DECARBONIZING TRANSPORTATION & CREATING OPPORTUNITIES IN AFRICA

A Report by Cleantech Group explores the climate impact, sustainability, and venture benefits in a burgeoning trend

"Africa's electric two and three-wheeler market presents a tremendous opportunity for venture investment and sustainable economic growth. Supporting the dynamic start-ups driving this transition can catalyze sustainable development while decarbonizing the way transport is done in many African countries.”

-- Noah Ross, Senior Consultant at Cleantech Group

Interview with Noah Ross, Senior Consultant, Cleantech Group

By Suzanne Forcese

WT: Please introduce yourself to our viewers giving us a background of your research interests and areas of expertise at Cleantech Group.

Ross: I am a Senior Consultant at Cleantech Group. My passion for cleantech began during my MBA at IESE Business School, where I interned for an East African scale-up that focused on transforming waste into valuable inputs for the agriculture and food sector.

Since graduating, I have been working on diverse projects at Cleantech Group, such as ecosystem building in the UK and Spain, innovation challenges with corporations like Swire Pacific in Hong Kong, and market landscape studies, including this African E2&3W report.

My recent research has centered on leveraging public policy to accelerate cleantech adoption. I have been assisting governments in identifying the most effective tools to drive cleantech growth based on their country's innovation stage, sector-specific needs, and national climate or industrial objectives, while considering their limited budgets and resources.

WT: Cleantech Group is a research-driven company that helps corporates, public sector, investors and others, identify, assess, and engage with the innovative solutions and opportunities that are related to the world’s massive, and growing, environmental and climate challenges.

Please tell us about your recent research project regarding investment opportunities in Africa's Electric Two and Three-Wheeler Market and why this is of interest in addressing the Cleantech Group mission.

Ross: I recently led a research project analyzing the electric two and three-wheeler market in six key African countries, speaking with over 15 innovators, investors, foundations, and other stakeholders that play a crucial role in advancing this sector.

Our report dives into the incredible growth of electric two and three-wheelers across the continent. In just over a decade, the number of two and three-wheelers in Africa has skyrocketed from less than 5 million to nearly 30 million. And this is just the beginning! A McKinsey report projects that by 2040, half of all motorcycle sales in Africa will be electric. But based on my conversations with innovators on the ground, many believe this estimate is conservative given their current growth trajectories.

The potential for impact is immense. Electric two and three-wheelers not only reduce carbon emissions, but also create vital economic opportunities, especially for Africa's young population. Supporting the dynamic start-ups driving this transition can catalyze sustainable development while decarbonizing the way transport is done in many African countries.

By sharing data-driven insights on market trends, barriers, and opportunities, Cleantech Group hopes to shine a light on this sector's potential.

WT: For this report Cleantech Group partnered with Factor[E] Ventures. Factor[E]’s website states: ‘We use a thesis-based investment strategy to identify critical market needs in energy, agriculture, mobility, and water.’

Please tell us why this partnership aligned with Cleantech Group.

Ross: Factor[E] Ventures played a critical role in our research on Africa's electric two and three-wheeler market. As an active investor in this space, they brought invaluable local knowledge and contacts to the table. Factor[E]'s portfolio includes leading companies like Ampersand in Rwanda and Roam in Kenya, which provided key insights. Their extensive network of development partners and stakeholders across the African e-mobility ecosystem was instrumental in gathering on-the-ground information and helping us frame the report.

Cleantech Group's partnership with Factor[E] leveraged our complementary strengths. We brought expertise in researching cleantech innovation and investment trends, while Factor[E] contributed a deep understanding of local markets. This collaboration allowed us to produce a comprehensive analysis of the electric two and three-wheeler opportunity, identifying innovators, investors, trends, challenges, business models, and more.

WT: Tell us about the growth in the African motorcycle market and why this is happening.

Ross: The motorcycle market in Africa has experienced remarkable growth, with the number of motorcycles increasing from less than 5 million in 2010 to over 27 million by 2022. This surge is primarily driven by the widespread use of motorcycles for commercial activities, such as taxi services and delivery. In many African countries, up to 80-90% of motorcycles are used for income-generating purposes, making them a vital source of employment and entrepreneurship.

Within the world of motorcycles, electric motorcycles are experiencing a surge in demand due to their lower operational costs. Although electric motorcycles have a higher upfront cost compared to their internal combustion engine (ICE) counterparts, their operating costs are often 50% less or even lower, depending on the country's electricity and fuel prices. This means that over the medium- and long-term, the total cost of ownership for electric motorcycles is lower than that of gasoline-powered bikes.

Interestingly, even in countries with minimal policy incentives for electric vehicles, such as Tanzania, there has been a significant increase in demand for electric motorcycles solely based on their favorable economics. The lower operating costs make electric motorcycles an attractive option for commercial use, as they can help increase profitability for businesses and individuals relying on motorcycles for income generation.

WT: What challenges need to be addressed in the motorcycle market in Africa?

Ross: There are several key challenges that need to be addressed for the electric motorcycle market in Africa to grow and deliver on its potential for economic and environmental impact.

