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Hero Moto to Power up EV Play, says the Game has Just Begun

Hero MotoCorp’s Expansion into Electric Two-Wheelers

Source and citation: Information adapted from an ET Bureau article published on January 24, 2024.

Analysis for Layman

Hero MotoCorp, one of India’s largest two-wheeler manufacturers, has plans to introduce three new electric vehicle (EV) models in 2025 as part of its effort to expand its product range in India. These models will cater to different customer segments, including business and fleet customers, mid-price, and affordable segments.

Currently, Hero is behind its competitors like Ola Electric, Ather Energy, and TVS Motor in the rapidly growing electric vehicle market, which constitutes 15% of India’s two-wheeler market. However, Hero sees the potential to export Indian-made electric two-wheelers globally while also focusing on the local market.

To strengthen its EV ecosystem, Hero is forming partnerships, including a charging infrastructure joint venture with Ather Energy. The CEO of Hero MotoCorp believes that the electric two-wheeler sector is still in its early growth stage, and industry consolidation is expected over the next three years as subsidies gradually decrease.

Hero Moto to Power up EV Play, says the Game has Just Begun

Impact on Retail Investors

For retail investors in Hero MotoCorp, the company’s plan to enter the electric vehicle market aligns with its strategy to benefit from the growth in electric mobility while maintaining its strong presence in traditional internal combustion engine (ICE) models.

While steady capacity expansion is a positive sign, investors should be prepared for longer payback periods, possibly ranging from 5 to 7 years. Hero’s extensive distribution network, customer trust, and international channels can provide advantages once the operational metrics stabilize after the initial phase.

Investors should also monitor Hero’s supply chain for EV components, the growth of charging infrastructure, and the company’s research and development efforts in next-generation battery solutions. Additionally, any strategic investments in niche electric mobility startups can provide future growth opportunities.

Balancing profitable ICE engine leadership with a successful electric transition is crucial for Hero’s long-term success, and prudent capital allocation should remain a focus.

Impact on Industries

Hero’s shift towards electric mobility can have a positive impact on the broader electric vehicle automotive supply chain, including lithium cell imports, battery pack assembly, component manufacturing, and specialized electronics. This growth in domestic EV production can lead to job creation and reduce risks in global supply chains.

Hero’s partnership approach to charging infrastructure suggests potential consolidation and synergies among fragmented players, which could enable nationwide access to charging. Fleet electrification can also provide stable volumes, supporting sustainable business models.

However, as Hero expands globally, it will face increased competition in emerging markets as Indian companies leverage export incentives. Competing on cost efficiencies and meeting safety and quality standards will be vital in these markets.

Overall, Hero’s progress in the electric vehicle sector can accelerate the adoption of clean mobility and deepen local manufacturing capabilities. Still, an excess of capacity without sufficient demand creation incentives could undermine stability, so prudent growth is essential.

Long Term Benefits & Negatives

In the long run, Hero’s gradual transition to electric mobility aligns with global sustainability trends and can enhance India’s manufacturing competitiveness and self-reliance. Steady capacity investments can lead to skilled job creation, local research and development, and testing facilities.

Hero’s well-established distribution network can help manage nationwide servicing support and charging access in the long term. However, effectively managing incentives without relying solely on state subsidies will be crucial to drive mass adoption, especially in lower-income segments. Addressing margin erosion from the decline in ICE engines is also essential for sustaining reinvestment capacities.

Hero is poised to ride the electric wave while leveraging its existing strengths without immediately disrupting its profitable ICE engine business. However, successful execution is vital beyond the vision, focusing on creating a market and building capabilities on the ground.

Short Term Benefits & Negatives

Over the next year or two, Hero’s electric scooter models aimed at business and mass-market customers can expect initial sales traction amid growing competition. Financially, investments may continue to outweigh returns during this period.

To sustain pricing power in the short term, Hero should focus on premium positioning, emphasizing safety and quality before cost advantages from scaling up production kick in. Rapid growth in customer engagement through charging and battery-swap access partnerships is also necessary.

However, overreliance on subsidies from government programs like FAME (Faster Adoption and Manufacturing of Hybrid and Electric Vehicles) poses risks once the support begins to taper off by 2025. Building robust use cases and potential downstream revenue should take precedence over relying solely on policy incentives.

While industrywide overcapacity risks exist if consumer demand is insufficient, Hero seems well-positioned to navigate the electric trend by leveraging its strengths and selectively building new capabilities.

Potential beneficiaries and losers from Hero Moto’s EV plans and outlook:

Indian Companies likely to gain:

  • Hero MotoCorp: Hero’s focus on expanding its EV portfolio, building charging infrastructure, and targeting global exports could solidify its position in the future EV market. This could lead to increased investor confidence and potentially higher share prices.
  • Ather Energy: As Hero’s charging infrastructure partner, Ather could benefit from increased usage and expansion of its charging network, boosting its brand awareness and potentially driving sales of its own scooters.
  • EV component manufacturers: The increased demand for electric two-wheelers could benefit companies supplying batteries, motors, and other EV components, like Tata Motors’ Alpharetta Powertrain and Bharat Electronics.
  • Ancillary businesses: Increased EV production and sales could also benefit companies involved in logistics, charging solutions, and EV servicing, like Mahindra Accelo and Tata Power DDL.

Indian Companies potentially impacted negatively:

  • Traditional ICE two-wheeler companies: As the EV market grows, companies like Bajaj Auto and TVS Motor Company, with a strong focus on petrol scooters, could face pressure on their market share and profitability in the long term.
  • Smaller EV startups: Hero’s entry and potential scale in the mid- and entry-level segments could intensify competition for smaller players, making it harder to gain market share and raise funding.

Global Companies unlikely to see significant impact:

  • International EV giants: Hero’s current focus is on the domestic market and exports to emerging economies. This is unlikely to directly impact established global EV players like Tesla or BYD.
  • Global charging infrastructure companies: While Hero’s partnership with Ather might involve technology collaborations, it is unlikely to significantly impact larger global players like Tesla’s Supercharger network or Electrify America.

Disclaimer: This analysis is based on limited information and should not be considered investment advice. Always consult with a qualified financial advisor before making investment decisions.

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