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Risk Management needs of the changing Indian EV Manufacturing Industry

EV charging station for electric car in concept of green energy and eco power produced from sustainable source to supply to charger station in order to reduce CO2 emission .

By Suresh Ramachandran

The Government of India (GoI) is committed to achieving 30% electrification of total mobility by 2030. Schemes like Faster Adoption and Manufacturing of Hybrid and Electric Vehicles in India (FAME) have provided the necessary catalyst to the EV sector and the results are very encouraging with EVs comprising of 4.7% of the total automobile sales in India in 2022.

Coupled with the push for EV adoption, the GOI is also providing necessary stimulants for making India as a global manufacturing hub for EVs as part of “Make in India” initiative. Production Linked Incentives (PLI) schemes for Auto & Auto Components and Manufacturing of Advance Cell Chemistries (ACC) worth INR 26,000 Crores (USD 3.25 Bn) have been rolled out by the GoI. Also, the “China + 1” strategy of global corporations have positioned India as a possible substitute to China, as a manufacturing hub. As a result of these policy interventions and the Geopolitical changes, lot of EV players, including global heavyweights, are setting up manufacturing plants in India for EVs and their components including batteries.

Initially, EVs (especially 2Ws) were imported into India, which subsequently moved to assembling in India and now, with the above changes, is transforming into manufacturing in India. This transition to manufacturing brings in lot of advantages along with a need for evolving the risk management strategy of the EV players.

 

Advantages of local manufacturing:

  • Supply Chain Resilience: The global EV industry is heavily dependent on China, especially for batteries. Given the volatile diplomatic relationship with China and the resultant impact on free trade, manufacturing in India would help to reduce external dependency and build resilience in the EV Industry
  • Cost Benefits: The incentive schemes of GoI are based on localization and local manufacturing helps in achieving the higher level of localization thereby being eligible for government subsidies.
  • Quality Control: Local manufacturing could help in raising the quality standards by adhering to the prescribed Indian quality standards.

Evolving Risks due to local manufacturing:

  • Increased Capex: Transition from assembly to manufacturing needs fresh capital investments, thereby raising the ROI expectation from the industry. While there is significant investor interest in Indian EV market, the investors would expect a well thought out risk management initiatives to protect the capital investments. Within EV manufacturing, battery manufacturing is of higher risk exposure. Fire accidents in battery manufacturing is high on severity and it tough to contain. The recent fire accident in a leading Indian battery manufacturing company is a case in point. As a risk mitigation measure, necessary fire protection measures need to be built into the design of these manufacturing units. Also, as a risk transfer strategy, appropriate Property Insurance solutions should be put in place.
  • New Manufacturing Technologies: Increased deployment of Industry 4.0 technology in manufacturing has increased the efficiency of the production process due to increased adoption of robotics and ‘digital twin’ concepts. At the same time, it has also increased the exposure to new age Cyber attacks like ransomware. In addition to strengthening the Cyber security, it is imperative to purchase a well -designed Cyber Crime insurance policy.
  • Increased R&D: Localization needs lot of investments in Research & Development, especially in Battery Cell technologies. Leading EV companies have already established R&D centers for Cell Chemistries. R&D spends are long term in nature and the success depends on myriad factors. Hence it is important that any breakthrough achieved is well protected from an IP perspective. Per a recent report from International Intellectual Property Law Association (IIPLA)# the annual legal expenses of Indian Corporates have gone up to INR 40,000 Crores (INR 5 Bn) on account of disputes arising out of IP and M&A. It may be worthwhile for Indian EV players to focus on protecting their IP under available legal provisions. Also, infringing other’s IP, inadvertently, is a growing exposure. Hence, appropriate Liability insurance policies like Directors & Officers and Professional Indemnity policies are to be looked at for protecting the Company and its key officials against any IP infringement cases.
  • Business Continuity: Even though there may be increased local supplies, the dependency on few key suppliers, especially that of EV Batteries, would continue. The exposure to a downtime in production owing to a physical damage at the Supplier’s end is real and heightened. Hence it is imperative to audit the physical risk management measures of Key suppliers and recommend a baseline level of risk preparedness. Also, available insurance solution like Contingent Business Interruption covers should be explored to pay for any loss of production due to a physical damage at Supplier’s premises.
  • Human Element: With increased localization, jobs in manufacturing and R&D sectors are bound to go up. The increased employee base calls for closer attention to workplace safety and healthcare benefits. In addition to these, insurance solutions like Workmen Compensation, Personal Accident, Term life (to pay for workplace injury/ death) and Health Insurance (to pay for medical expenses) needs to be put in place.

The future of Indian EV industry looks very promising and exciting. With the necessary risk management solutions in place, it would surely be rewarding for all stakeholders.

 

# Indian Firms’ Annual Legal Costs: ₹40,000 Cr on Rising M&A, IP (iipla.org)

 

(The author is Suresh Ramachandran, Practice Lead, Automotive Industry, Gallagher Insurance India, and the views expressed in this article are his own)