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Will FAME II scheme stimulate ‘Make in India’ initiative?

The Indian government’s efforts to enhance domestic manufacturing in conjunction with rapid adoption of EVs have materialized into phase two of the FAME scheme. There has been much talk about a localization rider attached to the scheme. It dictates that in order to avail subsidies, Original Equipment Manufacturers (OEMs) have to manufacture and assemble a certain percentage of xEV components domestically which feeds into the overarching Make in India initiative.

While some in the automobile industry have been optimistic about the regulation, the timelines stated for component indigenization in the latest Department of Heavy Industries (DHI) notification may make it challenging for some. This article will explore industry insights to evaluate the potential impact of the localization rider on India’s budding EV sector.

FAME II’s launch enables NEMMP 2020 objectives

The National Electric Mobility Mission Plan (NEMMP) 2020 was launched in 2013 by the Government of India to achieve fuel security by introducing hybrid and electric vehicles in the Indian auto market. NEMMP’s aim is to achieve 6-7 million YOY sales of hybrid and EVs from 2020 onwards.  FAME (Faster Adoption and Manufacturing of (Hybrid &) Electric Vehicles) is a market mechanism introduced to create momentum for the next phase of NEMMP 2020. The second phase of FAME scheme is to be implemented over the next 3 years.

The government has allotted a budget of INR 96.34 billion for FAME II. The funding is divided into three main components – Demand Incentives, Charging Infrastructure and Administrative costs (ref. Figure 1.) To maintain flexibility in the program, Department of Heavy Industries (DHI) has allowed reallocation of funds under each component depending on the expenditure for the duration of FAME II.

Source: DHI 

Automobile sector is a vital component of ‘Make in India’ initiative

Make in India was launched in 2014 in an effort to make India “a global design and manufacturing hub”. The automobile industry is responsible for 49% of the manufacturing GDP of India. Furthermore, it is set to attract USD 8-10 billion in both local and foreign investment by 2023 with an estimated USD 18.43 billion in FDI pooled between Apr 2000 and Dec 2017. 

The automobile component sector is predicted to see exponential growth of its own with a forecasted turnover of USD 115 billion by 2020-21 and USD 200 billion by 2026. While these do not include the electric vehicle sector, the promotion of EV component indigenization could contribute to the forecasted growth.

FAME II’s broader goals are to create a self-sustaining EV market which is expected to reduce 2 million tonnes of GHG through market penetration of 6-7 million xEVs by 2020. The idea of Make in India is to achieve as much localization as possible but be a competitive supplier on a global level. Hence, the immediate intention of the Government of India is to capitalize on this by implementing it within a matured supply chain ecosystem like the automobile industry.

Government attaches a localization rider for manufacturers to qualify for subsidy under FAME II

To accrue demand incentives, EV manufacturers have to meet specific criteria laid out by the DHI. The official notification of FAME II states:

“To meet the qualifying criteria for demand incentives, the hybrid/electric vehicle (xEVs) including its variants and versions, should:

  1. be manufactured in the country and have such percentage of localization as may be notified from time to time”

Although a specific percentage of localization has not been mentioned in the official FAME II notification, an internal draft notification circulated to industry players by the DHI states:

“To avail incentive under FAME India Scheme localization content level should be at initial level of 40% for Buses and 4Ws and 50% for 2Ws and 3Ws subjected to review from time to time.”

However, the latest notification by DHI forgoes percentage based localization and mandates component level indigenization under six categories. Components under each category have been allotted a number which indicates the effective date of indigenization (i.e. both manufacturing and assembly) of parts. Since domestic manufacturing of Li-ion are minimal, key parts of the traction battery pack can be imported however they have to be assembled domestically by 1st July 2019. The aim of the Phased Manufacturing Program (PMP) is to indigenize the list of EV component manufacturing and assembly in the next 3 years.

