Mahindra & Mahindra’s EV bet: All charged up and not sure where to go

The building is eminently missable; off a dusty two-lane road in Bengaluru’s Whitefield area, it definitely doesn’t look like a space that houses a company in one of the hottest sectors in the world. One of the floors is a playschool; another has sundry small businesses jostling for space. The other floor houses the corporate office of Lithium Urban Technologies.

The office itself suits the building; walls unpainted, Spartan furniture, unpredictable lighting… It could be any boring business anywhere in the country. What it is, however, is the flagbearer of electric vehicle (EV) adoption in India today. Lithium runs a fleet of electric vehicles, hiring them out to companies such as Mercedes-Benz, SAP Labs, and Wipro, which use EVs to ferry their employees to work. Lithium buys these vehicles and then leases them out, a model that the government has since adopted; public sector Energy Efficiency Services Ltd (EESL) is now doing the same thing to promote the adoption of EVs by government offices.

An alarming increase in air pollution, largely caused by vehicle emissions, has put EVs in the limelight. In February this year, the Supreme Court called vehicular pollution a “critical problem” that needed to be resolved by the government at the earliest. Open Government Data Platform India (data.gov.in), part of the government’s open data initiative, says that “in recent years, air pollution has acquired critical dimensions and the air quality in most Indian cities that monitor outdoor air pollution fails to meet WHO guidelines for safe levels”. Significantly, it blames “uncontrolled vehicular traffic” as the primary reason for the country’s air pollution.

Meanwhile, the government claims that it is doing the best it can by advancing adoption dates of emission norms—and pushing for EVs. In April last year, amidst reports of increasing air pollution in Delhi and its surrounding areas, Piyush Goyal, then Union minister for power and renewable energy, said that “by 2030, not a single petrol or diesel car should be sold in the country”. Months later, the Union minister for road transport and highways, Nitin Gadkari, reiterated Goyal’s statement and said that Indian carmakers should “be ready to be bulldozed” to move to electric vehicles by 2030.

Predictably, there was pushback from vehicle manufacturers; the automobile industry is one of the key drivers of the economy and since liberalisation, almost every global carmaker has set up shop in India. The country is the fifth-largest passenger vehicle market in the world; but EVs account for just 0.1% of total cars sold each year compared with 2.7% in China. The Society of Indian Automobile Manufacturers (SIAM), an industry body, agreed that the country needed move to EVs, but added that a wholesale move in a dozen years was not feasible. Ultimately, the government blinked, saying that what the ministers had said was an idea, not a policy statement.

By then, the cat was among the pigeons, and carmakers were scrambling to get EV technology and gain some lucrative government contracts.

Sitting pretty in all this is Mahindra & Mahindra (M&M), pioneers in the EV space. Granted, those EVs are thanks to M&M buying out Chetan Maini’s Reva Electric back in 2010. But that buyout was a prescient move by the M&M executive chairman, Anand Mahindra, a businessman known for his penchant for unexpected moves. “By buying Reva, we wanted to be a part of the country’s history in electric vehicles and we will now be the pioneers,” says Mahindra, who is also chairman of the Mahindra Group.

His buy now seems like solid business sense too. Morgan Stanley Research in its May 2017 report estimates that EVs could be a $60 billion opportunity for India in the next decade. “We envision that the annual sales of EVs in India will be upwards of 30 million, making it the second biggest market after China by 2030 for such vehicles,” says Amitabh Kant, CEO of government think-tank NITI Aayog.

Reva Electric Car Company (the Maini version) was set up in 1994, and the Reva-i was launched in 2001, when EVs were seen as somewhat of an industry eccentricity even globally. There was no serious mass market battery operated electric vehicle in the market then. Nissan, under the leadership of Carlos Ghosn, was the only company that was developing a battery-operated all-electric car, the Leaf, while General Motors (GM) had decided to go the hybrid way for its Volt, using a gasoline engine to charge its battery to give it further mileage. The first Tesla EV, the Roadster, debuted in 2008, but at $109,000 apiece, it was more a luxury and aspirational vehicle than a street car. In California, Toyota’s hybrid Prius was then the most popular battery-operated vehicle but was heavily subsidised by state handouts.

Reva, clearly, was a car for the future. Back then, there were few takers, largely because the average car buyer was not prepared to shell out Rs 2.5 lakh-plus for what would largely be a car to be used for short trips. Charging was (and continues to be) the big stumbling block, though Maini did have a solar charging option. Enter Anand Mahindra. “The whole business of the ‘connected’ car was the kicker,” said Pawan Goenka, now managing director of M&M, a few years after the Reva acquisition; Goenka then was chairman of Mahindra Reva, which became Mahindra Electric (ME).

