Here’s why Maruti isn’t taking part in the EV race

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Here's why Maruti isn't taking part in the EV race
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Over the weekend, I was reading a blog by my favorite author, Morgan Housel. I came across an interesting conversation the author’s friend had with Warren Buffett in the context of the 2008 global financial crisis.

The author’s friend was driving around Omaha with Buffett in late 2009. The global economy was paralyzed at this point, and Omaha was no exception. Shops were closed and businesses closed.

The authors’ friend asked Buffett, “It’s so bad right now. How does the economy ever bounce back?”

Buffett responded with his own question: “Do you know what the best-selling candy bar was in 1962?”

“No,” replied his friend.

“Snickers,” Buffett said. “And do you know what the best-selling candy bar is today?” Buffett asked.

“No,” replied his friend.

“Snickers,” Buffett said.

And that was the end of the conversation.

Here’s what to take away from this simple conversation.

Focusing on what will never change is more important than trying to anticipate how something might change.

While it’s important to understand and predict how technology will change our lives, isn’t it just as important to focus on things that will never be replaced?

When we talk about change, EV is at the top of the list.

I am sure you must have read countless articles on why EVs are the next billion dollar opportunity and the best EV stocks to buy in India.

So this time, let me play devil’s advocate and try to figure out why India’s biggest automaker, Maruti Suzuki, isn’t jumping on the electric vehicle bandwagon.

Tata Motors hits the headlines almost every month with updates and new electric vehicle launches. On the other hand, Maruti is going the hybrid route with its newly launched Maruti Suzuki Grand Vitarra.

Tata Motors is the undisputed market leader in electric passenger vehicles. Maruti doesn’t even have a single EV product. Its first EV will be launched in 2024-25.

So that’s the billion dollar question…

Is Maruti behind the curve in the EV race?

To answer this question, let’s look at the numbers.

Besides factors such as lack of charging infrastructure, I have analyzed the dynamics of EV ownership costs in the table below.

It will take 16 years to recoup the extra cost of buying an EV.

Mmf1234GPractically, it doesn’t make sense to choose an electric vehicle over a CNG car. I didn’t even factor in the cost of replacing EV batteries.

It seems that Maruti’s emphasis on targeting the growth of the CNG segment is right.

CNG’s contribution to the overall passenger car industry was 8.5% in FY22. But CNG cars contributed 17% of Maruti’s total domestic sales over the same period.

After all, the majority of CNG cars are small cars which account for 40-45% of total industry volumes. The important statistic here is that Maruti’s market share in the small car segment is over 70%.

Doesn’t it make sense to target the small car segment, where you are the market leader, in which the share of CNG fuel is increasing?

But there is a catch here…

The way the industry is changing, the share of small cars is decreasing and the share of SUVs is increasing.

In the SUV segment, Maruti has launched hybrid technology which is battery plus petrol as opposed to its competitor Tata Nexon which is a pure EV.

The cost dynamic here is in favor of electric vehicles.

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Although it takes 1.4 years to recoup the additional cost of an EV, the savings from using an EV are huge after the initial cost recovery. Electric vehicles cost only 20% to operate compared to a hybrid, as our calculation shows.

I have not included the battery replacement cost for an EV which I believe is Rs 0.5-0.6m as of now. The reason is that the replacement will take place after 5 years, and by then the cost of the battery would be considerably lower than it is today.

Also, most vehicle owners replace their vehicles after 6-7 years.

So, to conclude…

CNG > VE

EV > Hybrid

Where does Maruti fit in the EV v/s CNG v/s Hybrid race?

Maruti is the leader in the hatchback car segment which accounts for 45% of the total car volume. So the company’s strategy of targeting CNG fuel and not EV makes sense. Market leadership as well as favorable cost dynamics work for Maruti.

But…

Excluding the battery replacement aspect, it makes more sense to buy EVs than hybrids.

However, this argument gets diluted when we talk about the lack of EV infrastructure. Indeed, convenience often precedes cost.

Additionally, Maruti’s plan to use hybrids as a bridge between combustion engines and electric vehicles could work because the ecosystem is slow to evolve.

I guess not having first mover advantage might work, as is evident in the two-wheeler business.

What do you think, dear reader? Is Maruti on the right track in taking the hybrid approach and slowing down EVs?

(Disclaimer: This article is provided for informational purposes only. It is not a stock recommendation and should not be treated as such.)

This article is syndicated from Equitymaster.com

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