The government has cleared Rs 26,000-crore worth new production-linked incentive (PLI) scheme for the auto sector, to boost the production of electric vehicles and hydrogen fuel vehicles. What kind of impact will you see of this on the auto industry and the whole Atmanirbhar mission which you have been taking forward for a very long time?
Frankly I have not seen the scheme, I have not seen the announcement. All I know is what I have heard from some friends in the media and I am only reacting to that which may not be entirely accurate. My first point will always be that when it comes to such incentive schemes — subsidies and sops — is that I do not believe in this. I think business should be built on sound strategy because as that alone is sustainable.
Of course, MEIS (Merchandise Exports from India Scheme) or RoDTEP (Remissions of Duties and Taxes on Exported Products) are not exactly subsidies or sops. Those are initiatives to negate certain taxes, etc, which should not be carried over into export and so that is fine. But otherwise, I have frankly not been one for subsidies or sops. So that is one general point. Then, I am told that IC engine vehicles have been left out of this. In principle, I have no issue with that although obviously a company like Bajaj Auto would have benefited enormously — to the tune of hundreds of crores of rupees — had IC engine vehicle exports been incentivised through such a scheme.
My only disappointment or the disappointment of the industry would be that for the last about 18 months, various government agencies had been actively discussing with the industry that there would be significant incentives for the export of these vehicles and now suddenly in the last few days, one has learnt that it may not be the case. So obviously there was an expectation that is now not going to be fulfilled. So there will be temporary disappointment in that regard. But for the long term, that is fine So again no issues with that.
Finally I am told that what we have now is not really a PLI scheme as in a production linked incentive scheme. What we have now is the TLI scheme, a technology linked incentive scheme and I cannot put my mind around this because I have been part of this industry for the last 30 years and I have seen or been part of many of the so-called technological advances — be the four-stroke engines, multi-cylinder engines, multi-valve engines, liquid cooling, ABS braking, linked type suspension, perimeter frame, TFT plus, ride-by-wire so on and so forth. One has seen so many advances take place simply on the merit of strategy and technology and quality. So, why suddenly is it felt that there is a need to incentivise and subsidise the development of technology? I do not understand.
I think OEMs are large enough. They have the resources. They should have the capability, the ambition and the passion to develop technology. That is how technology is developed in a meaningful fashion. Finally, in terms of incentives for EVs or hydrogen fuels and vehicles, etc — I do not want to comment on the latter because right now there is no hydrogen two-wheeler or three-wheeler in the horizon, at least in India. As far as EVs are concerned, today if you add up the incentives or crutches that is already extended to EVs in terms of the lower GST, FAME II benefit and additional benefits being rolled out by individual states, one would find that the electric scooters like our Chetak is already subsidised at the rate of Rs 1 lakh per vehicle. So it does become a little puzzling to try and reason with this.
If the technology is so potent, it is so promising, it is the future, it is what customers want and it is what is good for all of society, then why are we subsidising it by Rs 1 lakh per two-wheeler already? In pre-Covid India, two and three-wheeler industry size was 20 million vehicles a year approximately. Even if one million vehicles of that is changed over to EV, a subsidy of Rs 1 lakh per vehicle means a subsidy of Rs 10,000 crore a year. If that number becomes five million, that means Rs 50,000 crore subsidy a year. Now does the government really have the ability to subsidise one particular part of the auto industry with Rs 10,000-50,000 crore a year? If it does, then why were we denied much lower sums of money that were due to us last year in the form of MEIS?
Frankly, I would at least not build a business based on this because these things come and go. We have to build a business on a cash flow basis. We cannot build a business on a cash burn basis.
Something like ECU for airbags, for two-wheelers can be incentivised. At this point of time companies like yours are heavily dependent on imports. Do you think that these incentives might really help to build the local infrastructure?
Well if some industries or some component makers will receive some monetary support to do research or to make investment, one cannot say that is bad. All I am saying is over the last 30 years, whether it is OEMs or component makers — we have done a lot of good work. It is not for nothing that a company like Bajaj Auto is now exporting half of what it made when 15 years back it was practically zero! A company like TVS is exporting a third of what it makes. Even companies like Royal Enfield and Hero Motors’ exports have doubled as a percentage of their total sales.
In the last 30 years, I have not seen the need for this kind of technological innovation or advancement to be supported by 2%, 4%, 5% incentive schemes. Maybe I am too much of an engineer, but this trivialises the whole issue. It has to be driven by passion, by strategy, by technology and by quality. I do not see that. To do it on that basis is almost to concede that on its own, this technology cannot stand on its feet and this sometimes can be a big problem because by solving the immediate problem of its apparent unviability by incentivising it, you are masking the need for the manufacturer or for the component maker to actually improve it and make it competitive. One day, when the incentive is withdrawn because no incentives can be forever, that weakness will show up. So, we are only postponing the problem for the future but as I said, I have not seen the details of this scheme and so my comments are not entirely accurate.
One very senior person from the industry had messaged me yesterday that it is the Indian companies who are really believing in the EV strategy now, the Japanese and the Koreans are not so positive on that at this point of time. Do you think that the EV revolution in India can be very locally manufactured?
I would not agree that Indian OEMs are keener on something Japanese OEMs are not. What about Taiwanese and Italian OEMs? I do not think this is a nationality issue. I think the issue is between incumbents and the newcomers or the startups. The incumbents, be it in Japan or in India or any part of the world, have a very solid IC engine based business going whether they are into two-wheelers, three-wheelers, cars, trucks, whatever,. and it is a very profitable business. It is based on a certain business model that involves the dealer, suppliers and obviously they do not want this to be disrupted.
