Will Tesla be able to build its most affordable EV car in India?

With Tesla unlikely to circumvent India’s import duty policy barriers, the brand’s new strategy includes plans of manufacturing locally

Months after Elon Musk’s seemingly decisive tweet on Tesla not setting up a manufacturing plant in India, plans of a local subsidiary in the country are back in Tesla’s orbit. Although the brand continues to be playing tug-of-war with the country’s commerce ministry, recent events seem to suggest that the world’s largest electric car-maker doesn’t want to miss out on the world's third largest car market. 

A tech-driven automotive offering 

Twenty years since its founding, Tesla has created a track record of defying all odds. Not since the founding of Chrysler in 1925 had an American automotive concern seen any success, let alone grab half the market value of century-old American automotive titans like the Ford Motor Company. Within a decade of its establishment, Tesla had revolutionised the EV industry, bringing an unprecedented level of desirability and sensationalism to a technology that had come to be associated with sterile milk floats and golf carts. Contrasting the staid image of previous emblems of green mobility like the Prius, Tesla’s offerings like the original Roadster and the Model S proved that EVs were impossibly fast and silent supercomputers on wheels. It was also the first car manufacturer to classify itself as a technology company as well as an automotive one. Today, many legacy carmakers are following suit. “We consider ourselves a technology company first,” says Santosh Iyer, the CEO of Mercedes-Benz India, talking about the brand’s Level 3 autonomous software. Mercedes-Benz may have beaten Tesla to the punch when it came to getting US government approval for Level 3 autonomous function, but it’s the latter that continues to be associated with the revolutionary albeit controversial technology. 

It’s this sort of cache with a global consumer base that has allowed Tesla to outsell popular car makers like Peugeot, Nissan and even Mercedes-Benz in Europe, with sales having reached record highs as of last month. Despite luxury carmakers like Mercedes-Benz locally assembling EVs in India, experts believe that Tesla’s cars, should they reach Indian shores, will completely eclipse luxury EV sales of established marques. Part of it is down to Musk’s own cult of personality, the rest is due to the image Tesla has carved out for itself by rewriting the rulebook. 

One too many challenges

It’s also what has made operating in India a dubious proposition since Tesla prefers to manufacture everything in-house, instead of partnering with local suppliers. Something that’s a prerequisite for the Indian government. “When Tesla started out as a Silicon Valley start-up, there was no supply chain to cater to the EV market. Today, Tesla’s strategy is the opposite of that of several Chinese manufacturers which outsource everything. They’re aggregators.” says Sohinder Gill, CEO of Hero Electric and Director General of India’s Society of EV Manufacturers (SMEV). Partnering up with local suppliers for a brand like Tesla is a truly great challenge. 

To put it plainly, the central government wants Tesla to invest heavily in India and set up a local manufacturing facility while Musk wants to start out by importing cars directly and gauge consumer demand first before setting up shop. Musk has sought concessions from the Indian government when it comes to import duty structures, which currently sit at a whopping 100 per cent. Given this, even the most affordable Tesla product, such as the Model 3, will cost upwards of rupees 60 lakh in the country, where EV market penetration is as low as 2 per cent. And while there are many in the country willing to pay any money to own a Tesla, there simply isn’t enough demand to make Tesla a volume player here.

However, recent reports from Reuters have confirmed that Musk has resumed talks of setting up a factory with an annual production capacity of half a million EVs. It marks one of Musk’s many policy reversals in the wake of his acquisition of the app formerly known as Twitter. But in this case, his hand may be forced by geopolitical factors. “China is placing huge pressure on Tesla. Because Chinese EV giants like BYD and SIAC keep competing with them for costs and the Chinese government is giving all sorts of concessions to local brands, making it difficult for Tesla to operate out of China and cater to South Asian markets” says Gill. If Tesla is to cater to the Indo-Pacific region, it is India’s EV policies that may prove to be more favourable. 

Compelled to tweak terms? 

With the Finance Minister having quashed rumours of a relaxation in import duty for EVs, the Central Government has made its stance very clear: invest in India and manufacture locally. The Finance Ministry is doubling down on this, by offering a reduction on duty on the capital goods required to make EV components in India, instead of subsidising the import of components themselves. Even the import duty of lithium-ion cells has been slashed from 21 per cent to 13 per cent. 

The fact remains that the only way Tesla can crack the Indo-Pacific region is by offering a car even more affordable than the Model 3. Musk has stated that he intends to make an even cheaper car that would cost rupees 20 lakh, if manufactured locally. But it’s a double-edged sword. While Tesla’s sheer brand value may see many car buyers throng to its gullwing doors, according to Gill, by the time it sets up a base, the competition from local brands would be equally strong. “Making an affordable EV isn’t a core strategy of Tesla, which is already making a truck for the developed market. They might lose their edge, dilute the brand” says Gill, whose son works for Tesla. “Tesla’s edge lies in its comprehensive, integrated EV systems”. Tesla’s advanced autonomous driving software, another differentiator, isn’t applicable to India either. 

There are other challenges as well. Tesla has globally relied on its extensive network of “Superchargers” to provide a parallel revenue stream. At present there are over 50,000 Superchargers in the world, powering up Tesla car batteries in minimal time. But electricity grids in India are currently not capable of providing consistent power at that scale. 

Like many others, Gill confirms that when it comes to EVs priced at rupees 60 lakh and above, Tesla would have the clear edge and, in that sense, can pose a threat to existing luxury EV makers as it’ll likely command the highest market share of a very small segment. But its dominance in the Indo-Pacific region is contingent upon a more budget offering which presents its own challenges. India can no longer be ignored by Tesla or any other EV maker. But presuming Tesla sets up shop in the next five years, the challenges it faces will be unprecedented. 

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