FAME II: The Electric Dream Just Got Bigger! But Will It Remain A Dream?
The scheme for Faster Adoption and Manufacturing of Electric Vehicles in India Phase II (FAME II) was notified by the Ministry of Heavy Industries and Public Enterprises in March 2019 and is planned to be applicable for three years from 1st April 2019. This note intends to analyze the policy mainly from the perspective of the electric two wheeler segment
Following are the big hits of Fame II
On a macro level, the policy seems to be making the right noises to get the industry and end users to start taking electric mobility seriously
The overall outlay in Fame I was Rs. 895 Cr. over four years ending 31st March 2019 and that planned for the next three years under Fame II is Rs. 10,000 Cr. (includes Fame I committed expenditure of Rs. 366 Cr.) – a net increase of around 9 times
Specifically for two wheelers the number of vehicles expected to be covered in three years time frame is 10 lakh units (Rs. 2,000 Cr. @ around Rs. 20k per unit) – which is a commendable target compared to actual industry size of the segment which was around 55k units in FY 2018 and around 80k in FY 2019.
The overall outlay also includes an allocation of Rs. 1,000 Cr. towards funding for establishment of charging infrastructure to the extent of upto 100% of the cost depending upon the project proposal – shows that the intent is to take an holistic approach and develop support infrastructure as well
To be eligible for the incentives, OEMs need to provide a comprehensive 3 year warranty for the vehicle including battery - This would have two significant benefits: (i) Provide confidence to prospective end users who may be sitting on the fence, wary of investing in buying an electric two wheeler unsure about its performance / quality and life; (ii) Encourage OEMs to improve the overall quality of their offering and at the same time making it difficult for small time players to offer average products – which in my understanding has done a lot of harm to the industry in the past (low quality lead acid battery powered two wheelers by random OEMs gave an impression of electric two wheelers being unreliable to initial users from 2012 to 2015)
Restriction of maximum ex-factory price to avail the incentives is Rs. 1.5 lakhs – this ensures that luxury / super bikes do not get subsidy (nomenclature in the policy is demand incentive) and the same is reserved for the common man’s ride
The bad news is that almost all the existing electric two wheeler models being offered in the market either would not qualify for subsidy under Fame II or would see their subsidy amount decrease significantly (average Rs. 10,000). This would mean an increase in the sale price by that much, i.e. a 10-17% increase from their price as of 31st March 2019. If not corrected, this would be a significant blow to the industry and would make electric two wheelers financially unviable both for individual and institutional use. Following are the reasons and my take on each of them:-
Localization Mandate to OEMs: To qualify for the incentives under FAME II, OEMs need to meet the criterion of 50% localization. This criterion needs to be removed or relaxed significantly due to the following reasons: (i) Current localization levels are quite low, industry is dependent on significant imported components such as batteries, motors, etc; (ii) If equivalent local components are already available they are probably more expensive, which is why the OEMs chose to import in the first place or would take some time to find, test and adopt, surely can't be done right away. (iii) If equivalent local components are not available, does it make sense for local component manufacturers to establish production lines for an industry which is only around 80k units per year?
In either case, even if the OEMs somehow meets this criterion, my sense is that it would increase input costs (at least in the short term) and therefore the sale price to end users, jeopardizing the growth prospects of the industry
Subsidy linked to battery: The intention of this criterion clearly seems to be to increase the battery size offered and thereby address the range anxiety concern of prospective end users. This criterion though well intentioned would do more harm than good due to the following: (i) Larger battery means higher cost; since total subsidy per unit is not going up compared to FAME I this would result in more expensive vehicles for end users. (ii) End users who don’t need more than the current average range of 40-50 kms (which I think is a significant majority) would have to pay for higher range / additional battery. (iii) Current average battery size offer ease of detaching and charging (in various models) or battery swapping (which can be a viable alternative to charging infrastructure) which would become more difficult if the batteries become larger and heavier. Hence even if this criterion is not changed, OEMs should be encouraged to have multiple modular batteries rather than one large battery.
Unregistered vehicles not covered: Electric two wheelers with a top speed of 25kmph do not require registration and hence would be out of the scope of incentives under FAME II. Following are the reasons why this is particularly unfortunate:- (i) Such vehicles are perfect for students (age group of 16+) as their first vehicle. With these models there is an opportunity to get the next generation to have an electric two wheeler as their first vehicle and become electric vehicle users for life, however without subsidy these would not be financially viability for students. (ii) Other major users of such vehicles would be the lower middle class who may not be able to afford a high speed electric or for that matter even an IC two wheeler and definitely deserve the government incentives on electric vehicles which they would use to earn their livelihood.
Subsidy cap at 20% of the cost of vehicles: Does not seem right as this means more subsidies to people who can afford better and more expensive vehicles and less to the ones who have to settle for the lower / cheaper variants. I strongly feel that the subsidy should have a cap in absolute terms rather than percentage terms.
Probable lack of Stability: I found the following point in the policy a bit discomforting – “The proposed demand incentives would be reviewed annually or earlier by the Project Implementation & Sanctioning Committee (PISC)”. This means that the rules to obtain the incentives can be changed anytime. The intention of the policy makers may not be to have frequent changes but having stability in policy would be critical for OEMs, dealers and fleet owners to make strategic business decisions. I agree with the sentiment that being a dynamic and developing industry there may be a need to update the policy, however stability for at least 18-24 months would not be an unreasonable expectation. At the minimum there should be an assurance that the incentives would not come down or rules to obtain them would not be made more stringent from where they currently are.
OEMs to have at least 25 dealers: This would not affect the larger OEMs who already have 25+ dealers but would seriously hamper / discourage smaller OEMs as well as the ones who do not want to sell via the dealership model. It is not easy for any OEM to get 25 dealers immediately as someone who takes up an electric two wheeler dealership needs to invest about Rs. 35-40 lakhs and get into a business where the volumes till date are quite low. This also discourages new startup OEMs as they would need 25 dealers on the day 1 of launching their vehicle to be able to get subsidy.
Battery Swapping: The policy only talks about charging infrastructure but I strongly feel that the better alternative to that is battery swapping, which does not seem to find any mention in the policy.
GST + Subsidy Counter-intuitive? Electric two wheelers fall under the 12% GST bracket. So by providing a 20% subsidy, the effective net incentive from the government is only about 8%. I think it would more effective to exempt all electric two wheelers (and their major components) from GST (say for a period of 5 years) and then incentivize the type of vehicles that the government feels need additional impetus. This is also a simple method to incentivize without any additional paper work or compliance requirements.
I sincerely hope these concerns are addressed by the relevant authorities at the earliest. The ongoing general elections may make it difficult for the authorities to make changes immediately so maybe it would be best to extend the FAME I policy for another 6 months. Few dealers I have interacted with have told me that they are not doing any business since 1st April 2019 and that it would not be viable to do business if the prices of electric two wheeler prices go up due to decrease in per unit subsidy.
Published by Vikas Jain Founder & CEO at Welectric
My notes on FAME II. Would be happy to receive comments / different perspectives.