Innovations will make EVs cheaper than ICE Vehicles: Kunal Khattar of AdvantEdge Founders

Kunal Khattar, founder partner at AdvantEdge Image: Amit Verma

Kunal Khattar, founder partner at AdvantEdge, a mobility-focussed early-stage VC firm, talks about the role of various stakeholders as the electric vehicle (EV) sector grows in India—from startups like Ather to multinationals like Tesla. Edited excerpts:

Q. Tell us about the opportunity you see in India’s transition from ICE [internal combustion engines] vehicles to EVs?
As investors, our focus lies in the ever-evolving landscape of technology-driven disruption. Shared mobility, for instance, significantly disrupted various sectors, from public transportation to bike taxis and traditional taxi businesses.

However, what truly excites us now is the paradigm shift from ICE to EVs. We’re witnessing a global shift where over 5 percent of new vehicle sales in numerous countries are electric, indicating a pivotal moment where EV adoption accelerates. This acceleration is bolstered by well-established charging infrastructure and growing consumer consideration of EVs.

Our calculations hint at a once-in-a-lifetime opportunity with potential wealth creation surpassing a trillion dollars. Over the next eight to 10 years, we anticipate the sale of around 100 million EVs, leading to the emergence of new auto component companies, disruptive original equipment manufacturers (OEMs) like Ather and Ola Electric, innovative distribution models, after-market opportunities, including battery recycling and replacement, EV financing, insurance, servicing and pre-owned EV sales. Additionally, the treasure trove of real-time data generated by EVs presents numerous business opportunities.

While autonomous vehicles are on the horizon, India might need more time to fully embrace them. Nevertheless, when we consider the disruption across the automotive industry, from component manufacturers to dealerships, finance and insurance, and combine it with the transition of shared mobility towards electric options, it becomes evident that this is a trillion-dollar wealth creation opportunity.

As a fund, our aim is to strategically invest across this sector, identifying and supporting companies poised for successful outcomes in this transformative era.

Q. What are your views on the path to profits for EV companies in India?
Ola and Uber (globally) have achieved profitability at the operating level, though the journey was impacted by the 18-month disruption caused by Covid-19. Creating equilibrium between supply and demand in a two-sided marketplace is crucial. Initially, these platforms had to invest heavily in building supply before demand caught up, resulting in significant expenses. Covid-19 forced them to essentially rebuild their supply and demand from scratch, giving the impression of continuous capital burn.

Customers also realised that free rides and discounts wouldn’t last forever. Prioritising growth over profitability is common for startups, but as capital raising becomes more challenging, the focus shifts to profitability. By scaling back operations and concentrating on acquiring and retaining paying customers, profitability becomes achievable, even if it’s at a smaller scale than initially envisioned.

 Both Ola and Uber, though potentially not at their pre-Covid scale, are generating free cash flows from their core business models. This shift towards profitability is not unique to India; it’s happening globally in the shared mobility sector, where dominant players can maintain pricing and prioritise profitability over growth.

The quality of service may have suffered immediately after Covid due to vehicle repossessions, but it’s gradually recovering, and demand remains strong. While India’s market conditions differ from the US due to income disparities, with lower disposable incomes in India, building billion-dollar companies takes time. Patience from investors is crucial, and India will continue to produce successful companies with the right approach and capital support.

Also read: Ather Energy has survived so far by scripting a differentiated play. Can they continue creating magic?

Q. And in this context, what are some of the challenges on the OEM front?
As an OEM in the EV industry, the cost dynamics are critical. The cost is heavily influenced by scale, particularly regarding the bill of materials (BOM). Presently, we rely heavily on China for EV cells, which account for a significant portion of an EV’s value, whether it’s a two-wheeler, three-wheeler or four-wheeler. China’s dominance in cell manufacturing is evident, but the good news is that the prices of lithium ion cells, including LFP and other chemistries, have been steadily declining and are currently at historic lows.

For early-stage EV OEMs with lower volumes, BOM costs can be high, while selling prices are market-driven. This means absorbing the additional manufacturing cost without overpricing your EV compared to ICE vehicles. Initially, low volumes may result in negative unit economics, necessitating capital from investors to bridge the cost gap.

