India’s Plan For Tesla-Like Battery Gigafactories Needs A Reality Check

India plans to lure domestic and global firms to build Tesla-style Gigafactories that make millions of battery cells. Manufacturers and analysts say companies are unlikely to commit anytime soon because of onerous conditions and lack of demand.

The nation’s nascent electric-vehicle sector needs battery manufacturing to succeed as they account for half of the vehicle’s price. India has plants that assemble batteries but no makers of cells, the component that stores energy.

Asia’s third-largest economy wants to fix that through its Rs 18,100-crore production-linked scheme for a total of 50 gigawatt-hour capacity of advanced chemical cells. The aim is to attract Rs 45,000 crore worth of investments from local and overseas companies engaged in solar infrastructure, handset or other electronic manufacturing in the next decade. That, according to a government statement, can save up to Rs 2.5 trillion through lower crude oil imports.

“It’s a step in the right direction but it might not be enough,” said Hetal Gandhi, associate director at Crisil Ltd. “And it may also be early because there might not be immediate use cases and, hence, people may not be able to utilise the capacities.”

The concerns stem from the minimum bid size of 5GWh capacity, 25% localisation in the second year of manufacturing and 60% in the fifth, and penalties for missing these deadlines. Already, a few domestic battery and solar manufacturers have taken up these issues with the government’s think tank, the NITI Aayog, two people privy to the discussions told BloombergQuint on the condition of anonymity as details are not public.

Where’s The Demand?

A battery capacity of 5GWh can power more than 1.5 lakh Tata Nexon electric SUVs. For a single company, this minimum requirement may prove to be a deterrent given the lack of immediate demand.

Among several EV production hopefuls, Bhavish Aggarwal’s Ola Electric Mobility Pvt. aims to produce 15% of the world’s e-scooters by the summer of 2022, and Tesla Inc. has started preliminary work for its India foray.

Yet, less than 1% of vehicles sold in India are EVs. While India has announced FAME-I and FAME 2 policies offering incentives, demand failed to take off.

“Unless there is demand creation, the conversion won’t happen, and nobody will invest a heavy amount in manufacturing,” Naveen Munjal, managing director at India’s largest electric scooter maker Hero Electric Vehicles Pvt., told BloombergQuint. The subsidiary of Hero Group, India’s largest two-wheeler maker, will first wait for the volumes to rise before deciding on investing in battery manufacturing.

While the scheme is focused more on the EV sector, it’s unlikely to be the initial beneficiary.

“First demand adopters (value-wise) will be solar power companies,” said Ankit Doshi, director of Waaree ESS, an energy storage firm. “Then it could be electronics. But the problem is that the electronics industry already has a set supply chain, so they will invest only if the net cost of production is less in India.”

Still, he said, “If you ask me today if I’ll be able to sell 5GWH today, it’s a big no.”

But Doshi worries they wouldn’t be able to participate due to high eligibility criteria.

According to the draft of guidelines reviewed by BloombergQuint, one of the eligibility criteria is a requirement of AA+ rating and a net worth of Rs 225 crore per gigawatt-hour. The rating condition, if retained, will exclude even Tata Motors Ltd. and Tata Power Co.

Exports could be an option. But Ashish Modani, vice president at ICRA Ltd., said it's not viable. “For exports you need economies of scale benefit which is not there in India yet. And global players are much better off. India will take a lot of time to be competitive.”

Raw Material Shortage

India relies heavily on raw material imports for batteries. Lithium-ion cell manufacturing is dominated by China, and then there is U.S., Thailand, Germany and South Korea.

“Companies need tie-ups for raw materials and everything needs to be integrated for the scheme to be a success,” Gandhi said. “Cobalt, lithium, nickel, are all being imported, and we need to ensure the procurement policies are in place for each.”

Shruti Saboo, associate director at India Ratings and Research Ltd., also cited raw material imports as a concern. “To reach 60% localisation, the market has to really grow,” she said. “Whatever raw material we use, we don’t have a reserve for that.”

Munjal suggested that the targets should be based on volume goals. “Localisation will happen only if there is demand,” he said. “Everyone knows it’s going to convert to electric, but will it happen in three, five or 10 years? No one knows.”

Atul Arya, Head of Energy System Division, Panasonic Energy System in an electric vehicle conference organised by Emkay global had said that the supply chain in India is still at a nascent stage.

"The entire eco-system needs to be developed. Currently, requirements of battery cells, components, BMS, etc. are being met through imports."

Safeguards, Clarity Needed

Doshi of Waaree recommended safeguard and anti-dumping duties. “If duties aren’t increased, consumers won’t buy from local manufacturing,” he said, adding cost structures between Indian and China is huge. “It can be tapered down once we have the cost structures somewhere closer to the competitors.”

Companies that have already started working towards battery manufacturing, include Exide Industries Ltd., Amara Raja Batteries Ltd. and TDS Lithium-ion Battery Pvt. Ltd.

Exide already has a joint venture with Switzerland-based Leclanche SA, Amara Raja has a technology transfer agreement with ISRO. Tata Chemicals Ltd. is also working on its lithium-ion cell project. The U.S.-based C4V has partnered with Omega Seiki Mobility.

Gandhi of Crisil, however, said clarity is needed on how the incentives will be disbursed. “And if these players would have gone without PLI, the answer is yes,” he said. “The question is how much PLI will reduce the cost of battery and that depends on how many incentives they are finally going to get.”

Then the government has also missed out on technology transfers as Indian companies don’t have R&D needed to support EV push, according to Gandhi. “We don’t know if global firms can directly apply or they need domestic partners.”

Omega Seiki Mobility, however, is optimistic. “We’re having conversations with the government right now, and we will be able to utilise 5GWh capacity in three years,” said Uday Narang, chairman of Anglian Omega Group, the maker of three- and four-wheeler cargo vehicles. Narang said the company aims to use the capacity to export its electric vehicles to markets like Bangladesh, Africa, Southeast Asia.

Dipti Lavya Swain, a partner at HSA Advocates, who had worked with NITI Aayog in formulating the PLI scheme, said while companies want more sops, there are multiple benefits within the existing framework.

“A sudden switch to EVs cannot take place unless there are policy movements like these along with corollary infra, which is also taking place slowly,” he said. “Certain teething issues may remain as this is new but most of them being ironed out soon must not be ruled out.”