Two years. That’s how long Nitin Gadkari, India’s transport minister, believes India will take to switch from using fuel-powered buses to electric ones for public transport. Gadkari made this prediction in September.
That’s a bold prediction considering it has barely been a year since India started this transition. According to research think tank Intelligent Transport, there are 170,000 public transport buses in India, ferrying roughly 70 million people daily. The electric bus count, however, is just around 200, with another 170 set to hit roads soon.
This gap is an opportunity for bus makers. India’s electric bus market—which stood at $47.4 million in 2018—is projected to grow at a compound annual growth rate (CAGR) of 37.6% through 2024, according to management consulting company TechSci Research.
The opportunity is also evident in the government’s allocation of funds towards electric buses in March 2019 under its FAME II (Faster Adoption and Manufacturing of Electric vehicle) program. While aimed at driving the adoption of electric 2-, 3- and 4-wheelers, the focus of FAME II’s Rs 8,595 crore ($1.21 billion) budget is clearly on buses. Of the total corpus, Rs 3,545 crore ($500 million)—about 41%—is earmarked to subsidize the purchase of 5,595 buses for various state transport undertakings (STUs).
That’s 7X the budget allocation and 5,175 buses more than the government-sanctioned under FAME I early last year. This massive overhaul was a chance for Indian bus makers like Ashok Leyland, Mahindra and Mahindra, Eicher Commercial Vehicles Ltd, and Tata Motors to cement their leadership. But just like other EV vehicles in the industry, the old guard is being shown up by agile newcomers.
One, actually—Olectra Greentech.
More precisely, Olectra-BYD, an Indo-Chinese joint venture (JV) formed in November 2016. The JV won contracts for 290 buses under FAME I, leaving Tata in second place with 215*. Leyland was a distant third with 40 buses. No other manufacturers won tenders. Incidentally, Olectra-BYD has also delivered the most number of buses since, according to various people The Ken spoke to. As a result, Olectra-BYD controls nearly half the EV bus market, they estimated.
China-based BYD is backed by Warren Buffett and fuelled by state subsidies and bank credit. Not only does BYD account for more than 170,000 of the roughly 380,000 electric buses globally, but it’s also the world leader in EVs overall. This shouldn’t come as a surprise—the ecosystem for making electric batteries barely exists outside China and BYD’s battery manufacturing facility in the Chinese province of Qinghai is the largest in the country (and therefore the world). A battery pack is the most critical part of an EV, accounting for about 40% of the total cost.
Unlike with other sectors, India has not set any limits on foreign direct investment (FDI) in the EV space. Still, a tie-up with a domestic company has its advantages and BYD picked Hyderabad-based Olectra Greentech, a company that did not have any prior expertise in automaking.
Even though the Indian company has voting control in the JV, the Chinese company controls the flow of technology. BYD fits the battery and wiring into a bus chassis in its own factory in Chennai. This is then transported up the coast to Olectra’s factory in Hyderabad, where the rest of the bus is assembled.
The three-year-old JV has blossomed because of the well-oiled ecosystem BYD has back in China and its control over the supply chain. This is in stark contrast to India’s traditional bus makers. Volvo—still used as a noun for air-conditioned buses in India—is at the R&D stage when it comes to EVs. Leyland, which relied on battery-swapping technology, was caught off-guard as lithium-ion battery prices dropped rapidly, making their technology redundant.
The biggest problem for the electric vehicle industry, however, much like the solar industry, is its reliance on China—for batteries of the right specifications, in the right quantities, for the right price and on-time. Tata was almost blacklisted by the government for the late delivery of buses earlier this year.
“It is an entirely new ball game for new and old players,” says Aman Madhok, an analyst from tech-oriented research firm Counterpoint.
Indian companies are pulling out all the stops to prevent the rising Chinese giant. Tata, which has significant clout in industry lobby Society of Manufacturers of Electric Vehicles (SMEV), has been blocking Olectra-BYD’s entry, preventing its access to key policy decision-making, a person with knowledge of the matter said on the condition of anonymity. Tata, however, denies the allegation. But Olectra, which is a unit of a massive Indian conglomerate well-versed with winning tenders, is making its own fate. Ken has seen Olectra’s top executives walking into India’s offices of power. This extends to the business card of Olectra CEO Naga Sathyam sitting on the desk of a key official at Niti Aayog, the Indian government’s policy think tank.
