VC Insights | Issue# 7 [November 12, 2024]
What?
The Indian Electric Vehicle (EV) industry saw a few interesting developments over the past year or so. The reduction in allocation for the FAME (Faster Adoption and Manufacturing of Hybrid and Electric Vehicles) scheme during the Union Budget was a blow to the industry earlier this year. This followed the FAME-II fiasco in 2023, when government action against electric two-wheeler companies that wrongfully claimed subsidies impacted the sector negatively. The central government has recently introduced the INR 10,900 Cr PM Electric Drive Revolution in Innovative Vehicle Enhancement (PM E-DRIVE) scheme as an extension of FAME to further support the EV segment.
In other developments, Ola Electric, the leader in the two-wheeler EV segment, successfully listed on the bourses. However, the company is grappleing with declining sales due to customer complaints about poor customer and after-sales service. Meanwhile, Ather Energy is preparing for its own IPO and would like to ensure avoiding the mistakes that have impacted Ola Electric.
Currently, India is looking to bolster its domestic manufacturing with stronger electronics production, new semiconductor fabs, and stricter EV localization rules. In the light of these developments, Inc42 recently interviewed Blume Ventures’ partner Arpit Agarwal, a leading deeptech and EV investor in India. Blume’s EV investments include Yulu (electric mobility), Battery Smart (battery swapping), ElectricPe (EV charging infra), and Euler Motors (three- and four-wheeler EV Original Equipment Manufacturer or OEM), alongside other startups, such as GreyOrange (robotics), Niqo Robotics (robotics), Pixxel (spacetech), and Ethereal Machines (manufacturing). The discussion centered on Blume’s EV strategy, investments, and trends and analysis of the emobility sector, with additional insights into semiconductor and electronics manufacturing. Let us learn more.
Blume Ventures’ Approach to EV Investment
Arpit shared that the early-stage VC firm’s investment in the Indian EV space was driven by curiosity to understand the space, rather than a specific strategy. Blume started with investments in startups like Yulu, which allowed them to gain insights into the industry’s landscape, and EVs in general. As deeptech investors, Blume had been more interested in focussing on understanding how deeptech can drive business models within the EV sector, rather than aiming for broad market coverage. The VC analyzed both domestic and global trends in the EV space. In 2019, the VC firm noted that there were about 5 lakh e-rickshaws in Delhi, which highlighted the massive growth potential of the EV sector and the importance of otal Cost of Ownership (TCO) in driving the EV market.
Blume currently holds five EV-related investments. The VC firm is satisfied with its five investments and does not plan to expand further in this segment, except possibly in software within three years. Their strategy relies on a narrow window where sector and timing align, beyond which further investment is not viable. Blume might consider exiting its current investments in five to six years, as startups like Yulu, Battery Smart, and Euler Motors mature and prepare for an IPO.
Challenges with OEM Business Models
Interestingly, the leading early-stage VC has stayed away from investments in Indian two-wheeler EV OEMs. Arpit reasoned that OEMs often face barriers that make them less appealing to early-stage venture capitalists. As an example, in the EV industry, it is crucial not only to create a high-quality product but also to manufacture the vehicle at the right cost. However, building EVs is highly capital-intensive, requiring significant initial investments (usually between $10-$20 Mn) to scale and reach production levels that meet market demands. Most startups struggle to secure such funding at an early stage. Early-stage VCs too typically avoid heavy capital expenditure (capex) models, as seen in the lack of new funding in areas like battery manufacturing and component production. If a startup is able to secure big-ticket investments to produce EVs at the scale and cost that the market wants, it is more likely too succeed. A good example would be Ola Electric, India’s largest two-wheeler EV maker, which started with an investment of $250 Mn.
