Tokyo-based start-up Terra Motors, a manufacturer and distributor of three-wheeled electric vehicles, recently launched a financial subsidiary in India. Its goal is to use microfinance to increase buyers’ income and boost vehicle sales. But will a Japanese startup be able to thrive in India as the coronavirus spreads at a record rate?
An electric vehicle exhibition was held in New Delhi, capital of India, in early August. While many domestic companies had their own displays, people gathered at Terra Motors’ booth, where, alongside its vehicles, the company presented financial sector services.
At the end of July, just before the show, Terra Motors created Terra Finance in India as a financial subsidiary. “Our main target is low income people, so financial support is essential,” Terra Motors CEO Akihiro Ueda told the exhibition center.
Terra Motors’ main three-wheeled electric vehicles have a maximum speed of 25 km / h and can carry four passengers plus the driver. Taxis and other commercial transport vehicles are in demand, but the high price of around $ 1,800 creates a bottleneck. According to Terra, driving a three-wheeled taxi can make a person several thousand dollars a year, but almost half of India has an annual family income of less than $ 5,000. Many people don’t have the money for an upfront payment on a vehicle.
Terra Finance uses funds borrowed from banks to cover these initial purchases. It provides loans to people looking to buy a vehicle, and they repay the loans using their daily income as taxi drivers.
Large Japanese carmakers who have established themselves in India in the past, such as Suzuki and Honda, have mainly provided loans through local institutions. “There are already local financial institutions specializing in this area,” said an employee of a major Japanese car manufacturer. “We decided that we should focus on product development, rather than bothering to provide our own financial services.”
In contrast, Terra Finance is 80% owned by Terra Motors and the remaining 20% by local lender Vedika Credit Capital. Terra Motors is leading the financial operation, and a local consultant noted that it is rare for a Japanese automaker to be so involved in financial affairs.
Terra Motors was founded in 2010 by President Toru Tokushige, who first worked at a Japanese insurance company before moving on to a business support company in the United States. on the development of its activity in emerging Asian countries. Ueda, who took the presidency in 2019, was from Sharp, and CTO Masanori Takahashi was from Honda.
The company’s philosophy is to solve problems that affect society, such as air pollution, and it has raised funds from SMBC Venture Capital and Shinsei Bank. Individual shareholders include former Sony chairman Nobuyuki Idei and Koichiro Tsujino, the former head of Google’s Japanese subsidiary. In July, the company announced that it had accepted an investment from FCC, a parts maker affiliated with Honda, boosting its business expansion into high gear.
Electric vehicles have fewer parts than their gasoline-powered counterparts. EV companies don’t need to maintain a vertically integrated industrial pyramid like other major Japanese manufacturers, and it is believed that a horizontal division of labor will provide more opportunities for startups.
Gasoline cars make up the majority of the Indian market, but the government is pushing subsidies for electrification and other measures. India has a huge trade deficit due to imported oil, and severe air pollution plagues its cities, especially the capital. Electric vehicles are expected to represent 30% of the market by 2030. Terra Motors expects the three-wheeled vehicle market, currently around 600,000 units, to gradually shift from gasoline-powered vehicles to electric vehicles.
Terra Motors already has more than 250 distributors in India and sells more than 10,000 three-wheeled electric vehicles per year. According to the audit firm KPMG, the Indian market for electric three-wheelers is 90,000 units. There are no official statistics from industrial groups, but Terra Motors believes it has the highest market share. The company claims to have known how to differentiate itself from its competitors by being the first to offer a manufacturer’s warranty.
However, Terra Motors had little expertise in financial services. Previously, buyers were invited to sign loan agreements with local financial institutions. So why did Terra Motors feel the need to set up its own financial services operation? Ueda said that depending entirely on local financial institutions meant that “the speed of business promotion and the way we manage risk was different, making it difficult for us to control the business and promote it the way we wanted.”
Auto sales in India, including three-wheeled vehicles, had slowed even before the pandemic. One of the reasons was the struggling financial sector. In India, loans to people with poor credit were prevalent, but as of 2015, the Central Bank of India (RBI), under the government of the day. Raghuram Rajan has started to tighten bank inspections. The NPL ratio, which hovered around 4%, jumped to 10%, mainly in public banks. The banks responded by curbing auto loans.
