Why will Ola Electric dominate the market?

Last Updated on August 14, 2024

Intro

Being the first EV startup to have gone public, In this post, we will take a look at Ola Electric. This will also be one of the largest IPOs in 2024. As I write this post, the Ola Electic has hit the upper circuit limit, just a few days after going public. Before we take a look into Ola Electric, we should look at the Electric 2-wheeler market first.

EV market share by major players

Now, let’s look at the Electric 2-wheeler market share by major players.

Top 3 players hold more than 60% of the market share. Ola 33%, TVS 20%, Ather 11%, Bajaj 10%, Ampere 7% and others hold the remaining 19%. It is very interesting to see how the market shapes up in the future. The market is relatively new, but all the players in the market are not new.

As the EV market grows, it eats up the traditional ICE two-wheeler market. This is, of course, a threat to existing players in the ICE two-wheeler market like TVS, Bajaj etc. They are the established brands and have been operating for decades. We have to wait and watch their moves in the market as well.

Subsidy going down

To manage the increasing demand and lessen the burden on EV manufacturers, the government has reduced the maximum subsidy cap. For electric two-wheelers (e2W), the cap is now Rs 10,000 per vehicle, down from Rs 22,500, and for electric three-wheelers (e3W), it is Rs 50,000, reduced from Rs 111,505. Both categories will receive incentives of Rs 5,000 per kilowatt-hour (kWh)

The government has reduced the maximum subsidy cap. So, it has gone down from 22,500 to 10,000 for electric two-wheelers and from Rs 111,505 to Rs 50,000, for electric three-wheelers. They have gone down by more than half. They can only support so much for so long.

Increasing-Subsidy Demand by Industry

To facilitate cost parity between E2Ws and conventional two-wheelers, consider offering purchase subsidies to electric two-wheelers until 2025–2027, beginning with a higher subsidy of ₹15,000/kWh of battery capacity, capped at 40% of the ex-showroom price, and gradually phase down the subsidy amount in line with EV cost reduction trends.

Another important thing is the subsidy given for each kWh of a battery. Right now it stands at 5000 Rs. But, the industry think tanks are asking for 15000 Rs per kWh

The government might have reduced the subsidy, but it also provides other support like lower GST rates at 5% for EVs. Eventually, the EV market has to operate without subsidies. This means even more competition at pricing.

EV Market Growth Rate

The India Electric Two-Wheeler Market is expected to witness a compound annual growth rate of 40.34% during the forecast period.

Rephrasing- The Electric Two-wheeler market in India is expected to grow at a CAGR of 40.34% up to 2031. That is 7 years from now. Still, I am really really skeptical about the growth rate. I understand that a 40.34% growth rate is an average growth rate. So, it will grow faster in the early years than later. Still, I am really really skeptical about the growth rate.
I will believe in the growth rate if the subsidy goes up and/ or the cost of battery goes down. Another factor, which, I think, is very important is charging infrastructure. If we don’t have charging infrastructure or swap stations in tier 2, tier 3 and tier 4 cities, we can’t expect this to grow at this pace. Swap stations sounds like a better idea than charging infrastructure. So, When your battery is running low, you can go to a swap station that allows you to swap the battery with a fully charged one.

Ola addressing the Cost of Battery

Ola Electric plans to invest about $150 million of its IPO proceeds into the cell manufacturing unit.

Here’s is where Ola electric can shine I think. Ola understands this problem very well.

That’s why Ola has plans to invest $150 million into cell manufacturing units. One of the big-ticket items in producing EVs is batteries. This way they want to address the cost of battery by making it themselves. This becomes even more important if the subsidies go down.

Ola has been making losses

Despite its strong market presence, Ola Electric has been grappling with financial losses. The company reported a loss of ₹1,584 crore in the financial year 2024, an increase from the ₹1,472 crore loss incurred in the previous fiscal year.

Ola has been making losses every year. It has not turned a profit. This is okay because it is still in the growth phase. To be fair, It is not just Ola but many of their competitors are in the same position. When the market is growing at a CAGR of 40%, everyone wants to capture the market as much as possible. This is a relatively new market, so there will be some first-mover advantage. So, everyone wants to capture it before the market growth saturates.

Ola break-even is 2-3 years away

Some say it takes 2-3 years for the company to generate any profit.

Product Adoption phase

According to an analysis report by Elara Capital, the market penetration for EV two-wheelers stood at 8.9% in March 2024, up from 5.7% in the previous month.

The market penetration stands at less than 10%. That means only early adopters are buying the EVs. That is if I am being generous. As with any technology, it is very easy to get early adopters to buy the product. But, people in the early majority, and the late majority will surely look for charging infrastructure, swappable batteries and swap stations. This is why I remain skeptical despite the stock market hitting the upper circuit limit for Ola Electric.

Ola experimenting with renting Electric Cars

Ola is very well aware of this. Ola tried renting out Electric Cars in 2017. They ran a pilot in Nagpur with 200 cars with a battery capacity of only 100 Km. This didn’t go as well as they thought because they wanted to expand this to other cities as well. Here is where they understood the importance of the role played by a battery in terms of price, time(charging time), and power(the total distance you can travel with full charge). They decided that they had to invest in a cell manufacturing unit to address all of this.

Ola has the upper-hand over others

Ola recognized early that if it developed its own battery, then it would massively lower its cost of production. You might think that this might be the main reason they are doing it, but you would be wrong.

There is a lack of standardization among the specifications of the battery from different manufacturers. You can not easily swap one batter with another without first matching the specs. So, even if there is a swap station, you might not find the battery your EV is compatible with. Let’s say a battery manufacturer sets up swap stations across India, including in tier 3 and tier 4 cities and they also happen to have been manufacturing and selling EVs. Wouldn’t you love to buy from this company? This is the position the Ola Electric is in right now. A few years down the line, you would comfortably choose Ola Electric over others because their price is lower and the availability of their swap stations with compatible batteries across India. You would choose Ola Electric because you wouldn’t have to worry about Battery compatibility, swap station infrastructure or high-price of the battery or EV. No EV company has a swap station infrastructure of its own except Ola Electric as of now.

Ola already has successful businesses in cab-hailing/ride-hailing service and food-delivery service. These businesses complement the EV 2-wheeler market. This is something that competitors will never have.

With a new battery cell manufacturing unit, Ola Electric has the potential to lower the battery cost and set up swap stations across India. That’s why Ola Electric is dreaming big and the dream is bigger than its competitors can imagine.