By 2013, Mahindra Reva had launched the e2o, a far more mainstream-looking car. However, the hefty price tag (back then, it cost something like Rs 6.5 lakh) was somewhat off-putting, and the company has not managed to make a profitable business in EVs.

“We were told that we were making a big mistake by betting on battery-powered vehicles, but I had to,” says Mahindra. There were three reasons why he was driven to this decision, explains Goenka. One, the obvious need to offer less-polluting vehicles. Two, battery costs (the bulk of the cost of an EV) were slated to crash, making EVs affordable. “The third,” says Goenka, “was an emotional kind of reason.” It’s also a reason that gives us a peek into what makes Mahindra—the man and the company—tick. Goenka says India has always been the follower in automobile technology, at best tweaking what is available elsewhere. An EV gives M&M the chance to lead globally in a nascent sector. “I’m not saying we are going to do a Tesla kind of technology,” Goenka adds hastily. “But we are getting into a space where we could actually be leaders and become a source of electric vehicle technology and components. So this was a bigger reason—more of an aspiration.”

For a while, it looked like the dream was going to stay a dream; for nearly five years after buying Reva, the company sold a few hundred cars a year. It pumped money into a futuristic factory and company product design overhaul and rebranding, but none of that paid off. That was around when Mahindra realised the Reva was driving after the wrong set of customers. Individual buyers were largely sceptical about EVs, and were not confident about the government providing sufficient charging points across cities. Nor were they happy about the “coolness” of the cars though early customers who drove the Reva vouched for its low maintenance and stress-free rides; M&M is no Tesla, and Anand Mahindra, for all his charisma, is no Elon Musk. “We are too small to bet on everything. We had to make one bet and I was not unused to taking bets. I had to choose a set of circumstances and hope I’m right,” says Mahindra.

That’s when Mahindra decided to change lanes; he began focussing on fleet operators. Enter Lithium. The company was set up in 2015 by Sanjay Krishnan, who did stints with automation experts Honeywell and Andersen Consulting, and co-founder Ashwin Mahesh. They wanted to set up a transportation company that ran on clean energy. Both the founders had driven Reva variants and were sure the cars would find takers. They calculated that an average car owner drove a maximum of 40 km a day (this is the same premise that Nissan’s Ghosn worked on when developing the Volt). A vehicle that is part of a commercial fleet, however, runs up to 5,000 km a month; that’s an outer limit of 166 km a day. Krishnan believed (rightly, as it turned out) that an EV with a range of 120-150 km could be a good addition to a fleet. Companies could score carbon credits as well as boasting rights.

In a couple of years since Lithium, ME has been going after fleet operators with dogged determination. Last year, it announced that Ola would lease 100 EVs from ME. Bengaluru-based Baghirathi, a two-decade-old car hire company that runs 3,000 conventional fuel cars, has now placed an order for 1,000 Mahindra electric cars. ME has since tied up with other fleet cab operators like Meru for a pilot project in Hyderabad. Bengaluru-headquartered Zoomcar, which offers self-drive cars on hire, will begin offering ME’s electric vehicles in Mumbai. “Our philosophy on EVs is different from Tesla’s. Tesla wants EVs to be an aspirational product but at Mahindra we have always been saying that we want the new technology to percolate to the mass market to solve societal problems,” says Mahesh Babu, chief executive officer, ME.

All of which meant that in 2017, ME sold 4,026 EVs, nearly four times more than the previous year. Most buyers were fleet companies. This has encouraged ME to make plans to invest Rs 900 crore in expanding manufacturing capacity and building a new plant for assembling batteries. M&M, meanwhile, has already invested in a new research and development centre in Detroit, which will help in developing new battery technology and vehicle platforms that will come in handy for the group’s overall EV strategy. M&M is also testing commercial EVs, such as buses and light commercial vehicles, as well as SUVs.

Enter the government. Last year, eesl, a joint venture of four other psus—ntpc, power finance corporation, rural electrification corporation, and powergrid corporation—was tasked with getting more evs on indian roads. Last september, EESL floated a tender to buy 10,000 electric vehicles. Following the Lithium model (and EESL’s own experience earlier with LED bulbs), the PSU will buy these EVs outright and give them to government departments and other institutions on a ‘pay as you save’ model. Simply put, EESL will give the electric cars (with a driver) at Rs 40,000 a month to government employees.

A contract for 10,000 cars in a space that sees a few hundreds sold is clearly a big deal, and all carmakers wanted a piece of the action. The tender made Mumbai-based Tata Motors kick-start its EV programme and win the EESL bid by quoting the lowest price for its proposed electric car. It also brought alive several state governments to potential benefits from investments from EV companies. At least three states—Andhra Pradesh, Maharashtra, and Karnataka—are drawing up incentives for EV-related investments. EESL, subsequently, has floated another tender for 10,000 more cars to be delivered by 2020. By virtue of being the second lowest bidder in EESL’s tender, ME will supply the government 4,000 vehicles over the next two years. It has already delivered 150 cars so far.