Olectra, Tata and Leyland did not answer detailed questionnaires from The Ken, saying they were either in a “silent period” ahead of results or busy with tenders under FAME II. Their focus on the tenders is understandable, especially for Tata and Leyland, since all tenders have to be made under a bus-leasing model. Under this model, the OEMs run and maintain the buses and its charging infrastructure in return for a payment from the government at per kilometer basis—the very model that helped Olectra-BYD dominate FAME I.
Local marries global
The Indian auto industry’s current situation is similar to that of the early ‘90s. Indian automakers tied up with foreign companies and prospered. The tie-ups eventually led to technology transfers, like Hero Motors’ association with Japan’s Honda in the two-wheeler segment, or carmaker Maruti’s partnership with Suzuki that helped it become a market leader.
But the difference this time around is that the foreign players are predominantly Chinese companies and the tie-ups are with smaller Indian companies, some of which don’t even have experience in the auto sector or electric mobility. These tie-ups, though, are still advantageous for both parties, even though there is no FDI limit in the EV sector.
A tie-up with a local player could help reduce the foreign company’s initial investment by up to 50%, said a senior researcher who did not wish to be named as he is not authorized to talk to the media. It also helps in navigating governmental bureaucracy, the researcher added. This is especially true in the bus sector as central and state governments are the biggest purchasers and they don’t look fondly on Chinese companies.
“There are some sentiments in India which are not favorable towards China,” said the researcher.
So, it’s little wonder that domestic-foreign tie-ups have been on the rise. Take, for instance, Gurugram-based JBM Auto Ltd. The company has partnered with Poland’s Solaris PV to make electric buses in India. Its rival, Haryana-based Foton PMI, is also a JV between India’s PMI and China’s Beiqi Foton.
The Olectra-BYD combine, of course, is the most successful example.
Olectra Greentech’s parent company, Megha Engineering, and Infrastructure Ltd (MEIL), has cut its teeth in the power industry—a space bursting with bureaucratic red tape. The three-decade-old MEIL is no stranger to bidding for contracts, having won tenders for government projects like the Polavaram hydro-electric dam in Andhra Pradesh, among others.
But Goldstone Infratech Ltd, as Olectra Greentech was called before the BYD JV, had no experience in the auto industry. It used to make electric insulators, a key component in power distribution. So even though Olectra controls the voting rights, it’s BYD that brings the technological prowess. And considerable tech prowess, at that.
BYD has been in the electric mobility business since 2003, and in India since 2007. Its Chennai factory produces mobile components, solar panels, and forklifts, besides battery products and chargers. Today, though, the Chennai factory has shifted its production focus to buses, says an employee at the factory, who declined to be named as he is not authorized to speak to the media. Close to 40% of employees at the factory are Chinese, the employee added.
So why tie-up with a company that had no experience in the auto industry? “You can’t dictate terms if you partner with a bigger company,” said an industry consultant who did wish to be named.
BYD makes the chassis and battery packs, which constitute close to 60-70% of an EV bus’ value, the consultant estimated. This then goes to Olectra’s factory in Hyderabad, where the body and other fittings are done for the two models under production—the K7 and K9. This factory can manufacture 2,100 buses per year but, if necessary, could be scaled up to make 6,000 buses annually, according to a report by the Times of India.
With BYD’s expertise and supply chain in tow, Olectra was the surprise winner of the FAME I program. Its bus business raked in Rs 144.8 crore ($20.5 million) in revenue in the year ended March 2019, nearly as much as its insulator business’ Rs 145.5 crore ($20.6 million).
But, it’s not just a question of technological expertise. Winning a contract depends on one factor—making the most attractive bid.
Right place, right time
BYD’s entry into India’s bus market also heralded a new approach to tenders. Under FAME I, many bus makers placed bids that required state transport units, or STUs, to buy the bus outright and handle operational and logistical requirements themselves.
The JV placed their bids under the gross cost contract (GCC) model, commonly known as opex or leasing model. Here, the STUs lease the bus from the manufacturer and are responsible for providing only manpower and electric supply. The manufacturer runs and maintains the buses and the charging infrastructure as well as trains drivers. The STUs pay the bus makers on a per-kilometer basis. While some other manufacturers like Tata and Leyland also bid for tenders using the GCC model, BYD’s previous experience with the GCC model set Olectra-BYD’s bids apart.