Industry perspectives on EV component indigenization

Generally, the automobile industry has welcomed the government’s push for local component manufacturing. Companies that have achieved economies of scale like Mahindra and Tata Motors have welcomed the draft notification since it allows them to maximize on their current production capabilities. When in asked, Mahesh Babu, CEO of Mahindra Electric says, “The success of India’s e-Mobility program cannot be achieved without a strong policy on manufacturing. Under FAME II, Ministry of Heavy Industries and Public Enterprises has released a Phased Manufacturing Program (PMP) which will boost local manufacturing of EV components including battery packs, power electronics and electric motors to be made in India for the world. Mahindra has been investing consistently on EV related technologies for over a decade now and we are now ready to make-in-India for the world.” For companies like Mahindra in the long-term, the localization rider could generate potential foreign investments which are an attractive option since Indian EV market could become cost-competitive globally.

Source: Mahindra Electric 

The Society of Manufacturers of Electric Vehicles (SMEV) have been vocal about separating the localization rider from FAME II. In their letter to Project Implementation and Sanctioning Committee (PISC), NITI Aayog and DHI they have pointed out the stringency under the scheme like lowered subsidies for 2W segment as well as tight timelines for indigenization which may not be conducive for all companies. “This sudden change is not possible. We don’t have numbers. Local vendors are used to getting big numbers and that we don’t have. So if we have a years’ time we can reach that number. Unless we have 1 million or 2 million vehicles on the street no one will want to invest on the supply side” says Alok Ray, Assistant Director- Operations at SMEV. While the timelines put out by DHI might be up for debate, Mr. Ray said “We are very focused on meeting the localization percentage” namely because that they want to strength the domestic market by ensuring there are federal provisions for local suppliers to invest in the market.

When asked about the localization rider, Society of Indian Automobile Manufacturers (SIAM) stated “[Government’s] direction is welcome, it is a fair deal. We may or may not agree on the timelines but those are technical aspects, one thing we always want as an industry is a roadmap and DHI has articulated that very well in their notification”.  SIAM believes that the distinction should be made between ‘make’ in India and ‘made’ in India. While domestic growth in the EV sector is vital, when optimized it can channel in foreign investments.

Localization also necessitates domestic cost-competitiveness in the long-term. With a localization mandate eventually there will be a gap in the market that Indian companies can fill. When asked, Debi Prasad Dash, Executive Director of India Energy Storage Alliance (IESA) said even the significant drop in cost of Li-ion battery packs in the last decade indicates that there is a potential this trend will continue given that there are enough players in the market, “currently, India has 1 GWh of Li-Ion assembling facility and 4-5 institutions are in discussion to put up cell manufacturing facilities in the next 2-3 years. The current cost of the Li-ion battery pack is at 250-350$ per KWh as compared to 1000$ per kWh in 2011. Li-ion battery accounts for 40-50% of the overall cost of the EV and is the most expensive component of EV. Indigenous manufacturing will bring down the cost of Li-ion battery and to further bring down the cost of EVs. All the foremost OEMs are currently importing batteries from China, Taiwan and Korea. Various Indian companies have already entered into the cell to pack assembling. But there is a huge opportunity in India for Li-Ion cell manufacturing India.”

There is a consensus within the industry that while FAME II is charting a clear path for the industry, it has to consider the ground realities as well. The intention of increasing charging infrastructure, demand incentives and capacity building, FAME II intends to create an environment for sustained growth of the EV sector beyond the next three years.

 

Sources:

Glossary:

OEMs: Original Equipment Manufacturers

DHI: Department of Heavy Industries 

NEMMP: National Electric Mobility Mission Plan (NEMMP)

FAME: Faster Adoption and Manufacturing of (Hybrid &) Electric vehicles

PMP: Phased Manufacturing Program

SMEV: Society of Manufacturers of Electric Vehicles

SIAM: Society of Indian Automobile Manufacturers

PISC: Project Implementation and Sanctioning Committee

IESA: India Energy Storage Alliance