Hero Electric is targeting 5 lakh-7 lakh EVs by 2025: Naveen Munjal

Hero Electric, India's largest electric two-wheeler maker, sold over 50,000 vehicles in 2020 and is looking at 15% growth in FY21 on the back of its hybrid sales model—a combination of online and offline sales. The company says that its most-popular scooters—the Optima and the Nyx—have become the perfect examples of ‘city speed’ vehicles. Hero Electric claims that it has the widest service network offered by any brand in the segment, having expanded to over 600 touchpoints covering 500 towns and cities across India.

The Gurugram-based company, which started developing electric two-wheelers in 2000, plans to expand its manufacturing facility from the existing 70,000 units annually to 2.5 lakh by the end of 2021. Fortune India spoke to Naveen Munjal, MD, Hero Electric, about what it will take for India to adapt better to electric vehicles (EVs), his expansion plans, and why new-age startups are more bullish on electric as the future. Edited excerpts:

The legacy two-wheeler makers currently have a minuscule part of their businesses in EVs. Is the market ready for electric yet?

In the last couple of years, EVs have become far more relevant than they were earlier for various reasons. Initially the issue was of purchase price and the cost of running. Both of those have been brought down dramatically. The vehicle has become far more robust. So, in terms of the initial purchase price of electric, the majority of the market lies with ICE [internal combustion engine] vehicles, [which] is about ₹70,000-₹75,000 for a 100cc motorcycle or a scooter. We, on the other hand, have been able to bring the price down to less than ₹60,000 for an electric vehicle in the city speed category, which goes about 42-45 km an hour, at about 80 km range, with a five-year warranty. The cost of running is far lower than that of an IC engine. It goes from anything [between] 1/5th to 1/10th that of an IC engine vehicle. When you look at it from all these angles, electric has come a long way in the last couple of years. The market is ready to take off. There are no two ways about it.

Then why aren't ICE bigwigs going for scale?

When you compare it with why the IC engine guys haven’t jumped in, it’s because that’s a very well-run machinery already. This level of disruption, where you have got to change your supply chain, your dealer network... the whole ecosystem is going to change. And this requires a very different thought process. This industry is going to grow, and, on the other side, you have got this mammoth industry which is already there. When you see what’s happening on the ground in terms of innovation, in terms of the governmental push, environmental reasons pushing it, from every angle, it makes absolute sense. Now if we look at it, India is a highly price-sensitive market. If you look at the current automotive pyramid right now, 85% of the vehicles are either entry-level or commuter vehicles. These are vehicles that sell up to a price point of ₹90,000 and beyond ₹90,000 is the premium end of the market and becomes more in the lifestyle category. Though that’s only 15%, that’s still a large market in terms of numbers.

What we believe is that the commuter segment will switch to electric only if the band is 10% plus/minus of where they are right now. We don’t believe that they are going to suddenly buy a ₹1.5 lakh product simply because it’s electric. What happens in electric in a high-speed, high-performance, and a big-capacity vehicle is you lose economics when you’re charging the vehicle, [especially] when you’re charging on a day-to-day basis. Plus, the initial purchase price is high and when it comes to replacement of the battery, that’s an exorbitant cost. Almost the cost of an IC engine vehicle. So, the customer understands it and it remains more of a lifestyle product. Whereas, what you [have] got to do in order to convert this market, is going with vehicles where initial purchase price is low, running cost is low, and the battery replacement price does not pinch your pocket. That’s the key. That’s where we have been able to bring our battery prices down to a sub-₹60,000 level.

You are one of the first-movers in the industry. What are some of your learnings?

We’ve been in the market for about 14-odd years. Now a couple of things that we’ve realised along the way is that what the customer wants and what the customer needs. Pre-Covid-19, a number of people filled out the form but did not actually pay the advances. We wanted to understand what the logic behind all that is. So, what we understood from them was that they haven’t tried out an EV. One of the things that we came up with is the three-day return policy. The second thing we did was to give them a five-year warranty basically to eliminate any anxiety or issues that they might have. Then, we understood that customers don’t necessarily have charging infrastructure if you live in a block of apartments. So, we started creating portable batteries. We have got 13 models on six platforms and all of them have portable batteries. So, we have tried to make our vehicles as simple and user-friendly as possible.

How difficult was it to change consumer mindset?

Changing the customer's mindset is the toughest. One, they have either used it or seen someone else ride it, then they are willing to switch. First and foremost is to get vehicles on the road that they see. Your network is also very powerful. We’ve got at least 40% plus repeat sales. People who already bought it got their friends or family in. Customers still have range anxiety issues. One: you can plug it into any wall outlet in the country. But we started installing the charging infrastructure around the dealers. We’ve already installed about 1,000 of them. The idea is to take it to 20,000 in the next two years. The sales of vehicles around these dealers have gone up dramatically by 3X. So, that’s where we’re trying to change the customer's preference and the customer's mindset.

We’re focussing on plant expansion, new product developments. These products are going to be targeted at consumers and B2B businesses. R&D into light-weighting of vehicles, we want to integrate more and more IoT into the vehicle but also be conscious of the fact that we want to keep pricing at a level which is acceptable to the consumer. Marketing spends are another big area that we have to do. We already have 500 dealers and we’re going to expand to 1,200 in the next couple of years. We’re going to expand our distribution hubs as we go along.

How were you able to keep costs in check?

Due to the government's policy push, the refining of our supply chain, refining of the battery that we had, not putting extra bells and whistles on the vehicles. Just focussing on making it more robust, that’s how we’ve been able to bring the price down. Battery prices have dropped 85% in the last 10 years. We ourselves are at the fourth generation of our batteries now.

Do you think demand creation is still an issue?

We’re increasing our capacity to around 3 lakh-plus—[basically] quadrupling our capacity—[which] we’ll have it this year. We’re targeting about 5 lakh-7 lakh units in the next four years. It’s not only production-led. It’s also sales-led. We have been gradually increasing our sales volumes month-on-month. In the past four months, we’ve gone from 6,000-7,000 to 8,000 units a month. We’re looking at 1 lakh units by next year alone, starting April. The demand is there but it’s not an easy demand. Today, it's not that the demand is pulling the market. No, there's [a] tremendous amount of push that we’re doing into the market, there’s digital media awareness, trial campaigns, we’re doing a lot of work in the B2B space. Now [that] the pricing is right, we expect that the demand is going to explode. It’s going to double year-on-year.

Have rising fuel prices impacted your sales?

Due to rising fuel prices, we’ve suddenly [been] getting a lot of walk-ins. We’ve been able to marry online and offline sales. We’ve seen a 10X increase in our online sales as opposed to the previous year. And 15% increase in the sales overall over the past one year, despite the first quarter getting completely wiped out.

The EV industry is highly fragmented right now. How do you look at competition and what's your prediction for the market in, say, the next five years?

Competition will help us create that whole market and that noise. The customer will eventually buy a product he feels is suitable for him. That noise is important. We ourselves cannot do it. That’s why competition is important. What we believe is going to happen is that as we go along, the number of new entrants will come in, but the number of companies will not be able to survive in the long run. There’s no doubt about it that in the mid-long run, we anticipate that there’s going to be a couple of players who are going to be the main leaders. It’s not going to be a highly-fragmented market as it is right now because as you have serious players, the non-serious players will not be able to sustain that. What we’re anticipating at a very conservative level, we looked at a number of 30%-35% of the market to be electric by 2030. And even at that number, electric mobility is going to be close to about 10 million units by then.