How lofty targets, missteps, failed EV policy spelt doom for Ola, Hero

Even as the domestic electric vehicle market is expected to witness a 28 per cent increase in growth, the top two players face an existential crisis.

Last week, Ola Electric let go of over a thousand workers while Hero Electric filed for bankruptcy. Ola's market share has now plummeted to around 33 per cent from 49 per cent. It was a negligible 2 per cent for Hero Electric from around 26 per cent before it filed for bankruptcy.

Why did they fail?

The struggle for survival for the high-profile Ola Electric, helmed by the flamboyant founder Bhavish Aggarwal, and for Hero Electric, owned by Vijay and Naveen Munjal, shows that both set for themselves unrealistic profitability targets. And with mismanaged operations and government policy failures, it turned out to be the perfect recipe for failure.

At the same time, it raises urgent questions about the sustainability of the government’s EV policy and how start-ups in the EV two-wheeler space, without the resilient power of the established players like TVS or a Bajaj Auto, built their business models around subsidies.

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Riding high

Not long ago, Ola Electric was riding high as the poster child of India’s EV revolution. Backed by marquee investors (including SoftBank) and led by Bhavish Aggarwal, the startup captured nearly one-third of India’s electric two-wheeler market in FY24. Its flashy Ola S1 scooters and “Futurefactory” promised to disrupt the two-wheeler landscape much like Tesla did for cars.

One of the former management committee executives of Ola Electric told The Federal on the condition of anonymity that Ola set unrealistic targets behind the hype that sowed the seeds of trouble.

Internal projections show Ola had expected to sell 882,000 scooters in FY2024 – a goal it later slashed by two-thirds to 300,000 as reality set in. The company had to delay its profitability goal by a full year as well, after government subsidy cuts upended its economics.

Before the subsidies were reduced, Ola ambitiously forecast a first-ever operating profit of $220 million in FY24. It is now on track to post a loss instead.

Realities sink in

By late 2024, the gap between Ola’s aspirations and performance had grown too large to ignore. The company undertook massive layoffs – cutting around 400-500 employees (about 10 per cent of its workforce) – in a bid to trim costs. This was followed by over 1,000 workers being laid off early this month.

The layoffs, which hit manufacturing and supply-chain teams hardest, came amid a steep market share decline and mounting customer complaints. Ola’s share of the electric two-wheeler market plunged from 49 per cent in Q1 FY25 to just 33 per cent in Q2.

Operational missteps

Ola’s operational missteps have compounded these external pressures. Owners of the Ola S1 have frequently flagged issues with software glitches, battery performance and even wheels locking up. Service infrastructure struggled to keep pace with the sales surge, leading to long wait times for repairs – a stark disadvantage from competitors like TVS and Bajaj, which have decades-old service networks.

The Central Consumer Protection Authority (CCPA) even launched a probe into Ola Electric’s handling of customer complaints. (Such quality and service woes hurt Ola’s reputation just as new alternatives hit the market).

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Mounting losses

Financially, Ola’s first post-IPO results revealed distressing trends: a 43 per cent jump in net losses to Rs 495 crores in Q2 FY25 over the prior quarter and a 26 per cent sequential drop in revenue as demand slowed. Investor confidence nosedived – Ola’s stock is down over 50 per cent from its peak (eroding nearly Rs 38,000 crores in investor wealth) and trades far below its August 2024 listing price.

The company’s market cap shrank from an all-time high of Rs 69,000 crores to around Rs 31,000 crores by late 2024. In response, Ola is retrenching to a leaner model: shelving ambitious projects like its electric car programme and focusing on core two-wheeler products and battery R&D.

Aggarwal insists the company can “scale distribution” and improve margins in coming quarters, but the road ahead is undeniably steep. Ola must drastically enhance execution – fixing supply-chain kinks, expanding service centres and restoring consumer trust – to regain its footing in an increasingly crowded e-mobility arena.

Hero Electric’s downfall

While Ola grapples with a self-inflicted slowdown, Hero Electric’s crisis has been even more dramatic, mainly from a clash with government policy.

