2013

8/11/2013

Final Report: Electric Cars

Indian Automotive sector: The Indian Automobile sector has seen ups &

down’s in recent 10 years where 2009-2010 successful years was but from

recent two years industry has seen a global turndown due to economic

slowdown and rising fuel prices. Fig 1: shows domestic vehicle volume (annual)

Vs. Year-on-year growth. (Exception to the law of Demand: Keep price

constant, other factors influence the demand of the product)

Sources: SIAM

Indian automobile Market:

Sources: SIA

PERCENT

Market of Electric cars

Global Overview (Electric vehicles):. Fig A. shows Battery electric vehicles sales by

country in 2012.

Sources EVI, Marklines Database

Electric cars in India: Despite of few govt. initiatives and advanced features in the electric

cars, the market growth is not up to the mark.

E-Car market is 2-3% of the car market in India

Market for E-cars may be 4-5 over next years.

Mahindra has already setup over 250 charging stations in various cities which

includes 95 in Delhi & 100 in Bangalore (SBI branches, Mom & me retail, M7M

dealers, Gopalan mall, etc.)

Oligopoly Market Structure of Electric cars in India:

Electric cars market in India is oligopoly as of now few players who has performed in the US,

European market has entered in Asia particularly in India & China. For e.g Toyota, Nissan,

BMW & Honda. In the short run electric cars may not have been able to accelerate the sales

but in the long run the market will show positive results as the consumer awareness and

preference for the low emission vehicles grows.

Few characteristics:

Interdependence: E-car concept has very less penetration in the market. So the

existing firm has to be interdependent. For e.g. if M&M tries to raise its price then the

a high market demand of E-cars may be captured by Nissan Leaf .

Strategy: Whether to compete with rivals, or collude with them. Whether to raise or

lower the price, or keep price constant etc .GAME THEORY is used by oligopolies

where they portrays strategic situation where each oligopolies strategies are based on

expected actions of the rivals.

Pricing : Limit pricing (oligopolies sets low price & high output by selling at a price

just below the average total cost of the new entrant) or Predatory Pricing (

oligopolies set price low enough to force rivals out of the market)

Cost Plus pricing: Very uses for oligopolies where there is uncertainties.

Cost plus pricing= Fixed Cost + Variable Cost+ Profit

Oligopolies use this because precise calculation of Marginal Cost & Marginal

Revenue is difficult. For E-cars players, they should follow this pricing because in

India or in global scenario though the sale of E-cars has taken but still a shift is from

conventional cars to hybrid cars and E-cars are less preferred.

Product Differentiation: The firm makes the product substitutable (may be advanced

features like M&M e2o have mobile app etc) & through effective advertising assures

the uniqueness of the product.

Profit maximization: M&M wasn’t able to gain profit in India, so planned to move

European market which has been profitable market for E-cars & Reva too did a better

business in European market.. (MR,Marginal Revenue=MC,Marginal Cost).

Game Theory can be used in terms of strategies & payoffs

Barriers to entry:

Few Electric cars manufacturer (oligopolies) maintains there position in the market

because it’s too costly or difficult for the potential rivals to enter the market. These

hurdles are called Barrier to entry.

a) High set-up Cost leading to High Average Revenue (AR) & Average Cost (AC)

b) High R&D cost

Price

Cost

ATC+25%

ATC

Output

Cost & Revenue

c) Economies of Scale: E-car market has enough firms according to demand. If

economies of scale exist, the average cost for existing faces fall over wide range of

output. Anew entrant has to operate at much smaller scale & average cost for them will be

much higher.

Non-Pricing Strategy: Better option for oligopolies in E-Cars sector because price

competition can lead to price wars which can go in either successful or unsuccessful

market of E-cars. Few hurdles in acceleration of E-cars market is the Battery price

which can be reduced through R&D, charging infrastructure & service station. So

trying to improve these factors should be one of the strategies.

Correlation between product variety and sales:

Sources: Marklines Database

In 2010 there were 16 EV models on sale and around 20 in 2012.

An Entry game:

Many firms in an oligopolistic market have faced an entry game. A new firm will enter only

when it makes profit when compared with existing firm. Figures taken are assumed.

Existing Firm High Output

Low Output

Enter

New Entrant Stay out

High

Low

Few reasons for slow growth of Electric car market

a) High setup cost- High Average cost (AR)

The high set up cost for the manufacturing of electric cars is one of the factors which

contribute to high average cost of the vehicle.