On the demand side, the high upfront cost of electric motorcycles remains a significant barrier. While the total cost of ownership of electric motorcycles is lower, the initial price tag can be prohibitive. Access to asset financing solutions will be critical to making these vehicles more affordable and accessible.

Another challenge is the lack of consumer incentives for electric vehicle adoption in many African countries. Governments can play a vital role in accelerating the transition to EVs by implementing supportive policies such as tax exemptions, subsidies, and reduced import duties for electric motorcycles and components.

On the supply side, access to finance is a major obstacle for African e-mobility start-ups looking to scale their operations. Despite growing demand, many companies face production backlogs due to limited working capital. Attracting more equity investors and innovative debt financing will be key to unlocking growth.

Additionally, the motorcycle market in Africa must grapple with infrastructure challenges such as limited charging networks and unreliable electricity supply in many areas.

Finally, there is a need to address skills gaps in the workforce around electric vehicle maintenance and repair. Upskilling mechanics and partnering with vocational training institutions will be important to ensure the long-term sustainability of the market.

WT: What are the exciting innovations that you are seeing? What are the advantages and disadvantages?

Ross: One of the most exciting innovations in Africa's electric two and three-wheeler space is the rise of battery swapping models. Companies like Ampersand in Rwanda and ARC Ride in Kenya are pioneering this approach, which involves selling vehicles without batteries and then leasing the batteries to customers through a network of swapping stations.

The advantages of battery swapping are compelling. Firstly, it significantly reduces the upfront cost of the vehicles, making them more accessible to a wider range of customers. Secondly, it mitigates concerns around range anxiety and long charging times, as riders can simply swap their depleted battery for a fully charged one in a matter of minutes. This model also presents new revenue opportunities for companies who own battery assets, such as providing energy storage services to the grid.

However, there are some disadvantages to consider. First and foremost, battery swapping results in higher recharging costs, as each swap can cost 2-3x more than charging vehicles at home. Battery swapping also requires a significant upfront investment for the innovators to build out the necessary infrastructure and maintain a large inventory of batteries. It also raises questions around standardization and interoperability between different vehicles and battery types.

Other noteworthy innovations include the development of locally designed and assembled vehicles tailored to African road conditions and use cases, as well as integrated financing and insurance offerings that make vehicle ownership more attainable and secure for riders.

WT: According to the report batteries are currently imported from China.

Ross: Most batteries used in electric two and three-wheelers in Africa are currently imported from China. While there are deposits of critical battery materials in some African countries like Ghana, developing and leveraging these resources to establish a local battery production value chain remains challenging. China has a significant technological and price advantage in the global battery market, making it difficult for African and other global players to compete.

WT: Are Innovators dependent on importing materials?

Ross: Innovators in the African electric vehicle space often combine imported components with locally-produced materials, depending on the country and the specific expertise available. For instance, while batteries may be sourced from China, vehicle frames may be produced locally (Kenya has excellent metallurgy and produces great local bike frames). Similarly, tires are often developed locally to enhance durability and adapt to local road conditions (as imported tires from other countries are often unable to handle the rougher road conditions).

WT: Are local and international actors beginning to collaborate on battery recycling and establish critical materials circular economy initiatives?

Ross: Efforts to promote battery recycling and circular economy practices for critical materials are gaining momentum through collaborations between local and international stakeholders. Organizations like Siemens Stiftung are focusing on projects incorporating recycled materials into electric vehicle production. However, ensuring a steady supply of recycled materials presents challenges in scaling these initiatives.

With the anticipated surge in electric vehicles, battery recycling is becoming increasingly important. Innovators are exploring ways to extend battery life through second- and third-life applications, such as repurposing them for stationary energy storage in solar PV systems. Some companies are testing battery recycling projects to prolong cell life or replace individual cells.

Electric vehicle manufacturers currently handle most battery recycling, with users selling or returning batteries to them. However, the absence of battery shredding facilities in sub-Saharan Africa hinders progress, as economically viable recycling requires a substantial volume. Collaboration between countries to establish centralized recycling facilities could offer a solution, but regulatory hurdles surrounding e-waste import and export must be overcome.

WT: What does the investment landscape look like?

Ross: The African electric two and three-wheeler investment landscape involves diverse actors, each contributing uniquely to the sector's growth. Venture capital firms like Factor[E], Equator, Persistent Energy Capital, and others provide crucial early-stage funding and strategic support to innovative start-ups, but the industry struggles to attract sufficient equity investment due to perceived high risks and unproven exits, which also limits debt financing.

Development finance institutions (DFIs) are active participants, but some believe they could play a more catalytic role by providing first-loss capital or high-risk, high-impact investment structures. Foundations like the Shell Foundation use innovative approaches such as junior equity, grants, and concessional financing to support early-stage companies, but concerns exist about start-ups becoming overly reliant on grant funding.

Despite challenges, the potential for electric two and three-wheelers to drive sustainable development in Africa is increasingly recognized. As the market matures and demonstrates success, more investors are expected to enter the space.

Continued collaboration among ecosystem players will be crucial to unlocking the sector's full potential.