Hero Electric was an early trailblazer in India’s EV two-wheeler space – the first company to sell e-scooters in India back in 2007. For years, it dominated the low-cost electric scooter segment with models like the Optima and Flash, and by 2021, it was the market leader in electric two-wheelers.

However, after allegations emerged that Hero Electric (among others) was misappropriating subsidies under the FAME-II incentive scheme, the company's fortunes took a sharp turn.

Subsidy row

The Faster Adoption and Manufacturing of Electric Vehicles (FAME) programme offered generous subsidies to EV makers, but only if they meet localisation targets (using at least 50 per cent made-in-India components). In late 2021 and 2022, whistleblowers alleged that several manufacturers were claiming subsidies without actually complying with these localisation norms.

A government investigation found Hero Electric in violation – it had indeed sourced critical components from overseas while availing subsidy funds. The fallout was devastating: in September 2022, the ministry of heavy industries banned Hero Electric (and six other OEMs) from the FAME subsidy portal.

Effectively, Hero Electric could no longer offer subsidies on its scooters, instantly making its products Rs 10,000-20,000 more expensive than competitors’ models that still enjoyed the incentive.

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Devastating impact

Unsurprisingly, sales “precipitously declined”, and Hero’s once-bustling factories fell silent for months. The company’s CEO, Sohinder Gill, admitted they were in “dire straits”, unable even to meet operating expenses after the subsidy suspension.

The financial impact was catastrophic. Hero Electric reportedly lost over Rs 2,000 crores in revenue due to being delisted from the subsidy programme. It had already passed on the subsidy benefits as discounts to customers; so Hero was left with a massive hole in its books when the government clawed back those funds.

The ministry ordered Hero Electric to refund more than Rs 100 crore in wrongly claimed subsidies, plus interest – a payment the company simply could not afford.

Hero Electric tumbles

By late 2023, Hero Electric’s sole manufacturing facility had been shuttered for over a year due to the cash crunch, and its dealer network was collapsing under unpaid dues. Dealers claimed Hero owed them between Rs 400–500 crore for undelivered orders and refunds.

The crisis spiralled into a legal battle: suppliers like Metro Tyres, unpaid for components, dragged Hero to the National Company Law Tribunal. In December 2024, NCLT admitted an insolvency plea against Hero Electric after it defaulted on just Rs 1.85 crores of dues to the tyre maker.

The tribunal found Hero’s defences “baseless” and noted the company had shown no plausible plan to clear even small debts.

More trouble

Around the same time, the Serious Fraud Investigation Office (SFIO) raided and sealed Hero’s Gurugram office, probing the subsidy misuse allegations. It was a stunning fall from grace for a storied EV company that once led the market.

Internal missteps certainly played a role in Hero Electric’s downfall. Critics argue the company over-relied on government largesse, building its business model around subsidies while neglecting to invest in domestic supply chains.

When FAME-II rules tightened, Hero was unprepared to localise critical parts like battery cells or motors, unlike some competitors who had started aligning with the Phased Manufacturing Programme.

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Management failures

Hero Electric’s management also appeared slow to course-correct – even after the subsidy freeze, it struggled to raise fresh capital quickly. In November 2023, Hero Electric was frantically seeking Rs 550 crores from investors and lenders to “fight a working capital crunch” and restart operations. It offered up land as collateral to secure loans.

But these efforts came too late to prevent insolvency. By FY24, Hero Electric’s market share had dwindled to near zero, overtaken by new entrants and legacy rivals. In contrast, just a year prior in FY23, Hero Electric had around a 6 per cent share, which evaporated after the FAME ban. The company now faces the prospect of liquidation or a takeover under bankruptcy proceedings.

It’s a cautionary tale of how strategic missteps and regulatory non-compliance can sink even a first-mover in a booming market. As one industry observer noted, Hero Electric is “now staring down the barrel of a gun”. (It’s only hope for revival may lie in a rescue by a larger player or a drastic restructuring of its debts and operations.)

Policy, industry challenges

The twin crises at Ola and Hero Electric cannot be understood in isolation from the policy environment and broader industry challenges. Government actions – from altering subsidy schemes to enforcing localisation – have profoundly impacted India’s EV two-wheeler landscape, sometimes in unforeseen ways.

