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Japanese vehicle maker jumps into microfinance in India

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An electric vehicle exhibition was held in India’s capital of New Delhi in early August. While many domestic companies had their own displays, people packed into Terra Motors’ booth, where alongside its vehicles the company showed off the services of the financial business.

At the end of July, just before the exhibition, Terra Motors established Terra Finance in India as a financial subsidiary. “Our main target is low-income earners, so financial support is essential,” said Terra Motors CEO Akihiro Ueda at the exhibition center.

Terra Motors’ mainstay electric three-wheeled vehicles have a maximum speed of 25 kph and can carry four passengers plus the driver. Taxis and other commercial transport vehicles are in demand, but the high price of about $1,800 creates a bottleneck. According to Terra, driving a three-wheeled taxi can earn a person several thousand dollars a year, but nearly half of India has an annual household income of less than $5,000. Many people do not have the money for an initial 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 earnings as cab drivers.

Major Japanese manufacturers that have expanded into India in the past, like Suzuki and Honda, have mainly provided loans through local institutions. “There are already local financial institutions that specialize in this field,” said an employee at a major Japanese automaker. “We decided that we should focus on product development, rather than going to the trouble of providing 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 leads the financial operation, and a local consultant noted that it is rare for a Japanese manufacturer to be so involved in the financial business.

Terra Motors was founded in 2010 by Chairman Toru Tokushige, who originally worked at a Japanese insurance company before moving to a venture support company in the U.S. The company developed its electric two- and three-wheeled vehicle businesses, keeping its headquarters in Japan while focusing on growing its business in emerging countries in Asia. Ueda, who took over as president in 2019, came from Sharp, and Chief Technology Officer Masanori Takahashi came from Honda.

The company’s philosophy is to solve issues that affect society, like 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 Honda-affiliated parts manufacturer, shifting its business expansion into high gear.

Electric vehicles have fewer parts than their gasoline-powered counterparts. EV companies do not need to maintain a vertically integrated industrial pyramid like other major Japanese makers, and it is believed that a horizontal distribution of labor will offer more opportunities for startups.

Gasoline cars account for the majority of the Indian market, but the government is pushing electrification subsidies and other measures. India has a huge trade deficit because of oil imports, and serious air pollution plagues its cities, especially the capital. Electric vehicles are expected to make up 30% of the market by 2030. Terra Motors expects the market for three-wheeled vehicles, currently about 600,000 units in size, to gradually shift from gasoline to electric vehicles.

Terra Motors already has more than 250 distributors in India and sells more than 10,000 electric three-wheeled vehicles per year. According to audit firm KPMG, India’s electric three-wheel market is 90,000 units. There are no official statistics from industry groups, but Terra Motors estimates that it has the highest market share. The company says it was able 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 asked 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 relying entirely on local financial institutions meant “the speed of business promotion and how we handle risks was different, making it difficult for us to control the business and promote it how we wanted.”

Auto sales in India, including three-wheeled vehicles, had hit the brakes even before the pandemic. One reason was the struggling financial sector. In India, lending to those with poor credit was widespread, but from 2015 the Reserve Bank of India (RBI), the central bank, under then-Gov. Raghuram Rajan began to tighten bank inspections. The ratio of nonperforming loans, which had been hovering around 4%, jumped to 10%, mainly at state-run banks. Banks responded by hitting the brakes on auto loans.

In the place of banks, lending by nonbanks, which do not consider borrowers’ credit history, is on the rise. But in 2018, major nonbank lender Infrastructure Leasing & Financial Services, which had received funding from companies like Orix, defaulted on its debt. “Non-banks’ cash flow got worse, which also hit home loans and auto loans,” according to Mizuho Research and Technologies.

With the outbreak of the new coronavirus in 2020, cities entered strict lockdowns to control the spread of infections. However, these lockdowns 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 more than 400,000 new infections per day, and many car dealerships had to close. In June, the central bank revised downward its real GDP growth rate to 9.5%.

The number of new infections has dropped to about 40,000 per day, but the situation remains unpredictable. “Infections are increasing in some areas,” said RBI Gov. Shaktikanta Das in an August speech. “We need to be alert to the possibility of a third wave.” The central bank’s consumer confidence index is currently at a record low.

These issues in the financial sector and the broader economic slowdown have made it “particularly difficult for low-income earners” to get loans for Terra Motors’ electric three-wheeled vehicles, said Ueda. The industry group for electric vehicles in India also noted that the slowdown in loans 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 stresses that it does not intend to recklessly hand out loans. In an effort to cut down on bad loans, a special internet-connected device is embedded in the vehicle body to remotely manage the battery and collect driving data.

“We’ll be able to follow up” with taxi drivers “with a ‘caution alert’ if their operation rate drops or they deviate from their usual business route,” said Ueda. If borrowers fail to repay, their vehicles will stop operating. The system can be used to recover and resell vehicles in case borrowers default.

Terra Motors’ future challenge is to establish distinctiveness. The company currently relies on local partners to develop and analyze its smart devices. “We plan to conduct our own analysis in the future,” said Ueda. The company also needs to develop its own technologies, backed by patents, to ensure its competitors cannot copy its business model.

The company is also focused on building relationships with buyers. “The idea of repayment varies greatly depending on region and culture,” said an official at a company engaged in vehicle sales in Asia. “In some cases, we need to explain ‘this is what a loan is’ at the outset.” 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 enhance measures to improve its customers’ own businesses and incomes. It is currently considering partnerships with dispatch services. Many people in India call for cabs using ride-hailing apps, like Uber in the U.S. Many in India’s multilingual society do not speak English, and apps allow them to input their destination regardless of language. Apps also make it easier for cabs to find customers, rather than cruising and searching for them.

According to Terra Motors’ calculations, drivers registered with dispatch services make 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 signs, it is possible to display multiple advertisements that vary according to the vehicle’s location and the time of day. Terra Motors includes the word “internet” in its company vision, “building new social infrastructure through transportation and the internet,” because it is considering using its electric three-wheelers for digital business.

Of course, these creative efforts do not eliminate risks. “In cases of small loan businesses targeting the poor, there is a risk that the lender will lose their income all at once because of macroeconomic policies, or disaster like floods,” noted one local analyst.

The Indian government’s electrification strategy also requires attention. The government is clearly eager to promote electric vehicles, but it has changed course before. It took major automakers by surprise when it suddenly announced that all vehicles would be electric by 2030. It has provided subsidies for electric vehicles, but some are concerned that policy could once again change without warning.

Can electric vehicles raise low earners’ incomes while also bringing a business profit in India’s massive market? Terra Motors intends to find out whether its business model can succeed in this major emerging market. (Nikkei Asia)

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