EV components could be the next big bet for the decade

There is an interesting about the gold rush in the US about 150 years back. It is said that when people were rushing to prospect for gold, one man realized that the real gold lay elsewhere. Every man who went to prospect for gold would not find gold, but certainly all of them would need rugged pants to handle the tough terrain. The name of the man was Levi Struss and that is how Levi Strauss jeans was born. As he rightly predicted, not everybody found gold, but Levi Strauss became a billionaire and created a multi-billion dollar company.

The moral of the story is that when a particular business looks good and exciting the really lucrative business opportunities may lie elsewhere. Let us now juxtapose the case of Levi Strauss to the electrical vehicles (EV) business. We all know that the EV business is expected to grow exponentially in the coming years. However, it is hard to say which companies will flourish. However, one thing is certain that these companies will create a huge demand for EV components or parts that go into making the EV. That is the big opportunity here.

According to a recent report by CRISIL, the Indian auto component industry is expected to growth its revenues at a CAGR rate of 9% to 11% till 2027. However, CRISIL also estimates that most of the incremental revenue growth for the auto components sector in the next five years would come from EV (Electric Vehicle) parts. Ironically, the growth in demand for EV parts will be robust even as the supply of parts for the conventional internal combustion (IC) engine-driven vehicles will continue to maintain its growth momentum till 2027.

The growth in the share and the value of EV components, according to CRISIL, is likely to see frenetic growth in the next few years. Currently, the share of EV components in the overall revenue of auto components for FY22 was just about 1%. That is likely to increase exponentially and will be evident when you look at the numbers. For instance, the revenues from electric vehicle components is likely to surge from Rs4,300 crore in value in the last fiscal year FY22 to a level of Rs72,500 crore in fiscal 2027. That is exponential growth.

The mix of how this revenue of Rs72,500 crore for EV components is broken up is also quite interesting. For instance, it is estimated by CRISIL that nearly 60% of these revenues would be derived from the battery segment. The revenues from drivetrains and electronics would constitute 15% each, so these 3 parts between them will account for 90% of all EV component sales in FY27. Most of the EV components will be manufactured by the EV component companies for two-wheelers and PV (Passenger Vehicle) segments.

However, the transition will not be entirely smooth, but could also be rather disruptive in cases. For example, the transition to EVs is expected to create opportunities and challenges for domestic auto component makers, since there is a huge part of adaptation, upgrading of skillsets and modification of the ecosystem that is required. Not all companies may be able to make the cut and only the fittest are likely to capitalize on the big growth opportunity. But, this will be the big opportunity for ancillaries to diversify beyond Internal Combustion. 

Today, there is still the issue of cost efficiency in EVs. Hence, going ahead, it is cost viability of EVs versus IC vehicles and rising demand for cleaner mobility that will drive this shift. It has already begun, especially with the younger population. Two wheelers will lead the way the EV penetration likely to touch 19% by 2027 while PVs would be around 7% by then. The penetration will be relatively lower in the case of CV (commercial vehicles). All these trends will really determine the direction of EV components evolution in the next five years.