A week or so ago there has been quite a furore with many state ministers asking Elon Musk on Twitter to set up a factory in their respective states. Although you can’t fault their attempts to woo one of the most iconic entrepreneurs in the world to do business with them, you can definitely fault their hollow PR attempts to drum up their own image as they didn’t even address Musk’s larger challenges with the government of India about the tariffs and sourcing materials locally.
To understand these challenges one has to look at the global electric vehicle (EV) market as a whole and compare it to the Indian auto sector if it makes sense for Tesla to enter India.
Tesla, right from its launch, has been at the forefront of the EV revolution in the automobile industry. In fact they are the ones who moved the needle and compelled every other manufacturer to adapt by building futuristic cars while proving that battery driven cars can junk the ICE (internal combustion engine) and match the driving range of fuel driven cars.
Once they became viable options for consumers, it spurred innovation at a rapid pace as the competitors scurried to control their market shares in an industry that had barely changed for about a century. As Tesla started production and sales of the Roadster in the US, it was easily able to enter the European market in the same year, 2008 as there was higher focus on clean energy in many countries.
In 2013, the company made its foray into China with the Model S. Considering the US, China and European markets together account for over 50 per cent of the global auto sales, by 2013 Tesla had its footprint across half of the world.
Coming to manufacturing its cars, until 2019 when it opened the Gigafactory in Shanghai, Tesla was only manufacturing them in the US and exporting to all the other countries. It was only in 2019, that they sold their first locally manufactured car in China. Tesla’s revenue since then has skyrocketed and the company turned profitable only in 2020.
In 2021, Tesla sold close to a million cars globally with a quarter of those sales coming from China. The overall 2021 EV sales across the world amounted to around 6.4 million.
India’s entire passenger vehicle industry on the other hand is only about a seventh of the Chinese market with a total of 2.7 million units sold in 2021 compared to the 19.7 million units sold in China, 14.4 million units in the US and about 11.9 million units across Europe. EV sales in India are at best upto 0.5 per cent of the entire auto sales or about 13,500 units in 2021. In China, this number itself is around 3.3 million units. In short, China sold more EVs than the total number of cars sold in India in 2021.
It is understandable why then Musk is not in a hurry to build a factory in India, despite his Twitter mentions being clogged up by sugar coated invites from our ministers. It is also a bit over the top for the Indian government to insist that Tesla should source its materials locally or produce his cars in India.
Currently, Tesla operates 13 factories across the world, with six located in the US, three in Germany and two each in Canada and China. It is worth noting that out of these 13 the actual Tesla cars or the parts for those cars are manufactured at only four of them. Three of them are in the US in California and only one outside the US, at the GigaShanghai. All their other factories produce either the manufacturing equipment used in their factories or the superchargers. As of 2021, more than half of Tesla cars are manufactured at GigaShanghai making it their major export hub.
Considering the high end technology involved in Tesla cars and its manufacturing equipment also built in its own factories, it sounds preposterous that Tesla would want to set up a manufacturing or an assembly unit in India without having any validation of its sales when the entire number of EVs sold in India are not even 1.5 per cent of their global sales.
There is an aspect of exporting those cars from India, but with its GigaShanghai and the upcoming GigaBerlin and GigaTexas, once ready, can easily serve global production needs at least for the foreseeable future. There are also several issues related to the raw materials required to manufacture the lithium battery packs which probably do not even have established supply chains in India.
Then comes the issue of duties and tariffs of the Indian automobile industry. Largely import regulations classify cars sold by foreign manufacturers in India into three kinds. CBUs or completely built units and CKDs or completely knocked down units.
CBUs are cars which are imported directly as is and sold in India, whereas a CKD is one you import in parts and assemble within the country. The third kind are SKDs which are semi knocked down units which fall in the middle ground between CBU and CKD based on the percentage of parts imported in an already assembled state.
CBUs attract 60 per cent tariffs if they’re EVs while CKD parts have 0 to 1 per cent tariffs. At this stage, Tesla wants concessions to import a smaller number of cars in CBU state at lower tariffs to test the market before making larger investments. Selling even a Model 3 at 60 per cent EV tariff will put it in the 50+ lakh luxury car segment beyond the reach of many customers. To put this in context, all luxury car manufacturers together sold only about 20,000 units in India in 2020.
Is it even worth it then to woo Musk if Tesla doesn’t want to manufacture its cars in India for the world and if it doesn’t make any sense for him to set up a factory in India? Yes, it is. And the benefit shall be for the entire Indian automotive industry. Because Tesla is not just any other car company, it is an energy company with the most advanced battery technology available in the world, it’s also a tech and AI company with their cars leading the autonomous driving segment.
Like Apple did with the iPhone, Tesla has reimagined and redesigned every single component of a car from scratch. At the same time, Indian manufacturers have been complacent selling substandard vehicles with scant regard towards even basic safety standards to Indian customers by keeping the competition at bay with higher tariffs.
This kind of a protectionist mindset is not even displayed by China which rewrote their rules to bring EVs into China by allowing Tesla to own a company with 100 per cent stake as the leadership was not happy with the quality of cars sold in the country. Within less than a decade, there are companies like BYD selling more EVs than Tesla and it is spurring the automotive industry growth in China with thriving competitors such as NIO, XPeng, LiAuto, etc. Globally while the auto industry is going through a slump, it is the EV segment which is growing at around 50 per cent each year.
If we want the Indian automobile industry to grow multifold and provide value for money to its customers, it is important that the government of India looks at Tesla as a catalyst to that much needed innovation and change and not just as any other foreign car maker seeking profits in India. There is no reason why India cannot follow the China model and give concessions to Tesla to spur growth in India. Especially, when the overall market is set to grow with the advent of EVs.
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