**Refining Strategic Sourcing** I'm currently deep in refining our strategic sourcing approach. My focus is on establishing robust, long-term supplier relationships for critical EV battery components, ensuring both cost-effectiveness and supply chain resilience. This involves detailed market analysis and scenario planning to mitigate potential disruptions and secure competitive pricing. **Developing Partnership Proposal** I'm now focused on formalizing a joint venture proposal for the CPO. This initiative aims to localize EV battery pack assembly by partnering with a Chinese supplier and an Indian electronics firm, ensuring compliance with Indian regulations and driving cost efficiencies. **Analyzing JV Economics** My current focus is on the financial implications of the proposed joint venture. I am meticulously analyzing the cost breakdown for imported versus locally assembled battery packs, scrutinizing the projected volumes and the proposed ownership split to ensure a viable and profitable partnership for localizing EV battery pack assembly in India. **Calculating Cost Savings** I am now meticulously calculating the specific cost savings associated with localizing EV battery pack assembly. My analysis shows a substantial reduction per unit and significant annual savings, reinforcing the economic viability of the proposed joint venture. **Structuring Partnership Document** I am now organizing the key sections for the joint venture proposal, focusing on the strategic context, proposed governance, operational model, and detailed financial analysis, including a 5-year projection of cost savings and a risk mitigation matrix. **Finalizing Proposal Details** I am now consolidating all information into a comprehensive 2-3 page document, ensuring clarity on financial projections, including exact INR figures and multi-crore macro values. I'm also refining the tone for a C-suite audience and outlining clear, actionable next steps for CPO approval, while meticulously double-checking all cost calculations. **Calculating Unit Savings** I've completed detailed calculations for unit cost savings, factoring in localized assembly and overheads. My analysis confirms significant savings per unit and supports the projected annual and five-year cost reductions for the CPO. **Quantifying 5-Year Savings** I've finalized the comprehensive 5-year savings projection, detailing total projected costs for both baseline and localized assembly. My calculations confirm substantial savings, amounting to over ₹5,715 crores for the CPO, and I've integrated this into the broader regulatory context, explaining how FAME II and PMP incentives are met through the proposed SKD/CKD approach. **Analyzing Control and Risks** I'm now focused on structuring the ownership and mitigating risks for the joint venture. I plan to secure majority control to protect our intellectual property while leveraging EvTronics' local infrastructure and expertise, noting the FDI regulations and potential future localization sensitivities such as forex. **Assessing Forex Exposure** I am assessing the foreign exchange exposure, noting that child parts in Phase 1 are still susceptible to USD/INR shifts, impacting unit costs. I'm also looking at how customs duty arbitrage and future component localization will further reduce this exposure and its financial implications. **MEMORANDUM / STRATEGIC SOURCING PROPOSAL** **TO:** Chief Procurement Officer (CPO) **FROM:** Senior Manager, EV Battery Sourcing **DATE:** October 24, 2023 **SUBJECT:** Strategic Proposal: Localisation of EV Battery Pack Assembly via Joint Venture (EV Batteries Inc. & EvTronics) --- ### 1. EXECUTIVE SUMMARY Following the successful launch of our three new four-wheeler electric vehicle (EV) models, securing a cost-competitive and regulation-compliant battery supply chain has become our highest procurement priority. Under the Government of India’s **Faster Adoption and Manufacturing of Electric Vehicles Phase II (FAME II)** scheme and the **Phased Manufacturing Programme (PMP)**, progressive Domestic Value Addition (DVA) is mandatory. Continued reliance on importing Completely Built Unit (CBU) battery packs from our Chinese supplier, **EV Batteries Inc.