The deadlock between the government and a handful of electric two-wheeler makers over the distribution of subsidies has led to a massive financial crunch, and many players are unsure if they can keep the lights on for another day, says Hero Electric’s CEO.
Key Takeaways :
- Sohinder Gill says Hero Electric is in the process of raising Rs 2,000 crore in funding and is looking actively for strategic investors.
- Blockade of subsidies has led to investors losing confidence in India’s EV story, he says.
- According to him, 10,000 people could be laid off if the subsidy issue isn’t resolved.
- EV two-wheeler sales hit their lowest in 12 months in June 2023, as per e-governance platform Vahan.
Hero Electric’s Sohinder Gill is fervently vocal about the Indian government’s handling of the electric vehicle (EV) subsidies, guaranteed by the FAME II scheme. He says the distribution of subsidies by regulators to manufacturers has been “inadequate”, especially after manufacturers have already passed on the benefits to customers, digging into their own pockets.
Although he wants to cling to the belief that the government has honourable intentions for the FAME II scheme, the last few months have been tumultuous at Hero Electric, leaving him quite jaded and worried about the company’s future.
We’re in the ICU now, this is the dire straits, and we’re barely hanging on,“ laments the company’s CEO, talking not only about Hero Electric but the wider electric two-wheeler (E2W) manufacturing sector as well.
Hero Electric was founded in 1998, but it began to really ramp up operations only around 2007-2009 when it launched a lead battery e-scooter. Its best-selling e-scooters today are Optima CX 2.0 and 5.0, which retail for Rs 1.06 lakh and Rs 1.29 lakh, ex-showroom, respectively.
Despite being from the stables of Hero Motocorp, a leader in the two-wheeler segment in India today, the company has been struggling financially. In fact, Hero Electric has been searching for strategic investors to participate in its $250-million fundraise, which it hopes to close by the end of September this year. So far, it has been able to drum up only around $46.2 million.
Localisation caveat and its impact
The lead-up to the troubled times began in 2019, when the government put together the Faster Adoption and Manufacturing of Hybrid and Electric Vehicles (FAME) scheme, aimed at boosting EV adoption for personal and commercial mobility. From a total capital outlay of Rs 10,000 crore, the scheme set aside Rs 2,000 crore for E2W manufacturers.
However, nearly Rs 1,200 crore is yet to be paid out, points out Gill. What really led to this “inadequate” distribution of subsidies—as Gill describes it—was the caveat related to localisation of the supply chain. The government wanted at least 50% of E2W parts to be sourced from vendors and suppliers in India, in the hope that EV makers would continue to localise their supply chains, leading to a flywheel EV ecosystem of sorts.
Manufacturers hailed the decision too, postulating that it would lead to the highest level of quality control. Their only supplication to the government was that the deadline for reaching localisation be extended by 12-18 months. Industry body SMEV (Society of Manufacturers of Electric Vehicles), which is made up of players such as Hero Electric and Bajaj Motors Ltd, said in its petition, which requested an extension, that the supply chain for E2Ws in India had just started to take shape and achieving 50% localisation would take time.
In 2020, the government conceded, but it refused to entertain further requests for extensions beyond September 2022. Gill says Hero Electric and several other manufacturers weren’t able to meet the localisation requirement by the government’s deadline. So, the company—and several other manufacturers—wrote to the government asking for its approval to let them keep working on setting up local supply chains, while they continued to offer discounts to customers. They hoped that, when they reached the 50% localisation cutoff, the government would refund the subsidies they had already extended to customers.
“We took permissions to pass on subsidies to our customers and we disclosed to regulators that we were still working towards the prescribed level of localisation. The government green-flagged it,” says Gill. However, several months after the government began distributing subsidies to eligible companies, there were media reports that the disbursal had been paused and an official investigation into alleged misappropriation of subsidies and non-adherence to localisation requirements had been launched.
There were also indications that some companies under the government scanner might be asked to return the subsidies they had received till then. These manufacturers are reportedly said to owe the government a refund cheque for Rs 500 crore.
