India's concerted efforts to promote green initiatives in the world's largest two-wheeler market led to the rapid emergence of numerous electric scooter startups. However, these startups are now facing a loss of favour due to their reliance on Chinese parts instead of locally sourced components.

The Indian government has taken a firm stance, demanding that six electric scooter manufacturers, including Hero Electric Vehicles Pvt, once a top player in the Indian e-scooter market, reimburse 5 billion rupees ($60 million) in subsidies due to their violation of localization regulations. Furthermore, subsidies owed to other companies are being withheld, causing a significant financial setback for these businesses. This situation has created a challenging financial environment for these startups.

The origins of this issue can be traced back to last year when a series of e-scooter fires, including incidents involving Okinawa Autotech International Pvt and Ola Electric Mobility Pvt, prompted the Indian government to investigate whether companies were complying with localization requirements under a subsidy program.

The investigation revealed that some manufacturers were importing ready-to-use parts, primarily from China, which diminished their control over the quality of the final products. This situation posed a safety risk to customers.

However, Ola has emerged from the investigation relatively unscathed and is now the dominant player in India's e-scooter market. The company recently announced plans to further localize its supply chain by establishing an electric battery factory and secured $140 million in funding in preparation for an initial public offering.

Meanwhile, other e-scooter manufacturers such as Okinawa, Hero, Greaves Electric Mobility Pvt, Revolt Motors, Benling India Energy & Technology Pvt, and Amo Mobility Solutions Pvt are grappling with financial challenges and difficulties in attracting investors. The government's withholding of subsidies worth 12 billion rupees has intensified their struggles, and collectively, e-scooter startups have incurred losses of 90 billion rupees without these incentives.

Ather Energy Pvt, ranked third among e-scooter startups, is seeking to raise 9 billion rupees from its existing shareholders, Hero MotoCorp Ltd. and GIC Pte. Meanwhile, TVS Motor Co., the second-largest player in the sector, is reportedly in discussions with Goldman Sachs Group Inc. for additional funding.

This shift in the industry landscape has posed particular challenges for early entrants like Hero, which began selling e-scooters back in 2007. Adapting their supply chains to align with India's localization rules, introduced only in 2019, has proven more daunting for these established companies. In contrast, Ola, which entered the market in 2021, had the advantage of building a supplier base that complied with the government's localization requirements from the outset.

While the quest for funding continues, the stringent localization regulations are impeding progress in the electrification of two-wheeler transport in India. This is concerning as a thriving e-scooter industry is vital for the country to make significant strides toward its zero-emissions objectives. India currently lags behind other nations, and electric cars have not gained widespread adoption.

Factors such as the high upfront cost of electric vehicles, limited options for consumers, and a lack of charging infrastructure have deterred people from transitioning away from gasoline-powered cars, despite worsening pollution levels, particularly in cities like New Delhi.

According to BloombergNEF, just 1.3% of the 3.8 million passenger vehicles sold in India last year were electric. In contrast, in some Chinese cities, one in every three new cars sold is electric. While promoting the growth of a local supply chain and domestic auto parts firms is commendable, it raises questions about the environmental impact, especially in a market dominated by motorbikes.

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