**, risks the loss of critical demand subsidies and exposes us to punitive customs duties, severely undermining our retail pricing competitiveness. While EV Batteries Inc. declined to establish a standalone manufacturing facility in India due to conservative 5-to-10-year standalone volume projections, our sourcing team has structured a viable alternative: a **Joint Venture (JV) between EV Batteries Inc. (51%) and our domestic electronics partner, EvTronics (49%)**, operating out of Delhi. Under this model, EV Batteries Inc. will supply battery child parts, and EvTronics will execute local pack assembly. For a projected demand of **110,000 units per year over 5 years (550,000 units total)**, localising assembly and overheads alone reduces unit pack cost from **INR 830,000 (USD 10,000)** to **INR 726,090 (USD 8,748)**—a **12.52% reduction** in total pack cost and an **83.46% reduction** in assembly and overhead expenses. This generates **INR 103,910 in savings per battery pack**, translating to **INR 11,430,100,000 (INR 1,143.01 Crores) annually** and **INR 57,150,500,000 (INR 5,715.05 Crores) over the 5-year horizon**. --- ### 2. STRATEGIC CONTEXT & REGULATORY IMPERATIVE India’s regulatory architecture uses a carrot-and-stick approach—combining FAME II demand incentives with PMP-linked Basic Customs Duty (BCD) escalations—to transition the domestic EV ecosystem from import dependency to self-reliance. ``` [Phase 1: Yrs 1-2] ➔ [Phase 2: Yrs 3-5] ➔ [Phase 3: Yrs 5-9] ➔ [Phase 4: Yr 9+] Local Assembly Pack, Motor, VCU Inverters, BMS & Cells, Semicon & of Packs & EVs & OBC Localised Thermal Systems Advanced Tech ``` #### PMP Regulatory Mandates for Four-Wheeler EVs: * **Phase 1 (Years 1–2):** Local assembly of electric vehicles, battery packs, and motor controllers. * **Phase 2 (Years 3–5):** Deeper localisation of battery packs, electric motors, vehicle control units (VCUs), and on-board chargers (OBCs). * **Phase 3 (Years 5–9):** Localisation of critical power electronics, including traction inverters, Battery Management Systems (BMS), and thermal management units. * **Phase 4 (Year 9 Onwards):** Full localisation of advanced, capital-intensive technologies, including lithium-ion battery cells, semiconductors, and complex electronic assemblies. **The Strategic Bottleneck:** Currently, EV Batteries Inc. ships fully assembled battery packs from China at USD 10,000 (INR 830,000) per unit. While technically reliable, this CBU import model violates Phase 1 and Phase 2 PMP thresholds. Because EV Batteries Inc. views our standalone 5–10 year volume as insufficient to underwrite a greenfield gigafactory in India, a collaborative partnership with an established local tier-1 supplier is essential to bridge the capital and operational gap. --- ### 3. PROPOSED PARTNERSHIP & SOURCING MODEL To de-risk market entry for EV Batteries Inc. while securing immediate PMP compliance for our EV portfolio, we propose a structured Joint Venture with **EvTronics**, our trusted domestic automotive electronics supplier. #### A. Joint Venture Governance & Equity Structure * **Equity Split:** **49% EvTronics : 51% EV Batteries Inc.** * **Location:** Delhi-NCR (leveraging EvTronics’ existing industrial footprint, utility infrastructure, and proximity to northern automotive logistics corridors). * **Division of Responsibilities:** * **EV Batteries Inc. (51% Lead Partner):** Retains majority equity to safeguard proprietary intellectual property (IP). Responsible for pack design architecture, technical oversight, manufacturing process validation, quality assurance protocols, End-of-Line (EOL) testing parameters, and the uninterrupted supply of tier-2 child parts. * **EvTronics (49% Operating Partner):** Leads local factory operations in Delhi, assembly line execution, workforce management, local statutory and environmental compliance, domestic logistics, and supply chain coordination with our vehicle assembly plant. #### B. Sourcing & Operational Flow Under Phase 1 of