For an outright purchase, the Department of Heavy Industries (DHI) provides a 60% subsidy and the STU bears the rest. Under GCC however, the STU gets up to 60% of the capital cost in equal instalments over the years—which means funds are disbursed in smaller amounts.
Under FAME II, DHI will pay up to 40% of the estimated cost of the bus, up to a maximum of Rs 55 lakh ($77,974), for standard buses, Rs 45 lakh ($63,797) for mid-size buses and Rs 35 lakh ($49,620) for minibusses. This subsidy is crucial when it comes to electric buses, which cost more than Rs 1 crore ($141,772)—double the price of a basic diesel bus. Even an air-conditioned Volvo bus—a decidedly premium offering—costs around Rs 85 lakh ($120,506).
The GCC model is a god-send for loss-making STUs across the country and BYD has pioneered it to operate buses across the globe. No surprise, then that, Olectra-BYD was able to outbid other manufacturers for the three biggest contracts under FAME I.
Like any other EV, the operating cost of an electric bus is cheaper than its diesel counterpart. The cost of running an EV bus is estimated to be around Rs 61 ($0.86) per kilometer, while the cost of running its diesel equivalent is about Rs 68 ($0.96), according to HM Shivanand Swamy, a professor at CEPT University, Ahmedabad.
Now, with Fame II—GCC isn’t an option but a mandate. This gives Olectra-BYD the upper hand, not only for its experience in running a bus service, but also the others’ lack thereof. Tata might even be looking at hiring a third-party to operate the buses for them, the consultant quoted above said, further adding to costs.
Still, it’s not a clear road ahead for Olectra-BYD. Rival companies have won tenders recently. In October, Tata won a contract to supply 300 buses to Ahmedabad under the GCC model, the biggest such contract so far in India.
Moreover, not all STUs are happy with the leasing model. The Karnataka government canceled Olectra-BYD’s 150-bus contract under FAME I as it concluded that the total cash outflow at the end would be higher than in an outright purchase model. Bengaluru Metropolitan Transport Corporation (BMTC) director Anupam Agarwal likened the situation to when it had awarded contracts to Volvo years back with the leasing model. It ended in failure, financially speaking, Agarwal told The Ken, declining to provide details.
The battery is the new engine
The key advantage Olectra-BYD has over its rivals and will have for at least a couple of years is a steady supply chain for battery technology. Indian manufacturers lack the knowledge and experience in sourcing and dealing with battery technology, was the refrain of various sources The Ken spoke with.
Tata was almost blacklisted by the government for the late delivery of buses under FAME I, which the company blamed largely on sourcing batteries.
As such, Indian companies partnered with Chinese battery makers two years ago when the technology was very nascent, said Debi Prasad Dash. He is the executive director of India Energy Storage Alliance, an industry body. This has made it difficult to switch to firms that can offer lower prices, Dash added.
“Indian companies are talking to multiple companies from China where they can buy the battery,” said Dash. “Each company is giving them different specifications, different warranties, and different sizes. So they have not yet decided which specifications they require. It is not about battery availability, it is about the blindness about the technology of all the companies that are entering this space.”
Take Ashok Leyland, which partnered with Delhi-based swappable battery manufacturer Sun Mobility. When the price of lithium-ion batteries fell faster than expected, Leyland’s swap-tech became less viable. The company is now developing a bus that works on plug-in technology, a company official said on condition of anonymity.
While Indian manufacturers are coming around to developing the technology, fixing their sourcing and adapting to the GCC model, it turns out that STUs have their own set of worries.
Route identification is one. Congested routes are not economically viable and that could reduce the number of trips per bus, says BMTC’s Agarwal.
Charging infrastructure is another bone of contention, says Agarwal, even though, technically, charging stations can be set up in a planned manner given buses have predetermined routes. But FAME II does not specify the number of charging points or their specifications (fast charging or slow charging). Besides, with one charger costing about Rs 10 lakh ($14,177), bus makers would likely install charging points only in depots. So, what happens if a bus runs out of charge in the middle of a busy road? asks Agarwal.
“Who will be answerable to the people? Not the operators, but for us.”