Instead of banks, loans from non-banks, which ignore borrowers’ credit history, are on the rise. But in 2018, the main non-bank lender Infrastructure Leasing & Financial Services, which had received funding from companies like Orix, defaulted on its debt. “Non-bank cash flow has worsened, which has also affected home loans and auto loans,” according to Mizuho Research and Technologies.
With the novel coronavirus outbreak in 2020, cities have entered strict closures to control the spread of infections. However, these blockages also prolonged the economic slump. The pandemic peaked in India in September 2020, but a mutated strain of the virus led to a second wave of infections in 2021. In May, there were over 400,000 new infections per day and many car dealerships had to shut down . In June, the central bank downgraded its real GDP growth rate to 9.5%.
The number of new infections has fallen to around 40,000 a day, but the situation remains unpredictable. “Infections are increasing in some areas,” RBI Governor Shaktikanta Das said in a speech in August. “We need to be alert to the possibility of a third wave.” The central bank’s consumer confidence index is currently at an all-time high.
These problems in the financial sector and the more general economic downturn have made it “particularly difficult for low-income people” to obtain loans for three-wheeled electric vehicles from Terra Motors, Ueda said. India’s electric vehicle industry group also noted that the slowdown in lending is an issue affecting demand for electric vehicles.
Terra Finance has developed its own lending standards with an 18-month repayment period and an annual interest rate of 16.5%. The company aims to increase sales by 1,500 to 2,000 units per year. But the company emphasizes that it does not intend to grant loans recklessly. In order to reduce bad debts, a special device connected to the Internet is integrated into the body of the vehicle to remotely manage the battery and collect driving data.
“We will be able to follow up ‘with the taxi drivers’ with a ‘caution alert’ if their operating rate drops or if they deviate from their usual business route,” Ueda said. If borrowers don’t repay, their vehicles will stop working. The system can be used to salvage and resell vehicles in the event of borrower default.
The future challenge for Terra Motors is to make a distinction. The company is currently relying on local partners to develop and analyze its smart devices. “We plan to conduct our own analysis in the future,” Ueda said. The company must also develop its own technologies, backed by patents, to ensure that its competitors cannot copy its business model.
The company also focuses on building relationships with buyers. “The idea of reimbursement varies considerably by region and culture,” said an official at a company specializing in vehicle sales in Asia. “In some cases, we have to explain up front“ this is what a loan is. ”Even with vehicle data, the company may not be able to incentivize its customers if it cannot maintain close contact with them.
In the future, to differentiate its business model, Terra Motors plans to strengthen measures aimed at improving the activities and revenues of its customers. She is currently considering partnerships with dispatch services. Many people in India call taxis using ridesharing apps, like Uber in the US. Many members of the multilingual Indian society do not speak English and the apps allow them to enter their destination regardless of the language. The apps also make it easier for taxis to find customers, rather than searching and searching for them.
According to calculations by Terra Motors, drivers registered with dispatch services earn about 2.5 times more per month than private drivers. The company is also preparing a system that will not only cover the cost of the vehicle, but also provide drivers with a smartphone and introduce registered drivers to dispatch services.
The company is also considering a future model that incorporates digital signage and uses advertising fees to pay off loans. Using digital signage, it is possible to display multiple advertisements that vary depending on the location of the vehicle and the time of day. Terra Motors includes the word “Internet” in its corporate vision, “to build new social infrastructure through transportation and the Internet”, as it plans to use its electric three-wheelers for digital commerce.
Of course, these creative efforts do not eliminate the risks. “In the case of small credit businesses targeting the poor, there is a risk that the lender will lose income all at once due to macroeconomic policies or disasters like floods,” noted a local analyst.
The Indian government‘s electrification strategy also requires attention. The government is clearly keen on promoting electric vehicles, but it has already changed course. He took major automakers by surprise when he suddenly announced that all vehicles would be electric by 2030. He provided subsidies for electric vehicles, but some fear the policy could change again without warning.
Can electric vehicles increase the incomes of low income people while generating business profits in the huge Indian market? Terra Motors intends to know if its business model can succeed in this large emerging market. (Nikkei Asia)
