EV policy – nice and cautious start

Much-awaited Electric Vehicle (EV) policy is unveiled. Ministry of Industries’ proposal is ratified by the ECC and in the next week this will likely be approved by the Cabinet and then the Presidential Ordinance will come to implement the policy. And in the next budget, the parliamentary approvals will be taken.

This is the first step towards bringing clean and green passenger cars in the country. The price of EVs is usually 30-35 percent premium to comparable internal combustion vehicles (ICVs). The policy is envisaged to have a relatively relaxed duty structure to have a similar consumer price for comparable models of EVs and ICVs.

Some would argue that these incentives are not enough to promote EVs and investment in charging infrastructure. They think that a bigger push is required to promote the new technology. In developed countries, cash handouts are given to support EVs; but Pakistan is a poor country and the government can only offer a relaxed duty and tax structure. That is being done; for all categories of passenger cars.

A few additional incentives are proposed for EVs having motors below 50Kwh capacity (mostly small cars). The 16 percent tax differential in addition to mere one percent duty on EV parts is a deal breaker for anyone. However, the new entrants (such as BYD) are more interested to milk the growing compact SUV market.

At the same time, the recent entrants (those who came under AIDP 2016-21- such as Lucky-Kia and Nishat-Hyundai) want to first capitalize on the investment they put in ICVs plants and models. The lesser incentive on EVs above 50kwh motor is giving room to AIDP 16-21 entrants to cement their foundations in the Pakistan market. Since no new reputable entrant in AIDP 2016-21 is focusing on small cars, and none of the old Japanese cars (but Suzuki) is into the segment, the government is giving room for building EV market in smaller cars. But it’s not easy to compete with Suzuki.

It was not an easy job to come up with the EV policy, as the government wants to strike a delicate balance between ICVs and EVs. Pakistan’s market is for long dominated by Japanese players, and these Japanese automakers are globally not interested in EVs. They are vocally against the long-term potential; their choice of cleaner technology is hydrogen fuel cell.

Fuel cell technology is no doubt a better option in theory; but it lacks commercially viable solutions. It may or may not be a top choice in distant future. But today in passenger cars segment there is no comparison. There are less than 20,000 Fuel Cell Vehicles (FCVs) in the world today versus over 7 million EVs. The latter is a technology of today. Toyota being a pioneer in hybrid technology has somehow missed the EV ride. Same holds true for Honda. Thus, the principals of Indus Motors and Honda Atlas in Pakistan would never fully support EV policy in the country. Having 50KWh motor limit for higher incentives in EVs would somehow protect their bread and butter Sedan segment.

The EV disruption came from the Silicon Valley (Tesla) which was resisted by conventional automotive makers in early days. But now American, European, Chinese and South Koreans are progressing fast in the segment. The highest number of EVs in the world are in China – over 2 million, and growing. Today, Pakistan’s best bet is to attract Chinese EV assembling here.

BYD is big in China, and a reputable local group (Sapphire) is mulling over the idea to set up an EV assembling plant in Pakistan in partnership with BYD. The other keenly interested party is MG – it has already launched a compact SUV in ICVs segment. It is planning to have ZS EV (compact SUV) soon. Then the Korean brands have good options in EV. None of their local partners has shown keen interest in launching EV models anytime soon.

One party interested in EV is saying that the government should have supported EV more. Seeing its environmental benefits along with savings on imported fuel, it’s no brainer to attract fiscal incentives. Plus, Pakistan has surplus electricity today and to lower its fixed cost (capacity charge), higher consumption is warranted. EVs are one big avenue for consumer electricity.

They think that to have $100 million investment in a new plant, they should have higher incentives in all segments. Limiting the higher incentives for below 50KWh motor would limit the scale. That is partially true. But there are decent options below 50KWh such ZS MG at 44.5 KWh. But cars similar to Audi E-tron (a new love of elite) having motor over 90Kwh are out.

They need to realize that government is serious in EVs, and there are limits to invectives that a cash-strapped government can offer. If they show promise and start investing today, the government may give them what they want. Just as the case of smartphone policy, where a local player was pleading for 4 percent WHT removal; but his factory was operating at full without it. Now that incentive is given, that player and others are planning to expand.

Having said that, incentives in offing are not petty. The duty structure on CKD for non-EV parts is similar to those given in ADIB 2016-21 i.e. 10 percent duty on non-localized parts and 25 percent duty on localized parts. The duty on EV parts is 1 percent. The cost of EV parts – motor, batteries, control etc., is around 40-60 percent of a car. Thus, effective duty of EV CKDs would be 6-8 percent versus 15-18 percent for non EVs. Then there is on FED on EVs. The government is planning to have lower registration fee and concessionary consumer finance for EVs. The package deal is not bad to invest.

EVs’ other challenge is charging infrastructure. Many may be reluctant to make investment before the development of charging infrastructure. But the charging infrastructure investment may wait for EVs to seep in the market. It’s a chicken and egg problem. The world experience shows that both are to grow simultaneously.

Some say that duty on CBUs should have been kept at zero percent (it is at 25%) to have imported cars flooded in the market to attract charging investment. Once that is done, the local assembly would become lucrative. Well, the government rightly wants local assembly to promote manufacturing at home. Hence, CBUs’ import should not be dirt cheap. Someone has to take the risk to invest and to have first mover advantage – like Kia got lucky in ICVs SUVs. BYD needs Sapphire in Pakistan to charge up.

Copyright Business Recorder, 2020