Here’s Why Maruti Is Not Joining The EV Race

Here’s Why Maruti Is Not Joining The EV Race


Over the weekend, I was reading a blog by one of my favorite authors, Morgan Hosel. I came across an interesting conversation a friend of the author had with Warren Buffett against the backdrop of the global financial crisis of 2008.

Friends of the author were driving around Omaha with Buffett in late 2009. The global economy was in tatters at this time, and Omaha was no exception. Shops were closed and business came to a standstill.

A friend of the author asked Buffett, “It’s bad right now. How does the economy come back from this?”

Buffett replied with a question of his own, “Do you know what was the best-selling candy bar in 1962?”

“No”, replied his friend.

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

“No”, replied his friend.

“Snickers,” said Buffett.

And that was the end of the conversation.

Here is the gist of this simple conversation.

Focusing on what is never going to change is more important than trying to predict how something might change.

While it is important to understand and predict how technology is going to change our lives, isn’t it equally important to focus on the things that will never change?

When we talk of conversion, EV tops the list.

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

So, this time, let me play devils advocate and try to find out why India’s biggest carmaker Maruti Suzuki is not jumping on the EV bandwagon.

Tata Motors has been in the news with fresh and new EV launches almost every month. On the other hand, Maruti is going the hybrid route with its newly launched Maruti Suzuki Grand Vitara.

Tata Motors is the undisputed market leader in the passenger EV space. Maruti does not have a single EV product. Its first EV will be launched in 2024-25.

So, here’s the billion dollar question…

Is Maruti behind in the EV race?

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

Apart from factors like lack of charging infrastructure, I have analyzed the cost dynamics of owning an EV in the table below.

It will take 16 years to recover the increased cost of buying an EV.

mmf1234gPractically it doesn’t make any sense to go for an EV over a CNG car. I haven’t even considered the replacement cost of EV batteries.

Maruti seems to have the right focus on targeting the growth of the CNG segment.

The contribution of CNG to the total passenger car industry stood at 8.5% in FY22. But CNG cars contributed 17% to Maruti’s total domestic sales during the same period.

After all, most CNG cars are small cars, accounting for 40-45% of the industry’s total volume. The important statistic here is that Maruti’s market share in the small car segment is above 70%.

Is it not a smart move to target the small car segment, where you are the market leader, in which CNG fuel is gaining share?

But there’s a catch…

The way the industry is shaping up, the share of small cars is going down and that of SUVs is going up.

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

The cost dynamics here are in favor of EVs.

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While it takes 1.4 years to recover the incremental cost of an electric vehicle, the cost savings on using an EV after the initial cost recovery is huge. EVs cost only 20% to run compared to hybrids as can be seen in our calculations.

I haven’t included the cost of battery replacement for EVs which I think is 0.5-0.6m today. This is because the replacement is going to be after 5 years, and by then the cost of the battery will be much lower than it is today.

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

So, to conclude…

CNG > EV

EVs > Hybrid

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

Maruti is the leader in the hatchback segment, which accounts for 45% of the total car volumes. Thus the company’s strategy to target CNG fuel and not electric vehicles makes sense. Market leadership with favorable cost dynamics works for Maruti.

but…

If we leave aside the battery replacement aspect, it makes more sense to buy an EV than a hybrid.

However, this argument falls short when we look at the lack of EV infrastructure. This is because often convenience precedes cost.

Also, Maruti’s plan to use hybrids as a bridge between combustion engines and electric vehicles may work as the ecosystem takes time to develop.

I think not having first mover advantage can work, as is evident in the two-wheeler sector.

What do you think dear reader? Is Maruti on the right track with hybrid approach and slow pace in EVs?

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

This article is syndicated from Equitymaster.com

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