the proposed sourcing model, the bill of materials (BOM) is bifurcated into imported child components and localised value-add operations: ``` +-------------------------------------------------------------------+ | EV BATTERIES INC. (Manufacturing, China) | | Supplies Child Parts: Cells, Housing, Thermal, BMS, Connectors | | (Cost: USD 8,500 / INR 705,500) | +-------------------------------------------------------------------+ │ ▼ (CKD/SKD Import to India) +-------------------------------------------------------------------+ | JV FACILITY: EVTRONICS & EV BATTERIES INC. (Delhi) | | • Local Pack Assembly (INR 20,000) & Overheads (INR 590) | | • Technical Oversight & Quality Sign-off by EV Batteries Inc. | +-------------------------------------------------------------------+ │ ▼ (Just-in-Time Local Delivery) +-------------------------------------------------------------------+ | OUR EV MANUFACTURING PLANT (India) | | Total Landed Cost: INR 726,090 per Battery Pack | | Volume: 110,000 Units/Year (3 EV Models) | +-------------------------------------------------------------------+ ``` --- ### 4. FINANCIAL ANALYSIS & COST-SAVING POTENTIAL The financial evaluation below isolates the impact of localising battery pack assembly and factory overheads in Delhi while holding child part costs constant at current pricing, assuming a fixed exchange rate of **1 USD = 83 INR** and an annual production volume of **110,000 units over 5 years (550,000 units total)**. #### A. Per-Unit Cost Breakdown (Current CBU Import vs. Proposed Local Assembly) | Cost Component | Current CBU Import (USD) | Current CBU Import (INR) | Proposed Localised Model (USD Equiv.) | Proposed Localised Model (INR) | Unit Cost Variance / Savings (INR) | Cost Reduction (%) | | :--- | :---: | :---: | :---: | :---: | :---: | :---: | | **Child Parts** *(Cells, Housing, Thermal, BMS, Connectors)* | $8,500.00 | 705,500 | $8,500.00 | 705,500 | 0 | 0.00% | | **Assembly Costs** | $1,300.00 | 107,900 | $240.96 | 20,000 | **87,900** | -81.46% | | **Overheads** | $200.00 | 16,600 | $7.11 | 590 | **16,010** | -96.45% | | **Sub-Total (Assembly + Overheads)** | **$1,500.00** | **124,500** | **$248.07** | **20,590** | **103,910** | **-83.46%** | | **Total Battery Pack Cost** | **$10,000.00** | **830,000** | **$8,748.07** | **726,090** | **103,910** | **-12.52%** | #### B. Aggregate Spend & Savings Projection (1-Year and 5-Year Horizon) | Financial Metric | Annual Impact (110,000 Units) | 5-Year Cumulative Impact (550,000 Units) | | :--- | :---: | :---: | | **Baseline Spend (Current CBU Import)** | INR 91,300,000,000 *(₹9,130.00 Cr)* | INR 456,500,000,000 *(₹45,650.00 Cr)* | | **Proposed Spend (Localised Assembly)** | INR 79,869,900,000 *(₹7,986.99 Cr)* | INR 399,349,500,000 *(₹39,934.95 Cr)* | | ** Savings from Assembly Localisation** | INR 9,669,000,000 *(₹966.90 Cr)* | INR 48,345,000,000 *(₹4,834.50 Cr)* | | ** Savings from Overhead Localisation** | INR 1,761,100,000 *(₹176.11 Cr)* | INR 8,805,500,000 *(₹880.55 Cr)* | | **Total Net Cost Savings** | **INR 11,430,100,000 *(₹1,143.01 Cr)*** | **INR 57,150,500,000 *(₹5,715.05 Cr)*** | #### C. Financial Sensitivities & Future Localisation Considerations While the analysis above holds child parts fixed at INR 705,500 (USD 8,500), several financial sensitivities will influence total cost of ownership (TCO) as the JV matures: 1. **Foreign Exchange (Forex) Sensitivity:** Localising assembly immediately converts USD 1,500 per pack of USD-denominated cost into INR, reducing our annual forex exposure by **USD 165 Million (INR 13,695,000,000)**. However, the remaining USD 8,500 in child parts remains exposed to currency fluctuation. Every **±1 INR** movement against the USD shifts unit pack cost by **±INR 8,500** (an annual impact of **±INR 935,000,000**). Accelerating Phase 2 and Phase 3 component localisation is essential to hedge this residual exposure. 