The electric vehicle (EV) industry is bracing for a short-term price surge, as the Ministry of Heavy Industries (MHI) has mandated a 100% domestic content requirement for 18 EV components, including the traction battery pack, battery management system, and heating, ventilation, and air conditioning system.

Original equipment manufacturers (OEM) that don’t comply with the mandate will not be eligible for subsidy under the Phased Manufacturing Program (PMP) mechanisms of the PM Electric Drive Revolution in Innovative Vehicle Enhancement (PM E-DRIVE) Program.

The PM E-DRIVE Program, with a total outlay of ₹109 billion (~$1.29 billion), focuses on providing demand incentives, deploying electric vehicles (EVs), and developing charging infrastructure to support wider adoption of EVs.

The recent mandate also prohibits importing battery modules, PMP components, and other EV components in a completely knockdown form from a single supplier.

Experts opined that there could be a short-term jump in EV prices due to manufacturers scrambling to source components locally.

Uday Narang, Founder and Chairman of Omega Seiki, said, “In the short term, the 100% DCR mandate on 18 EV components may lead to an increase in prices due to the initial costs associated with setting up local manufacturing and the potential lack of economies of scale. “

Prashant Vashishtha, Founder & Chairman of Sokudo Electric, also concurred that EV prices could increase in the short term.

“Local sourcing of components can be more expensive initially, especially if supply is limited. However, as the industry scales up and achieves economies of scale, prices could stabilize or even decrease in the long run,” said Vashishtha.

While the domestic content requirement mandate could boost local industries and lead to job creation, short-term disruptions in the supply chain cannot be ruled out.

“There may be temporary supply constraints, especially if manufacturers struggle to source sufficient domestically produced components. However, companies are already exploring ways to localize production, so the shortage may not be long-term,” said Vashishtha.

Supply constraints could arise from the import of critical elements used in EV manufacturing.

Key raw materials, such as lithium, cobalt, and nickel are imported from China, Australia, and Chile. Other components, like semiconductors, are imported from Taiwan and South Korea.

Narang said, “The majority of raw materials required for manufacturing EV components, such as battery cells and rare earth materials, are imported, with China being the primary supplier for battery cells. High-end shock absorbers are also imported. However, for two- and three-wheelers, about 95% of the components are already localized. Key countries exporting to India include China, Japan, Korea, Europe, and the U.S.”

It is estimated that 60-70% of total EV components used in manufacturing, especially those in completely knockdown form, are currently imported. This includes batteries, power electronics, and advanced semiconductors.

Currently, the percentage of EV components or components in complete knockdown form imports varies across vehicle types. “For two- and three-wheelers, around 5-10% of the components are imported, whereas in passenger four-wheelers, approximately 20% of the components are imported. High-end vehicles, however, rely on a larger proportion of imported parts,” said Narang.

While local OEMs are confident about meeting long-term demand, they believe that the manufacturing sector has not matured enough to support the development of advanced battery cells.

Vashishtha emphasized the need for substantial capital investment and time required for R&D and production scaling to meet the technology gaps.

While the government has introduced programs such as Faster Adoption and Manufacturing of Electric Vehicles and the Production Linked Incentive to encourage local EV manufacturing, the industry has called for more direct incentives for manufacturers, support for R&D, and easing of regulatory barriers.

The government recently dropped import duties on 35 capital goods used in EV battery manufacturing.

The industry also believes that support at the state level, in the form of facilitating infrastructure development, providing incentives, and promoting domestic manufacturing, is vital.

Forming strategic alliances with international partners can bring in technology, expertise, and investment, thereby enabling the faster localization and development of domestic manufacturing capabilities.

The cost-effective production of components, along with meeting domestic content requirements, will be a challenge, according to industry experts.

“Achieving this requires significant investment in infrastructure, technology, and capacity building. Additionally, more manufacturing plants and production lines must be established to meet the demand, necessitating careful planning and strategic execution. Without these advancements, it could be difficult to maintain competitiveness while adhering to the mandate,” added Narang.

However, industry sources say that domestic EV manufacturing will be a net positive in the long run.

“The reliance on imported parts will decrease, leading to a more self-sufficient EV ecosystem. This shift will help reduce costs associated with imports, such as customs duties and logistical expenses, ultimately making EV production more cost-effective for manufacturers and more resilient to global supply chain disruptions. As a result, EVs will become more accessible to a broader consumer base due to reduced manufacturing costs.” said Narang.

He added that lower component costs will likely translate into more affordable retail prices, accelerating EV adoption.