For e.g. BMW has invested 600 million euros in the production facilities , Core i3

costs $41,350 in U.S, 27 % more than the base version of the 3-series sedan and

Mahindra invested INR 100 cr for the plant setup & cost approx. 6-8 lakhs costlier

than its Substitutes.

No incentives proposed in this year budget for the electric cars.

c) Battery:

Lithium ion is used for E-cars.

High battery cost (Battery costs 1.75-2 lakhs for M&M e2o & USD $12000 for

Nissan Leaf,1/3rd

of the retail price of Leaf)

Expected life expectancy 4-5 years

Li-Ion batteries components imported from japan, china & Taiwan.

Loss Rs 3lakh, Rs 6 lakh

Loss Rs 8lakh, Rs 8 lakh

Loss Rs Zero, Rs 12 lakh

Loss Rs Zero , Rs 10 lakh

b) Bandwagon effect

People use to do certain things primarily because other individual are doing regardless of

their own beliefs.

In Indian scenario, Electric cars are widely affected by bandwagon effect as in Indian market

people choose to buy according to the majority of purchases done by other customers. Except

the small range of 100-150kms & highest speed of 80-100km/hr of Electric cars which are

less when compared to conventional or hybrid cars, these Electric cars have more advanced

features. But bandwagon effect resists people from buying it

c) Some other factors are

Price differential.

Availability of supporting infrastructure

Range (Distance travelled by electric cars is max of 161 km charged once.)

Service

Vehicle specification (Speed, Mileage, size etc.) & safety.

Utility:

Satisfaction derived by a person from consumption of a good or service. Since preference is a

budget & Price constrained, the rational consumer will not spend on an additional unit of

good unless its marginal utility is at least equal to or greater than the unit of another goods.

In an Indian scenario, utility from Electric cars is low due to its higher price, limited mileage

compact size & speed when compared to with its substitutes (Petrol & Diesel hatch back

cars) apart from these electric cars too very rich in features in comparison with substitutes.

Total Cost of Ownership (Energy Costs and their influence)

Electric cars offer substantial savings in terms of running costs when compared to vehicles

with internal combustible engines.

Assumptions (For Bangalore)

Electricity tariff is assumed at Rs. 5 per unit (1 unit = 1 kWh).

Petrol price: Rs 75 per Litre & Diesel Price: Rs 50 Per Litre

Mileage: Petrol Cars: 12kmpl & Diesel cars: 15Kmpl Calculation per 50 km

Units/Ltrs Cost

(INR)

Saving

(INR)

Savings per year

(INR)

Regular paid service

annually

Electric

cars

5 units 25 1500-2000

Petrol 4.17 Ltrs 313 288 1,05,120 3500-4000

Diesel 3.33Ltrs 166 141 51,465 4000-5000

Important concept for E-car industry:

Law of Demand: Under Ceteris paribus, Price of good & its demand are inversely

proportional. In 2010, when Ministry of New & Renewable (MNRE) provided 95 crore

incentives brought down the price of REVA down by INR Rs 1,00,000 (at least 30% Indian

parts) & at lower price demand increased & 600 units were sold until scheme was exhausted.

Supply curve:

Movement along supply curve, under ceteris paribus condition, the LAW OF

SUPPLY says that there is a positive relation between price and supply. In

comparison to Reva which cost 3.2lakh and its next version e2o cost INR Rs679,793

earlier there target was 3000 units per year, but now for e2o there target is 30,000

units.

P Movement

Q

Shifts of supply curve: Shifts of the supply happens when the underlying factor other

than its own price happens. For e.g. Delhi govt. provides the subsidy of 24%-29% of

subsidy and Chhattisgarh & Punjab govt. provides 0% VAT. This result in supply of

Government/Regulatory support

Customer power Investment in

technology (R&D)

more electric cars at same cost for M&M e2o & if there is fall in input price

(assumed).

Price s

D s’

s

s’

Q1 Q2 Quantity

Note: Rightward shift implies increase in the quantity supplied. Supplier being able to

supply more than before at the same price, or supply the same quantity as before at a lower

price

Marginal Output Rule: A firm will produce as long as Marginal Revenue is greater than

marginal cost & stop where MR=MC.

Shutdown Rule: If the price is below the Avg. variable cost, the firm should shut down

operations in short run.

For E- cars to be successful in India:

Pd

Pe

Conclusion:

Three factors low car penetration in small cities, rising fuel charges and rising income

(Nominal), when combined with increasing affordability of cars, will contribute to increase in

demand for Electric vehicles.

Sources: NCAER Estimate