Tata’s entry into the EV space (more on that later) highlights a problem M&M has faced before: its complete lack of preparedness for competition. For a long time, M&M was the undisputed leader in SUVs but when competitors like Maruti, Hyundai, and Ford launched petrol SUVs, its market share halved to 25% over five years as it didn’t have a competing product. True, the market expanded and M&M held on to its volumes but it no longer called the shots in the fastest-growing category of passenger vehicles. “It is inevitable,” admits Goenka. “Like in SUVs, we will lose market share to other players.” That seems an alarmingly defeatist attitude when the battle has hardly begun. But Goenka’s point is actually more nuanced. He says that losing market share means little to ME because that will mean that the entire EV space is growing. “When we made the Scorpio, the company’s future depended on its success. But for the country as a whole, and for the industry as a whole, electric vehicle is a much bigger deal than Scorpio,” he says.

This acknowledgement of a greater common good is somehow very Mahindra. Consider this small but telling incident. Recently, when the Enforcement Directorate seized Mumbai’s iconic music store Rhythm House and proposed to auction it, Mahindra tweeted: “If the ED is going to eventually auction Rhythm House, how about a bunch of us in Mumbai collectively acquiring it, restoring it & turning it into a performance venue for Rising musicians & a hangout for music lovers? Happy to be part of such a band.” The resultant crowdfunding initiative has seen positive response across the board.

But, and this is significant, the greater common good is not going to make a company profitable. As long as M&M subsidises ME, all is probably well. Can ME ever run as an independent company? The answer is probably not. Equally significant is the fact that Mahindra probably doesn’t care. He has always been the gritty entrepreneur who chose to venture into new businesses, and he views success and failure with equanimity, learning from the failures and rarely letting success go to his head.

Look at M&M’s two-wheeler venture, which began with the company’s acquisition of Kinetic Motors a decade or so ago. Some good bikes came of that deal, but the company found the going tough in the mass market. Even as it acquired the rights to make Jawa motorcycles in India, and acquired the BSA brand, the company has reportedly scaled down its mass market two-wheeler offerings. It will, say reports, focus on the niche segment with Jawa and on the export market (with BSA).

Mahindra has been an early mover in several new businesses over the years. He was one of the first to set up a used car portal, a technology-led logistics business, and even ventured into making boats. He has been the architect of building the group’s expertise in several areas such as hospitality, finance, and software, which have together added more than 40% to the group’s valuation over the years. The group’s value has gone up to $17 billion in less than two decades. And in all this, there are no clear category leaders, other than in tractors and holidays.

Coming back to EV’s, it may help to know what Mahindra’s competition is up to. The wild card, Tata Motors, made a dramatic entry into the EV space spurred by the EESL tender. Till then, Tata had only made electric cars as lab experiments or as prototypes to display at auto shows. In fact, Tata Motors parleyed with EESL to modify the original tender, which stipulated that the bidder had to be a manufacturer of EVs.

Tata Motors began a fast-track programme and put together a team of 35 from across departments. Their brief: to make an electric version of the Tigor in four months. (It usually takes a company 33 months to develop a new vehicle.) “The EESL tender offered the biggest opportunity to scale our business and we did away with so many rules to get the project going,” says Shailesh Chandra, the newly designated president, electric vehicles and strategy, Tata Motors.

Tata Motors has big plans going forward, as it gets set to start selling the Tigor commercially soon. But for now, it will focus on its one customer, EESL, service it fully and also continue to develop and fine-tune its product when it completes the targeted 6,000- car delivery over the next two years. Tata Motors also thinks that there will be a big opportunity in city buses, as these usually have a daily range of 150-200 km, easily serviceable by electric buses. Further, the bus hub can be charging points, doing away with the immediate need to locate real estate to place the chargers.

Chetan Maini, who now runs his new venture Sun Mobility, has developed a station that can charge and swap batteries in buses giving them an additional range. “There is a bigger use case for electric buses especially if there are ways to bring down the cost of battery by lowering its capacity and swapping them more often,” says Maini. The government has already put out tenders to buy electric buses in 10 cities and Tata Motors has won the mandate to supply in six, while Chinese company BYD has the contract for the remaining.

The other big vehicle manufacturers in India have still not revealed their plans. Maruti Suzuki is setting up a big battery factory in Gujarat, reportedly to power a range of hybrid vehicles. Recently, Maruti Suzuki’s local managing director & CEO, Kenichi Ayukawa, said that though Suzuki will launch electric vehicles globally by 2020, there are no plans to do so in India. Renault, another big player in the small car market, brought a couple of its electric cars to test in India but does not immediately see a market; the Leaf would cost upwards of Rs 22 lakh after import fees.

