Tesla Turns To Indian Auto Part Makers, Willing To Pay More To Reduce Reliance On China

In a significant shift in global supply chains, Indian auto parts manufacturers are increasingly becoming the preferred suppliers for Tesla as the American electric car giant diversifies its sourcing from China.

This shift is significant as Tesla is reportedly often willing to pay a higher price for components sourced from India.

Tesla's procurement strategy now encompasses a wide range of components made in India. These include small plastic parts, castings, complex differential systems used in transmission, and wheel hubs.

According to industry data reported by Livemint, about 30 suppliers, including Indian firms and multinationals with manufacturing operations in India, exported auto parts worth $135-150 million to Tesla in the fiscal year 2022-23.

The contribution to Tesla's supply chain is not limited to primary suppliers. Tier-2 and Tier-3 suppliers, who provide parts to direct suppliers, are also playing a significant role.

Major suppliers include Sona Comstar, Graziano Trasmissioni India Pvt. Ltd (a DANA group company), Tata AutoComp Systems Ltd, CISWW Engineering India Pvt. Ltd, and Bharat Forge Ltd.

However, the specifics of these business dealings remain undisclosed due to non-disclosure agreements with the US EV maker.

In a statement that underscored the growing importance of the Indian market to Tesla, Commerce and Industry Minister Piyush Goyal, in September, announced that Tesla sourced nearly $1 billion worth of auto parts from India in 2022, and was on track to double it this year.

Earlier this week, Goyal visited Tesla's manufacturing facility in Fremont, California.

Goyal's visit to the Tesla factory coincided with the Indian government's consideration of a new national electric vehicle (EV) policy. This policy might reduce import duties on EVs, provided international car manufacturers like Tesla agree to establish local production in India.

Tesla is focusing on capturing the mass-premium passenger EV market in India.

The United States levies steep tariffs on a wide range of goods manufactured in China, though some automotive components, such as electric motors, are exempt from these tariffs. This has propelled Tesla to diversify its vendor base, reducing reliance on China to mitigate supply chain risks amid continuing US-China tensions.

According to a Bengaluru-based maker of forged parts, which recently started supplying to Tesla, the US car maker is outsourcing a lot of components to India, including complex machine parts.

"India is considered a good, quality alternative to China even at a higher price. Tesla knows we can’t compete with China’s low raw material costs, and they acknowledge that and are ready to pay slightly higher prices," the Bengaluru-based Tesla supplier was quoted as saying by Livemint.

The increased sourcing from India is also driven by Tesla's product focus, including the Cybertruck.

Suppliers note a general trend of Tesla buying more from countries like India, Vietnam, and Mexico, especially for small, standard parts known as commodity parts, where switching costs are not substantial.

“Many small suppliers have emerged in the last two years to cater to this business. Indian suppliers will have the opportunity to work with the industry-leading EV maker in the world if Tesla does come to India," a second supplier quoted in Livemint report said.

This growing trend of sourcing from India is aligned with the Indian government's ambition to establish the country as a global hub for green mobility solutions. With the government considering lower import duties for EVs, foreign EV makers like Tesla, seeking an Indian foothold, may find favorable conditions to expand their presence in the Indian market.

In a move that could further incentivize foreign EV makers, the Indian government is contemplating a reduction in import duties for completely built-up (CBUs) vehicles.

Currently, CBUs priced below $40,000 face a 70 per cent import duty, but the proposed national EV policy might lower this to 15-30 per cent for EVs priced between $25,000 and $35,000.

This reduction would be conditional on the commitment of these companies to start local manufacturing within the next two to three years, with a clause to retract the duty concession if this commitment is not met.