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Can India recharge Tesla?

Can India recharge Tesla?

In today’s Finshots, we explain Tesla’s interest in India and the possible hurdles it might face.

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The Story

Earlier this week, Elon Musk opened up about Tesla pulling into India during an X space. He said it’s a “natural progression” for Tesla to enter India, with the country now becoming the most populous nation in the world.

Seems like Musk wants to capitalise on India’s growing population.

It makes sense too. Tesla’s business has been slowing down in recent quarters.

The company’s annual car sales have dipped, and profits were down 40% in the December quarter compared to the previous year. The stock price has crashed 30% since the beginning of the year, leaving investors in a state of frenzy.

Clearly, entering new markets could help Tesla recharge its business.

But why did Tesla not enter the Indian markets before?

Well, one reason could be that the Indian government imposes a very high tax on foreign EV makers when they try to sell cars in India. Every time Tesla or any other EV maker brings a car to India for sale, they have to pay 70-100% of its cost to the Indian government.

This tax is called import duty.

The government has been justifying the high import duty, claiming that it is in place to protect the upcoming domestic EV players from disruption. However, foreign EV manufacturers have been lobbying the government to reconsider the taxes, saying their entry would give consumers more choices and make India’s EV ecosystem more robust and vibrant.

And it seems like the government has given in to their whims! It has recently announced a new EV policy that would lower import duties, which could make way for EV makers like Tesla in India.

Here is a breakdown of the new policy in broad terms–

EV makers would be allowed to sell up to 8,000 cars every year in India at 15% import duty if–

  1. They invest a minimum of $500 million in India, which translates to a little over ₹4,150 crores
  2. Set up a manufacturing facility in the country within three years from the time they start selling the cars, and
  3. These factories locally source 25% of the components they use

Also, the price of the EV has to be higher than $35,000.

And this is actually a sweet spot for Tesla! Its most economical car, the Tesla Model 3, starts from $38,990.

Now, this cut in import duties might not be a coincidence. As we already said, Tesla has been lobbying for a lower import duty for the past four years. In return, it had promised to invest a huge amount in India.

And now that the policy is in place, the company seems to have started manufacturing for the Indian markets in its Berlin factory. These cars are just like the US models; the only difference is that they are right-hand-driven vehicles instead of left.

Tesla is also scouting locations to invest up to $3 billion in India to start its manufacturing factory. If its existing factories out of the US are any indication, it is expected that the company would make one big concentrated investment and open a Gigafactory, just like it did in Germany and China.

However, the question remains―Can cruising into India bring a screeching halt to Tesla’s business slowdown?

Maybe not.

Despite the vast population getting Elon Musk jumping for joy, India has lower-than-expected car sales.

In 2023, around 4.1 million cars were sold in India, out of which less than 2% were EVs. Compare this to China, a country with a similar population size, and you’ll see that around 30.1 million cars were sold in the country in 2023, out of which around 34% were EVs.

The lower EV penetration in India can be attributed to the dismal state of the charging infrastructure.

The charging infrastructure in India is scattered and lacks standardisation. Each EV maker has built its own network, but there is no interoperability.

For example, you might be unable to charge a Nissan car at a Tata charging station as their charger plug and voltage requirements differ.

The lack of standardisation and interoperability means Tesla must invest heavily in building a charging network for its cars from the ground up.

Secondly, Musk’s cars are expensive, and Indians don’t buy a lot of high-end cars. His cars start from $38,990 and go up to $ 1,19,990. That is between ₹32 lakh and up to ₹1 crore! Luxury vehicles make up less than 2% of all the cars sold in India, which comes slightly north of 45,000 units sold in a year.

And it is not like Tesla has a low-cost model in the pipeline that it could introduce in India. The company had been working on a prototype, but it ultimately scrapped the plan due to a lack of progress. So, it needs to look out for their Chinese counterparts.

You see, this new policy allows imports from any country, including China.

And unlike Tesla, Chinese automakers like BYD and Xiaomi offer a wide range of products, from high-end to affordable. They could start setting up manufacturing facilities in India and flood Indian roads with affordable EVs, giving Tesla stiff competition.

BYD already has skin in the game. It has been operating in India since 2007 and has a joint venture with privately held Indian company Megha Engineering. This means it could be relatively easier for BYD to ramp up the distribution and sourcing of materials.

Now, you could argue — but hey, just like Tesla, BYD would also have to deal with India’s dismal charging infrastructure, right?

Yes, but it has a solution for that.

BYD not only sells pure EVs but also sells hybrid cars. And this gives the company an edge over Tesla.

Tesla has also been facing these Chinese OEMs in the mainland and has tried to lure customers with heavy discounts. But the strategy does not seem to be working, and their sales have dipped around 20% this year.

Clearly, Tesla’s entry into India might not be smooth sailing.

But all is not lost. India can certainly be an integral part of Tesla’s supply chain. A gigafactory in India can help it ramp up exports to the Middle East, South East Asia, and Australia. It can also be a critical part of the “China+1” manufacturing policy to reduce reliance on China.

We’ll just have to wait and watch how it all pans out.

Until then…

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