2. **Customs Duty & Freight Arbitrage:** Importing disaggregated child parts under Semi-Knocked Down (SKD) or Completely Knocked Down (CKD) tariff codes typically attracts lower Basic Customs Duty (BCD) than CBU battery packs. Furthermore, shipping individual cells and nested housings yields higher container volumetric density than shipping fully assembled packs, offering an estimated **2% to 4% logistics savings** not yet baked into the baseline numbers. 3. **Downstream BOM Deflation (Phases 2 & 3):** In our current baseline, non-cell child parts (housing, thermal plates, BMS, high-voltage connectors) account for roughly 25%–30% of the USD 8,500 child part cost (~USD 2,100–2,550). As EvTronics localises BMS PCB assembly, wire harnesses, and aluminum extrusions in Years 3–5, we anticipate an additional **10%–15% cost reduction** on those sub-components, yielding a further **INR 18,000 to INR 30,000 in savings per pack**. 4. **Capex Amortization:** Initial capital expenditure for laser-welding lines, automated module assembly, and EOL cyclers at the Delhi plant will be incurred by the JV. Even if amortized across the 550,000 units via a piece-price markup, the massive gross savings of INR 103,910 per unit provides an exceptional margin of safety. --- ### 5. PHASED LOCALISATION ROADMAP To maintain uninterrupted eligibility for FAME II subsidies and comply with PMP schedules, the JV will execute a four-stage localisation roadmap aligned with government timelines: | Phase & Timeline | PMP Regulatory Requirement | JV Operational Focus (Delhi Facility) | Target Domestic Value Addition (DVA) & Sourcing Shift | | :--- | :--- | :--- | :--- | | **Phase 1**
*(Years 1–2)* | Local assembly of EVs, battery packs, and motor controllers. | • Setup Delhi JV assembly line & EOL testing.
• Import 100% child parts from EV Batteries Inc.
• EvTronics executes module-to-pack assembly. | **~15%–20% DVA**
Assembly & overheads fully localised in INR. | | **Phase 2**
*(Years 3–5)* | Localisation of battery packs, electric motors, VCUs, and OBCs. | • Localise mechanical pack housing (sheet metal/extrusions), busbars, and HV connectors via Indian tier-2 vendors.
• Localise cooling plates & structural trays. | **~30%–40% DVA**
Reduces imported child part bill by ~$800–$1,200/unit. | | **Phase 3**
*(Years 5–9)* | Deeper localisation of inverters, BMS, and thermal management units. | • EvTronics manufactures BMS hardware locally under EV Batteries Inc. license.
• Localise complete thermal management assemblies. | **~50%–60% DVA**
Only battery cells and specialized ICs remain imported. | | **Phase 4**
*(Year 9+)* | Full localisation: battery cells, semiconductors, complex assemblies. | • Transition cell sourcing to domestic ACC (Advanced Chemistry Cell) PLI gigafactories or expand JV into local cell manufacturing as volumes reach scale. | **>75%–85% DVA**
Full insulation from CBU/CKD import duties and forex volatility. | --- ### 6. STRATEGIC BENEFITS & RISK MITIGATION MATRIX #### A. Key Strategic Benefits * **Regulatory Compliance & Subsidy Protection:** Immediately satisfies Phase 1 PMP mandates, safeguarding FAME II demand incentives and avoiding punitive customs duty hikes on CBU battery packs. * **Substantial Cost Reduction:** Unlocks **INR 57.15 Billion (₹5,715.05 Crores)** in direct savings over 5 years, allowing us to price our three EV models aggressively to capture market share. * **Reduced Forex Exposure:** Eliminates USD 1,500 per unit (USD 825 Million over 5 years) from foreign exchange volatility by converting assembly and factory overheads to INR. * **Supply Chain Agility & Lead-Time Reduction:** Having final pack assembly and buffer stock in Delhi reduces replenishment lead times to our manufacturing plant, improves warranty servicing turnaround, and lowers working capital tied up in finished-pack sea transit. #### B. Key Risks & Mitigation Strategies | Risk Category | Risk Description | Severity | Mitigation Strategy | | :--- | :--- | :---: | :--- | | **Dependency on Imported Cells & Child Parts** | 100% of child parts (especially Li-ion cells) remain sourced from China in Phases 1–3, leaving us vulnerable to port bottlenecks, raw material spikes, or geopolitical trade disruptions. | **High** | • Mandate a **45-day safety stock** of child parts at the Delhi JV facility.