A pivotal moment came in May 2023 when the Central government announced an abrupt reduction in FAME-II subsidies for electric two-wheelers. Starting on June 1, 2023, the per-scooter incentive was slashed from Rs 15,000 per kWh to Rs 10,000 per kWh, and the subsidy cap was lowered from 40 per cent of the vehicle’s cost to 15 per cent.

This steep cut sent shockwaves through the market. With buyers no longer getting the hefty discounts, companies hiked e-scooter prices by Rs 10,000-30,000 overnight.

The subsidy core

As demand nosedived, monthly electric two-wheeler sales crashed by over 55 per cent from May to June 2023. Industry-wide registrations fell from 104,000 units in May to just 45,000 in June (the lowest in a year). Year-on-year growth, which had been a triple-digit 147 per cent in May (boosted by a pre-cut buying frenzy), collapsed to a meagre 3 per cent in June. The policy change left manufacturers with bloated forecasts and inventories without a long lead time or phased tapering.

Ola Electric, for instance, initially dismissed the subsidy cut as a “short-term blip”, only later to slash its sales targets by more than half and push back its profit breakeven. The disruption also hit smaller EV startups hard, leading some to scale down or exit. The subsidy rollback – aimed perhaps at stretching the government’s EV fund or curbing overspending – contributed to instability in a nascent but fast-growing market.

Another external challenge has been the government’s drive to enforce localisation and root out the misuse of subsidies. While justified mainly in principle, implementing FAME-II compliance checks proved rocky.

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Lack of clarity

Companies like Hero Electric and Okinawa (another major EV maker) were found flouting the 50 per cent localisation rule, prompting the ministry to withhold their subsidy reimbursements starting in 2022. Though necessary to ensure accountability, the ensuing investigations and fund clawbacks pushed these companies to the brink (as seen with Hero Electric).

Policy consistency and clarity have sometimes been lacking – for example, some firms claimed confusion over whether specific components (like chargers or software) counted as “local” under the rules.

The government’s hard line – demanding a refund of all past subsidies if non-compliance was found – left no room for a grace period to become compliant. “The clawback has hurt a lot of companies that had already passed on the subsidies as discounts to consumers,” noted Sohinder Gill of the EV industry association.

Freeze in subsidies

In Hero Electric’s case, the freeze on subsidies spanned many months with protracted audits, effectively choking its cash flow even as it tried to become compliant. Timing and coordination of policies have also posed challenges.

The localisation push under FAME and the parallel Production-Linked Incentive (PLI) scheme for battery manufacturing are laudable long-term initiatives – aimed at making India self-reliant in EV tech – but firms like Ola struggled to meet the aggressive timelines.

Ola Electric recently received a government notice for missing a key milestone in setting up its battery gigafactory under the PLI scheme, exemplifying how difficult ramping up local cell production can be.

Industry’s future

Safety and quality regulations are another external factor: after a series of e-scooter fire incidents in 2022, authorities increased scrutiny on battery standards, forcing manufacturers to redesign battery packs – a necessary step, but one that added cost and complexity for OEMs.

Were the government’s actions necessary corrections or disruptive overreaches? The answer lies in balance. Few would disagree that subsidy abuse had to be stopped – public funds must spur genuine manufacturing, not opportunistic imports. The stricter enforcement has nudged the industry to build deeper supply chains in India, yielding benefits in the long run.

Additionally, reducing subsidies was always part of the plan as EV adoption grew (to avoid market distortion and fiscal strain). However, the suddenness of policy shifts left companies little time to adapt. A more gradual tapering of incentives or a clear roadmap for localisation compliance might have prevented the shock that dented consumer confidence.

Stable policy needed

Even the government’s EV adoption targets have been missed partly due to these changes – India aimed for 2.3 million e-two-wheelers in FY24 as per NITI Aayog’s roadmap. Still, the actual numbers will fall far short (“Sudden tapering of subsidies is one factor adding to the shortfall,” Gill of SMEV observed bluntly.) In hindsight, better consultation between policymakers and industry could have smoothed these transitions.

A stable policy environment – consistent incentives, transparent rules and speedy resolution of compliance issues – will be critical to nurture the still-maturing electric two-wheeler market in India.