However, the advantage of EVs over traditional two-wheeler OEMs lies in the fact that about one-third of a vehicle’s ownership cost is related to fuel or energy expenses. With EVs, OEMs and partners can tap into this revenue stream by providing charging solutions, shifting the energy revenue away from public sector companies like Indian Oil or Bharat Petroleum. This additional revenue stream, coupled with increasing volumes, positions OEMs to achieve unit-level profitability faster, bolstering their path to profitability.

Also read: The Nexon was planned as Tata Motors' in-between car. Now it's driving the automaker's resurgence

Q. Where do you see the overall Indian EV ecosystem today in terms of its maturity?
We’re closely following the footsteps of more mature EV markets like China, the US and Europe, acknowledging that we might not catch up entirely but are making significant strides. Thanks to companies like Tata and Ola Electric, EVs have entered the consideration set of new vehicle buyers. Two years ago, the choice was among traditional manufacturers like Hero, Bajaj and TVS. Now, it’s a decision between ICE and EV, [which is] evident in the rising sales volumes.

To make EVs more accessible, a crucial approach is separating vehicle ownership from battery ownership. This aligns with the analogy that when you buy a petrol car, you don’t pay for five years of petrol upfront. Batteries constitute a substantial portion, approximately 40 percent to 50 percent, of an EV’s cost. Separating the two can significantly reduce EV prices.

We anticipate that in the next eight to 10 years, 40 percent to 50 percent of new vehicle sales in various form factors, especially two-wheelers and three-wheelers, will be EVs, translating to over 100 million EVs sold—a trillion-dollar opportunity. Despite occasional regulatory changes and subsidies, the long-term potential in the EV sector is akin to the revolutionary impact of Ford’s Model T and the assembly line.

Moreover, evolving regulations permit innovative business models, such as battery swapping services. These models decouple battery ownership from vehicle ownership, enhancing affordability. In essence, buyers can lease the battery separately, just like purchasing petrol separately for ICE vehicles, making EVs more cost-competitive.

Additionally, the presence of investors seeking yield-based opportunities rather than equity returns supports this ecosystem. The stage is set; it’s now a matter of identifying and supporting companies to realise this transformation in India’s automotive landscape.



Q. Can you do a quick dive into the talent aspect of this?
Our EV ecosystem is relatively young, with companies like Ather leading the way for seven to nine years. This experience has cultivated talent pools, fostering new startups. Some of our portfolio companies like Exponent and Bytebeam boast former Ather CXOs. This flywheel effect mirrors Maruti’s influence on the broader auto industry.

Additionally, technology has made the world flat, enabling access to global capital and talent. Covid-19 accelerated remote work and global hiring, enhancing team quality and speed. This podcast recording itself exemplifies this evolution, conducted efficiently without physical presence. These trends are also reshaping the EV landscape, fostering innovation and growth.

Also read: 'If they have OATS for breakfast, I put ICE cubes in my drink': Ola's Bhavish Aggarwal

Q. Tesla is expected to come to India. How will that change the sector here?
The entry of Tesla into the Indian EV market, while currently uncertain due to geopolitical tensions, holds promise. Tesla’s technology, talent and manufacturing expertise can positively impact India’s EV ecosystem.

Despite being a premium player, it will boost EV adoption, drawing more investor interest and conversation around EVs, akin to what Ola and Ether achieved. Tesla’s presence can inspire people to explore EVs, potentially leading to purchases from local players like Tata or MG.

Balancing the interests of local OEMs and the need for a player like Tesla is crucial. Tesla initially proposed importing vehicles from China due to its competitive pricing, but this faced resistance from domestic OEMs and the government. The government suggested Tesla establish a manufacturing plant in India, with potential short-term reductions in duties to incentivise local production and eventual export possibilities.

This negotiation reflects the government’s desire to promote domestic manufacturing while accommodating Tesla’s entry. It’s a complex process involving the interests of multiple stakeholders, including domestic OEMs, government policies, and Tesla’s intentions to enter and thrive in the Indian EV market.