Emerging Trends in the EV Sector
Arpit points out that certain segments, such as OEMs, battery swapping, component manufacturing, charging infrastructure (except for data and intelligence components like Battery Management Systems or BMS), and EV financing, are already saturated in India. This is because while some of these sub-segments are capex-heavy, in other cases, the startups across these sub-segments have grown and matured, or are yet to mature for investments, or do not have a differentiator that the early-stage VCs can identify with. However, the prominent EV investor emphasizes that there are new opportunities in building novel features, software, and middleware (e.g., platforms enabling access to data for the customers and financers) for EVs in India. This includes applications for locating charging stations and addressing the secondary use case of batteries. Lately, the EV sub-segments have also been attracting late-stage investors interested in sustainability-driven technology. With the global increase in green financing, the startups in the aforementioned EV sub-segments are likely to draw in more investments.
Government’s Role and Policy Impact
The Indian government’s PM E-DRIVE program, an extension of the FAME scheme, signals ongoing government support for the EV industry. However, Arpit believes a more aggressive approach could include specific incentives, such as, green tax on diesel vehicles which could be invested in the EV industry, separate registration costs for EV and Internal Combustion Engine (ICE) vehicles, and different road tax for both vehicle categories across states in India. He sees the government’s measured support as a balancing act between economic factors and employment considerations in the automotive industry with environmental goals. This is because the impact of EVs is not just limited to reducing environmental pollution, but also on reducing the reliance on oil imports that makes us vulnerable to global supply chain disruptions and geopolitical risks.
Impact of the Rise of Semiconductor Companies
Blume Ventures sees growth potential in India’s deeptech and semiconductor sectors, particularly as demand for automation, specialized electronics in manufacturing, and Artificial Intelligence (AI) computing infrastructure increases. Arpit acknowledges that there are significant challenges in reducing global supply chain dependence and establishing a domestic supply chain for semiconductors. This is because setting up fabs in India requires substantial investment, and even with such funding, the Indian semiconductor industry is unlikely to match the advanced capabilities of global facilities producing 2-4 nanometer chips anytime soon.
Moreover, the domestic consumer electronics companies are unlikely to source computing components from India, as there are no current plans to establish the necessary fab infrastructure. While automotive electronics may begin sourcing from Indian fabs for local OEMs, complete self-sufficiency in semiconductors remains unlikely for India over the next 20 years. Building a complete ecosystem that includes design, packaging, verification, and global supply, will also take a decade or more. Therefore, it is unlikely that the Indian EV industry will see the benefits of the semiconductor boom very soon.
Thoughts
Blume Ventures, led by a cautious but forward-thinking approach, sees selective growth in India’s EV ecosystem. Arpit emphasizes targeted investment in sectors that align with both market needs and government policy, while navigating challenges posed by high-capex segments like OEMs. Future opportunities lie in innovative tech, financial strategies, and gradual shifts in India’s production landscape.
The strategic insights from the leading early-stage investor will definitely work a dose of motivation for Indian startups working on designing new feature-based applications and innovations in the EV software and middleware space. The insights would certainly enhance the visibility into the thought process of early stage VCs and would not only help EV startups, but the Indian startup ecosystem in general.
It remains to be seen how the central government’s PM E-DRIVE scheme launched to back the Indian EV startups impacts the ecosystem. Also, it would be interesting to watch how the EV startups perform in the near future and whether the government considers reviving the allotment levels for the upcoming FAME-III scheme. With more startups maturing, we are certain that we will see more of EV startup IPOs in the coming future. Of course, startups like Ather Energy would streamline operations to stay laser-focussed on profitability and sustainable growth, and not look to repeat the mistakes of the likes of Ola Electric. Additionally, we expect more late-stage investors to foray into the segment and fund both early-stage and mature EV startups. Well, we certainly look forward to more such strategic insights about the Indian startup ecosystem from leading VCs.
If you are interested to learn more, feel free to check out this coverage by Inc42.
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Acronyms used in the blog that have not been defined earlier: (a) Venture Capital (VC), (b) Prime Minister (PM), (c) Crore (Cr), (d) Initial Public Offering (IPO), and (e) Million (Mn).