• Include dual-port routing clauses in supplier contracts.
• Initiate parallel qualification of domestic ACC-PLI cell suppliers for Phase 4 readiness. | | **Regulatory & FDI Clearance Delays (Press Note 3)** | Because EV Batteries Inc. is based in China and holds a 51% stake, the JV requires Government of India FDI approval under Press Note 3 (2020), which can delay incorporation. | **High** | • Structure an **Interim Contract Manufacturing Agreement (Technical Licensing)** where EvTronics owns the Delhi line 100% initially and pays a technical fee to EV Batteries Inc., transitioning to the 49:51 equity JV once FDI clearance is granted. | | **Coordination & Quality Complexity** | Splitting component manufacturing (China) and pack assembly (Delhi) introduces interface risks, potential quality defects, and warranty liability disputes. | **Medium** | • Station resident quality engineers from EV Batteries Inc. at the Delhi facility.
• Implement mirrored EOL automated test benches in Delhi linked directly to EV Batteries Inc.’s cloud telemetry.
• Define clear **Back-to-Back Warranty Indemnification** in the JV agreement. | | **Initial Capex & Volume Under-Absorption** | Setting up cleanroom module-to-pack assembly and laser welding in Delhi requires upfront Capex. Lower-than-projected EV sales (<110K/yr) could increase per-unit amortization. | **Medium** | • Design a modular, scalable assembly line in Delhi (phased in two 55K-unit lines).
• Negotiate a **Minimum Volume Commitment (MVC)** band (e.g., ±15% flexibility) rather than rigid take-or-pay penalties. | --- ### 7. RECOMMENDATIONS & NEXT STEPS The proposed 49:51 partnership between EvTronics and EV Batteries Inc. represents the fastest, lowest-risk pathway to achieve PMP compliance while capturing a transformative **12.52% unit cost reduction (INR 103,910/pack)**. **Recommended Action Plan for CPO Approval:** 1. **Approve Commercial Mandate (Week 1):** Grant formal approval to execute a tripartite Non-Binding Memorandum of Understanding (MoU) between our company, EV Batteries Inc., and EvTronics based on the 49:51 JV structure and the INR 726,090 unit price target. 2. **Initiate Dual-Track Legal & FDI Structuring (Weeks 2–4):** Engage corporate legal counsel to file for Press Note 3 FDI approval for the 49:51 JV while simultaneously drafting an interim Technical Assistance & Contract Manufacturing Agreement with EvTronics so Phase 1 timelines are not delayed by regulatory clearances. 3. **Joint Engineering & Capex Audit (Weeks 3–6):** Deploy a cross-functional team (Sourcing, Supplier Quality, and Battery Engineering) to EvTronics’ Delhi facility alongside EV Batteries Inc.’s technical leads to finalize plant layout, Capex amortization schedules, and quality validation gates. 4. **Lock in 5-Year Supply & Phase 2 Localisation Targets (Weeks 6–8):** Finalize the Long-Term Supply Agreement (LTSA) for 110,000 units/year, embedding contractual milestones to begin localising pack housings, thermal systems, and BMS assemblies by Q4 of Year 2.

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