Whalesbook
EV Makers Navigate Rising Costs and Supply Snags
Electric vehicle manufacturers are facing pressure from rising raw material prices and ongoing supply chain problems. Geopolitical instability, particularly events in West Asia, combined with high demand for components from the growing artificial intelligence (AI) sector, is creating a difficult situation for the automotive industry. Companies are reporting significant cost increases for essential materials like lithium-ion cells, rare earth magnets, and memory chips, leading to short-term profit squeezes and prompting them to plan price increases for consumers.
Specific Cost Pressures Mount
Manufacturers such as Bajaj Auto and Hero MotoCorp are experiencing substantial cost inflation. Bajaj Auto estimates commodity inflation could impact its costs by 3.5-4.0% for the March quarter, while Hero MotoCorp reported inflation in component costs in the high single digits. Ather Energy has also warned of short-term profit squeeze due to higher prices for commodities and electronic parts. Bajaj Auto's ability to meet demand has been reduced by 10-15% due to LPG shortages, manpower migration, and outbound logistics issues, only partly offsetting price hikes implemented in April. Hero MotoCorp has increased prices by about 2% across its products, but these adjustments don't fully cover the rise in input costs, including aluminum, steel, rubber, and plastics.
AI Demand Fuels Chip Price Surge
Demand for AI systems is directly affecting the automotive supply chain, especially for memory chips. Chipmakers are shifting production capacity to more profitable AI uses, causing substantial price increases for RAM and DRAM chips, with some prices rising two to fourfold. This diversion of resources by major chip producers like Samsung, SK Hynix, and Micron, which supply over 90% of DRAM, leaves the automotive sector, a smaller part of global DRAM revenue, with less bargaining power and higher costs. Wells Fargo analysts predict DRAM prices could rise by 70-100% in 2026, impacting vehicles with higher memory content, such as premium models and EVs.
Geopolitics Add to Material Costs
Beyond semiconductors, prices for battery materials like lithium, nickel, and cobalt, along with base metals such as aluminum and copper, have jumped. Lithium, for instance, has seen its price per kilogram triple recently.
Other Automakers Also Raising Prices
While the broader Indian auto sector is expected to grow 6-8% in 2026, supported by policy initiatives and improving demand, it is not immune to these cost pressures. Traditional automakers are also increasing prices; Hyundai Motor India expects to raise prices in May, citing rising commodity costs. Tata Motors, JSW MG Motor India, BMW India, Mercedes-Benz India, Audi India, and Honda Cars India have either implemented or announced price increases. Mahindra & Mahindra also raised prices on its internal combustion engine SUVs and commercial vehicles.
Key Financials: Bajaj Auto and Hero MotoCorp
As of May 2026, Bajaj Auto trades with a P/E ratio of approximately 29.7, indicating investors anticipate growth, while Hero MotoCorp has a P/E ratio around 18.4. Bajaj Auto's market capitalization is near ₹2.96 lakh crore, and Hero MotoCorp's is around ₹1.06 lakh crore.
Analyst Sentiment and Targets
Hero MotoCorp received a 'Buy' recommendation from Choice Institutional Equities with a target price of ₹6,000, citing strong Q4 FY26 results and a positive outlook. However, other analysts are more cautious. Prabhudas Lilladher downgraded Bajaj Auto to 'Hold' with a target price of ₹10,400. Citi maintains a 'Sell' rating on Bajaj Auto with a revised target of ₹9,300, and Morgan Stanley maintains an 'Underweight' rating with a target of ₹9,259, both noting pressures from commodity costs and stock valuations. Analyst consensus for Bajaj Auto's 2026 target price is around ₹9,800, implying moderate upside, while Hero MotoCorp's consensus target is between ₹5,000–5,500, suggesting potential upside.
Major Risks for EV Makers
Despite recent positive analyst ratings for Hero MotoCorp, significant risks remain for both manufacturers. The main vulnerability is the increasing cost of essential raw materials, particularly lithium, nickel, and cobalt for batteries, along with memory chips. India's heavy reliance on imported battery components and raw materials makes its EV sector vulnerable to global price swings and geopolitical disruptions, hurting competitiveness against global rivals. For memory chips, automakers are less important customers compared to AI data centers, facing higher prices and limited supply. The combined pressure from geopolitical events, like the West Asia crisis, and AI chip demand means companies may need to pass costs to customers via price increases, risking lower demand, especially in price-sensitive segments. Bajaj Auto's reliance on exports, particularly to price-sensitive regions, exposes it to currency swings and geopolitical instability. While Ather Energy is developing its upcoming EL scooter platform to depend less on expensive materials, this is a future plan that doesn't immediately ease current cost pressures.
Future Outlook
Looking ahead, EV manufacturers anticipate that ongoing fuel and gas supply issues may push more consumers towards electric vehicles for long-term savings. However, the immediate future for companies like Bajaj Auto and Hero MotoCorp will involve dealing with high commodity prices and supply chain uncertainties. The ability to effectively manage costs, implement strategic price adjustments without significantly lowering demand, and ensure stable component supplies will be key to maintaining profits and market position through the remainder of 2026 and beyond.