maker Sona BLW in FY22. The industry also needs significant investments in research and development for building capabilities specific to EV powertrain components. This is one area where the industry is lagging as the average R&D spend of the component makers is just 0.5 per cent of their total spending. According to ACMA president Sunjay Kapur, the same needs to go up to at least 3%.

[Vinutaa, Vice President & Sector Head - Corporate Ratings, ICRA]

Experts say the auto component industry has more opportunities than threats in the shift towards EVs. The positive is that there is still enough time to de-risk and diversify portfolios. Going forward, an individual company's gains or losses will depend on product portfolio, customer mix and the ability to reengineer.