Then there are the startups or the newcomers who are starting from scratch and they want to change the rules of the game and define a new way of doing things. Now the incumbents have to strike a fine balance between doing too little and risking obsolescence and doing too much and disrupting the current viability of their operation. That is the phenomena you are seeing there. As far as the second part of your question about whether India can take this forward, I think it is not a country that takes anything forward. It is individuals and individual organisations that take things forward.
Yes I would like to believe Indian OEMs are motivated to move in this direction. We are after all sitting in the world’s largest two-wheeler market. There is no doubt at the present moment that on the one hand there is a lot of tailwinds and traction for EV, both from the government and from certain OEMs and certain newcomers, but on the other hand, there is also no doubt that this is not a viable business at present.
We have to have a business which is based on cash flow and not cash burn and so it is our responsibility to challenge ourselves in terms of the technology and make it more competitive through smarter strategies. I do not think the answer is only or even primarily to subsidise things for five years and ten years. That is too contractual a way of thinking. I have not really seen what great technology has come in the world — whether it is in the auto industry or any other business like Apple, Google etc, where innovation is rooted in and driven by subsidies, sops, incentives and crutches. I do not think so.
What I can understand from what you are saying is that if the conventional industry would have been given more preference instead of the new modern technology and flex fuel like hydrogen cell, that would have been more beneficial for the industry in at least the short to medium term?
I would put it a little differently. First of all it is not that the existing OEMs have not been entering flex fuels. I would broaden it to say flex fuels or even to start with 20-30% ethanol for example or even CNG. This is where I fully support the initiatives of Nitin Gadkariji who has been pushing for these kinds of alternatives for a long time — both in the interest of clean air and also in the interest of reducing our fuel bill as a country. The government, the companies have been doing a great job of ramping up the CNG network across the country. And CNG is a near zero pollution fuel. It is near zero pollution, performance is good, charging infrastructure is available, the operating cost is outstanding. It costs almost one-third of petrol and is superior to diesel as well.
So I think, whether it is CNG, whether it is flex fuel, whether it is EVs, OEMs are doing a lot of work. It is not only the Ather Energies and the Olas that have electric scooters out there. Bajaj and TVS also have electric scooters and we are all selling reasonable numbers to start with though we are currently hampered by semiconductor shortages. So long story short would be that OEMs are doing a lot. There is no doubt that we should be doing much more in our own interest. Being first to the market is very important and in that context, I do not see what this technology linked incentive is supposed to do exactly. I will reiterate that I need to see the details before I can comment more decisively.
Do you think that the industry has not really been hurt by the government? They wanted more carrot and less stick and it is the stick approach which is working with respect to the government?
No, I do not think there is any carrot and stick approach. I personally have not experienced any stick approach, let me say this very clearly. I am one of the few people who speaks my mind and I am speaking my mind here again in the context of PLI and I would not be doing so if I had been struck by a stick several times or if I was anxious about that. So I have no such quarrel with anyone.
Having said that, I have been saying for the last two years that through the various regulations this industry is getting “over regulated” in terms of costs. It started with the higher insurance requirement; then we implemented a safety norm related to ABS one and a half years back, which was even ahead of the norms in Europe! Personally, I have said to Gadkariji many times that sir, please demand of us that we should be equal to the best. The highest standards in two-wheelers is typically Europe but do not ask for more than that because our consumers cannot bear that cost. It is almost behaving like Mary Antoinette and telling people if you cannot afford bread, go ahead and eat cake and we all know what happened to Mary Antoinette; so let us not go down that path!
Similarly, when BS-VI came in, that was a golden opportunity for GST to be reviewed from 28% to 18% and that was not done. This is a long list and I have said it many times and so I do not want to repeat it all over again here but what is the net result? The net result is that in about two years’ time, the cost of an average two-wheeler has gone up by almost 50%.
Unfortunately, for a long time, nobody else was willing to join me in saying this and there is a limit to how much one person can say and how much he will be heard. But I am very happy to see that in recent weeks I saw a quote from RC Bhardwaj sir of Maruti; I saw very emphatic views coming from Venu at TVS. So when such industry seniors and stalwarts speak, I am sure the government will listen. This one industry where India can be a global player and some of us are already there. But we can be even more dominant globally. If we are to hobble ourselves in our home market, then how will we have the strength to grow overseas?
Are you surprised that there is too much worry about the word disruption in the two-wheeler industry and that the terminal value of auto stocks is coming down?
How an average analyst or investor perceives the auto industry and perceives disruption and whether they see it as an opportunity or a negative is something you have to ask them. I can’t answer this question.
Do you think that the Indian auto industry is not getting fully rewarded by the market? It is after all, a stable business which is globally competitive.
I do not know. I have no interest in the stock market and I do not understand how they think. I can only say that in January this year, Bajaj Auto became the world’s most valuable motorcycle company in terms of market cap, the most valuable ever. So this is also one reality. Now instead of having a market cap of x, maybe our market cap should be 3x, this is not for me to say.
There are always challenges in business and so what is the most significant thing that is weighing down the business is exactly this, “over regulation”. If the price of a two-wheeler, which typically in the past would rise by 2-3-4% a year based on cost etc, rises by almost 50% in two years, obviously it is going to dampen the prospects of the industry. It is as simple and practical as that.
I do not see why anybody should be unnecessarily overwhelmed by the disruption or be intimated by it because so many technological advances and disruptions have taken place in the last three years also. So what is so new about what is happening now?