Tata Motors is upbeat about its prospects. “We have a few years’ lead time to build our presence as it will take time for overseas carmarkers to bring out an India-specific product,” says Chandra.

And what about the first mover in this space? Goenka says it’s not a positive to have been the only player for so long. Had the government spelt out a clear policy on electric and hybrid vehicles, Goenka may have been more optimistic. As things stand, he’s bracing himself for tough times ahead as ME has the biggest stake in the EV space today, and any change in policy is bound to affect it the most. The situation won’t be different than what it had to face when the government passed strictures on running diesel SUVs in the capital region to rein in pollution. Again, the company was pushed to a corner as it was the biggest manufacturer of diesel SUVs. Says ME’s Babu: “Sitting where we are, I feel that we would have missed an opportunity [to be in the EV business] if our plans had been delayed for a few years.

It’s a complicated exercise to try and understand the government’s policy. In 2015, the government announced FAME (Faster Adoption and Manufacturing of Hybrid & Electric Vehicles), under which it subsidised the cost of hybrids and EVs. M&M was the only player in this space, so it gained from these incentives. FAME was criticised by the industry as being a policy created on the fly, with no inputs from stakeholders. The government’s response was FAME-2, where public transport got the bulk of the incentives. Electric vehicles were given further subsidies, but hybrids were not.

Meanwhile, there were flip-flops regarding the goods and services tax (GST) on hybrids. When the GST was first announced, hybrids were taxed at the lowest slab. But later, the government called it an intermediate technology and taxed hybrids at the highest slab, wanting to discourage these vehicles and move to EVs. Toyota and M&M were hit hard as they are the only makers of hybrid engines. While Toyota made a strong case to the government to reduce GST on hybrids, M&M stayed mute as it was receiving subsidies on its EVs under FAME-2.

And, after all this, the government has now announced that there is no need for a policy on EVs; it will merely provide direction. “A policy document is the starting place for all strategy. How do you work without one?” demands Roland Folger, chief executive, Mercedes-Benz India. His question is echoed by many of the brass in auto companies, particularly the foreign ones. Chandra of Tata Motors, too, says a policy is needed to set the tone for the sector.

All of this means that M&M looks set to repeat in EVs what happened with SUVs. It has the first-mover advantage, but it doesn’t seem to have a long-term plan in place to deal with policy changes or competition.

The Tata Motors experiment in winning the EESL tender makes it clear that existing companies can bring electric models into the market quickly if they have the basic components in place. M&M is not a car company and has positioned itself as an SUV player all along. So, if players like Tata or Maruti start ramping up, they will immediately have more options to offer customers. The ease of bringing an electric variant may hasten trouble for M&M.

In fact, Tata Motors seems more prepared for competition. “Unlike internal combustion engine vehicles, nearly all the components in an electric vehicle are outsourced and therefore, we anticipate that there will be several automobile players in the space. If we can do a vehicle quickly, we anticipate that others too can,” says Chandra realistically.

There are other niggling issues too. Today, both the e2o and the Tigor run on a 72-volt battery and as EESL is buying those cars, it has set the charging standards in the country at that voltage. Globally, however, EV battery voltage ranges between 180V and 380V, which gives those vehicles higher mileage with a smaller battery and also hastens charging. Says a NITI Aayog official, who does not wish to be named: “It almost appears as if the innovation boundaries for Indian electric vehicles are predefined by the government and that is not a good thing.”

We press Goenka for M&M’s long-term plans. He is clear that the EV programme is not a pilot project. Even though M&M can, technically, write off all its EV investments without hurting the balance sheet too much, the company is not looking at that. It is expanding its Bengaluru plant to produce 50-70,000 electric vehicles by 2020; that’s likely a mix of three-wheelers, cars, trucks, and utility vehicles, all of which are already on the drawing board. Interestingly, M&M is the only company in India, and one of 10 globally, to be developing an electric racing vehicle. In Italy Pininfarina, an eclectic auto design company that Mahindra bought in 2014, is working on a luxury-, high-end electric car that will be pitched against the likes of Tesla. Recently, M&M tied up with Ford Motor to jointly develop electric SUVs and compact cars, which will give the group a greater presence in cars.

Is this a sustainable plan or is this just taking things one step at a time?

Given the state of the EV space today, there are no clear answers. But M&M is doing with EVs what American novelist E. L. Doctorow once said of writing; that it is “like driving at night in the fog. You can only see as far as your headlights, but you can make the whole trip that way”

(The article was originally published in July 2018 issue of the magazine.)