Tata/Renesas: Indian electric cars as the new hedge

A global shift towards battery-powered vehicles makes for interesting bedfellows. India’s biggest electric car maker and Japanese chipmaker Renesas are partnering to design and develop semiconductors. Amid a global shortage of auto chips, the benefits for Tata Motors are clear. But Renesas has more to gain long term.

Although electric vehicles have far fewer parts than typical automobiles, their dependence on technology may well be greater. Renesas will collaborate with Tata Motors on developing next-generation automotive technology including driver-assistance and 5G wireless systems.

The current global chip shortage means Renesas has the Indian government on its side. Overreliance on Taiwanese and South Korean chipmakers has prompted India to offer $10bn in incentives to lure more chip manufacturing into the country to build local supply chains.

Both companies could use a lift. Shares of Renesas and Tata are both down more than 15 per cent this year. Renesas trades at just 9 times forward earnings, well below global peers such as TSMC.

Tata needs closer links to chipmakers. Its earnings suffered last year due to chip supply disruptions. This year, shortages have continued forcing output cuts of 15 per cent in April. It has little leeway to pay up for components given razor-thin operating margins, which fell to below 1 per cent in the year to March.

For Renesas the potential is growth. Both Japan and India, despite having large auto markets, are both late in the shift to electric vehicles, leaving ample room for growth. The electric car market in India is expected to be a $200bn industry by 2030. It could help Renesas hedge its reliance on Japan’s automakers which have yet to fully embrace electric cars.

The two markets share a key characteristic. Unlike the US where large trucks and sport utility vehicles dominate, Japan’s auto market depends on sales of small and cheap cars. Mini-vehicles, fitted with engines under 660cc, account for nearly 40 per cent of all new local car sales.

Price matters. Both Nissan and Mitsubishi have developed ultra-small electric cars priced under ¥1.5mn ($11,000) after subsidies. Similarly, in India price-sensitive buyers have lifted sales of electric two-wheelers by triple-digits in percentage terms last year.

New technologies and parts developed by Renesas for small electric vehicles in India could later be adapted for Japan. Long term this could reinvigorate the shares of both Renesas and Tata.