Transforming Traditions: How Bharat Forge and Castrol India Are Navigating the EV Revolution

In an era where technology rapidly evolves and disrupts established industries, companies that once dominated their sectors are now facing existential challenges. From the rise of digital platforms like Airbnb, which in just a decade has amassed an inventory of over 4.5 million rooms (outpacing Marriott’s century-long expansion), to the personalized experiences offered by Netflix to its 150 million subscribers, the impact of technological innovation is evident. Yet, as we delve into the industrial sector, particularly the automotive and related industries, we see a similar wave of transformation, driven not only by technology but also by climate change and geopolitical factors.

One of the most significant shifts currently underway is the transition from internal combustion engine (ICE) vehicles to electric vehicles (EVs). This change is more than just a trend; it’s a seismic shift in how the automotive industry operates. The implications are profound, especially for auto ancillary companies that have long been dependent on the ICE value chain. The move from traditional ICE components to EV components, such as e-drive modules and systems, is reshaping the industry landscape.

A striking illustration of this shift is the comparison between the complexity of an ICE drivetrain and that of an EV. An ICE drivetrain typically comprises around 2,000 moving parts, whereas an EV drivetrain often has just about 20. This dramatic reduction in complexity underscores the need for auto ancillary companies to adapt or face obsolescence. The choices are clear: invest in research and development (R&D) to cater to the EV market or diversify into emerging business models.

Bharat Forge: A Strategic Pivot into Defence

Bharat Forge, a leading player in the auto ancillary sector, has been quick to recognize the need for diversification. While many of its peers are still grappling with the uncertainties surrounding the EV transition, Bharat Forge has strategically pivoted towards the defence sector—a move that began over a decade ago.

Between 2010 and 2022, Bharat Forge invested over ₹7 billion in developing a range of defence products, including weapons, guns, armored vehicles, and ammunition. For years, these investments did not yield significant returns due to restrictive government policies on defence procurement. However, the landscape began to change in 2014, when the Indian government introduced policies to encourage private sector participation in defence production. The ban on defence imports, coupled with these new policies, provided Bharat Forge with the Impetus it needed to scale up its defence operations.

Today, Bharat Forge is reaping the benefits of its early investments in the defence sector. While the defence vertical currently accounts for less than 10% of the company’s total revenue, the management is optimistic about its growth potential, projecting that it could contribute up to seven times its current share by 2030. This diversification has not only mitigated the risks associated with the EV transition but has also positioned Bharat Forge as a key player in India’s burgeoning defence industry.

Castrol India: Reinventing for the Data Center Boom

Similarly, Castrol India, a stalwart in the global lubricant industry, has faced challenges due to the rise of EVs. Castrol, which has been a key supplier of lubricants for ICE vehicles since 1910, has seen its market shrink as the automotive industry shifts towards electrification. The threat of becoming irrelevant, much like Kodak did with the advent of digital photography, loomed large.

However, Castrol India has taken proactive steps to avoid this fate. The company has identified data centers as a new and significant growth avenue. With the rapid expansion of data centers driven by the increasing demand for cloud services, artificial intelligence (AI), and big data, there is a growing need for advanced cooling solutions. Data centers, which house vast amounts of powerful hardware, generate significant heat, making effective thermal management crucial.

Castrol India is leveraging its expertise in fluid technology to develop innovative products tailored for data center cooling. This strategic pivot is timely, as data centers are projected to become some of the largest consumers of energy globally. By focusing on liquid cooling solutions, which are more efficient than traditional air-cooling methods, Castrol India is positioning itself at the forefront of a rapidly growing industry. The company has made significant investments in R&D to support this new venture, recognizing the potential for long-term growth.

India’s data center capacity is expected to double by 2026, with major investments from global giants like Amazon Web Services (AWS), Walmart, and Google, further underscoring the strategic importance of this sector. As the demand for effective cooling solutions intensifies, Castrol India is well-placed to capitalize on this emerging opportunity.

The Future of Auto Ancillary Companies in the EV Era

The stories of Bharat Forge and Castrol India offer valuable lessons for other companies in the traditional ICE automobile ecosystem. While the transition to EVs presents significant challenges, it also offers new avenues for growth and diversification. Companies that are willing to adapt, innovate, and pivot towards emerging industries stand a better chance of not only surviving but thriving in this new era.

As the automotive industry continues to evolve, it is crucial for investors and industry players alike to recognize the potential of companies that are successfully navigating these changes. Bharat Forge’s strategic shift into defence and Castrol India’s venture into data center cooling are prime examples of how traditional industries can reinvent themselves and tap into new growth opportunities.

In conclusion, while the rise of EVs may spell the end for some traditional ICE players, it could also pave the way for the next generation of industry leaders. For investors, this means staying vigilant and identifying companies that are not just surviving the transition but are positioned to lead in the new landscape. Bharat Forge and Castrol India, with their forward-looking strategies, could very well be among the multibaggers of the future.