Why the economics of Mahindra Reva e20 don't work

Why the Mahindra Reva e2o economics don't work?

Ashish K Mishra
Published: 05, Apr 2013

Former senior principal correspondent at Forbes (India). Since 2008, I have been writing on corporate strategy in the automobiles, clean technology and supply chain space. Before I got onto this assignment, I was part of the team that covered feature articles at The Economic Times. I actually started out as a trainee journalist on the ET desk in 2006. I graduated in commerce from Shri Ram College of Commerce in New Delhi and now live in Mumbai. I love automobiles and spend hours reading up on them and then devote painfully long hours to work on old cars that attract my fancy. Right now I own four cars (my colleagues call them fancy, junk or whatever) and a bicycle which outside my work hours get most of my attention.

The Mahindra Reva electric vehicle
Mahindra Reva e2o

Earlier this week, Vikram S Mehta, chairman of Brookings India, wrote in a column in The Indian Express that “governmental support is essential to create an enabling eco-system for electric vehicles (EVs)”. His main points can be summed up thus:

- EVs offer substantial savings in terms of running costs when compared to internal combustion engine vehicles

- EVs offer a sustainable answer to the challenge of energy and environment

- EVs should be incentivised by the government of India because we may find a solution to our energy and environment crisis

While one appreciates Mehta’s perspective, here’s what I have picked up from my own earlier research on EVs. I will focus on cost of ownership, understanding the subsidy burden if the government were to incentivise EVs, the clean car image and practical issues with owning an EV.

First, at Rs 8 lakh (estimated) price in Mumbai, the Mahindra Reva e2o is just too expensive for any sort of mass adoption. A major chunk of this cost is made up of the lithium ion battery (expected to be around Rs 2.5-3 lakh). Let’s assume that an average person drives 10, 000 km a year. And the e2o can be benchmarked against, let’s say, the Wagon R from Maruti Suzuki which costs Rs 5 lakh. In terms of charging, the e2o should cost Rs 50 per 100 km. That means a yearly running cost of Rs  5,000. The Wagon R, at a conservative fuel efficiency of 10 km to a litre, and price of petrol at Rs  75 would have a running cost of Rs 75, 000. So effectively a customer would save Rs 70, 000 every year. Except that in the total cost of ownership equation, this doesn’t work out very well.

A buyer of the e2o will take more than four years to recover the additional upfront money (Rs 3, 00, 000) that he paid for the vehicle. And let’s not forget that in the 5th year, the lithium ion battery needs replacement. At the battery’s current cost is not expected to go down drastically in the future, this completely alters the cost of ownership economics against the e2o. “This is not at a price yet which can lead to a volume build up. And without that OEMs are not going to invest in manufacturing capacity,” says Suvojoy Sengupta, managing director of Booz & Co India.

The Maruti Suzuki Wagon R
The Maruti Suzuki Wagon R

From a buyer’s point of view, a Wagon R CNG makes far better economic and practical sense. The lithium ion battery is just too expensive. 

Second, what is the quantum of subsidy burden we are talking about? Taking forward the earlier example, the government intends to bear about 40 percent of the difference in price between the e2o and the Wagon R. So that’s easily Rs 1 lakh or more for every EV sold. While I still don’t have an exact figure on the total amount, a good indicator would be what other countries spend. The US, for instance, has a proposed investment of just under $5 billion, China is about $20 billion, Japan at about $1.7 billion and France at about $ 3.5 billion.

A source who has been involved in these negotiations and discussions says that this is a big cheque to write. “I wasn’t surprised that the FM didn’t make any announcement in his budget speech. They have taken the proposal to the Planning Commission and finance ministry, but considering the public finance situation, this is a big cheque to write. And ultimately the Department of Expenditure will go through it with a fine toothcomb,” he said.

Third, with more than 90 percent of our energy coming from non-renewable sources, EVs don’t and cannot have a ‘clean car’ image. Period. According to the US Energy Information Administration, India’s largest energy source is coal, followed by petroleum and traditional biomass (e.g., burning firewood and waste).

Lastly, EVs cannot take off unless there is some basic level of charging infrastructure available. Range anxiety is the biggest fear of an EV buyer. I mean nobody wants to be left stranded with a Rs 8 lakh vehicle. Don’t you think that instead of incentivizing EV purchase, the government would do better to incentivise charging infrastructure? And let the manufacturers do their job of manufacturing and selling EVs.

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