India’s success with electric vehicles, mainly two and three-wheelers, showcases the perceptible acceptance of EVs among automobile connoisseurs. While average buyers are driven more by the cost-to-return ratio of the product, climate consciousness has been the major focal point in EV acceleration, with consumers weighing the environmental damage before buying vehicles that run on traditional fossil fuels.
Undoubtedly, the EV sector is on the cusp of growth, experiencing strong tailwinds from favourable government schemes and significant investments across the market. However, there is a pivotal piece of this value chain that has been really slow in catching up with EV Financing. The financing options available for EVs are comparatively lower than traditional vehicles, making the absence of a holistic EV financing ecosystem a significant hurdle to EV adoption on a large scale.
India, being one of the top five markets for automobiles globally has made a strong commitment towards supercharging EV penetration in the country. The EV market is expected to grow at a CAGR of 90% from 2021 to 2030 and be worth more than $150 billion by 2030, making it imperative to address the risks associated with the nascence of the EV industry. This also requires ensuring access to affordable financing to become a leader in the green mobility transition.
Uncertainty about the EV Residual Value The biggest roadblock to EV financing is the asset itself. While the EVs in India are at a nascent stage, the battery and cell technology continues to fluctuate making the end life-cycle of EVs a tricky issue to tackle. While the industry has taken decades to master how to quantify the residual value of Internal Combustion Engine (ICE) vehicles when disposing of them, there is uncertainty around reaching a fairly accurate residual value of the batteries and the absence of an organized secondary market.
Subsequently, the key difference in utilization and maintenance can lead to distinct disintegration curves for the same battery types. In addition to the technological risk, this also poses a risk around value retention which has made EVs a high-risk asset class.
A Glance At The EV Depreciation Scene
Just like the Internal Combustion Engines (ICE), EVs do depreciate over time. However, determining the EV depreciation costs are a complex process considering the cost of the battery is around 50% to 60% of the total cost of the car. Currently, the depreciation cost of electric vehicles and ICE vehicles is the same in the country. The main problem of the present EV scenario is that the defined schedule of depreciation that applies to traditional vehicles might not be true for battery-operated EVs. The average life of a battery is somewhere around 2-4 years making it obvious that it will depreciate rapidly in comparison to traditional vehicles wherein the battery lifetime is usually 10 to 15 years.
Thus, buyers need to consider the added recurring capital expenditure on the battery replacement every 4-5 years and the lack of viable financing options, a bottleneck to adoption at a broader spectrum.
Solving The Risks Of Residual Value And Depreciation
Several new-age start-ups have taken the lead in building solutions specifically designed to tackle this issue. As a collective initiative, we need to bring in EV retailers, buyers, financiers and OEM manufacturers under a unified pool to curate diverse business approaches. Departing from a pure-play lending model, by leveraging technology and data, we can build pricing capability on the asset to understand the lifecycle of these vehicles.
At the end of the day, any EV financier is bound to gain unprecedented tractions who starts with facilitating buy-back programs in partnership with OEMs and crafts a separate subscription for batteries, seamlessly integrates real-time data-driven models, and is capable of ascertaining the value of battery at any given time.
By creating standalone lending services for vehicles without battery or battery itself, EV financers reduce the loan amount on the vehicle, making it an affordable green mobility solution.
EVs Are Here To Stay
There is no denial of the fact that the emerging EV system is complex and comes with an invigorating set of challenges. Nevertheless, EVs have been able to make a shining imprint in the minds of an increasingly eco-conscious audience. With the collaborative efforts of all stakeholders – the government, financial institutions, OEMs and other industry players, navigating through the nuances of the EV industry becomes easier. Since the EV financing industry is a huge market opportunity for India, it is awaiting revolutionary execution.