Why Elon Musk’s ambitions for Tesla in India have hit a roadblock

The billionaire is pushing the government to lower duties on EV imports before setting up a factory in Asia’s third-largest economy

Tesla, which has already set up a manufacturing hub in China, has plans to enter the Indian market.

Prospects of India hosting a Tesla factory looked promising earlier this year, when the electric car manufacturer incorporated a local company. The Tesla move boosted hopes that India will eventually be able to join the ranks of global EV manufacturing hubs, alongside US, China and Europe. But these hopes are fizzling out fast.

The company's plans for expansion in India have hit a roadblock as Elon Musk, Tesla's billionaire chief executive, is calling for lower duties on imports of electric vehicles to test the market before setting up a factory in Asia's third-largest economy.

“Tough regulations and poor infrastructure are other headwinds which might affect Tesla [plans],” says Harsh Patidar, an automotive analyst at market research and consulting company CapitalVia Global Research. “The government needs to spend lot of funds on this sector.”

India's electric vehicles market is still nascent, but it is seen as a sector that has an enormous potential for growth. Prime Minister Narendra Modi's government has set a target of 30 per cent of private cars and 70 per cent of commercial vehicles being electric by 2030, in an effort to cut pollution and reduce the country's carbon footprint as part of its commitment to the Paris climate change agreement.

While it helps India to meet its environmental pledges, spending on the EV sector also means cutting its dependence on oil imports and saving billions of dollars in crude import bills every year.

“For a country like India, developing the EV sector is extremely critical because India's among the most polluted countries in the world and a mass EV adoption can deliver massive forex savings for the country,” says Devendra Agrawal, founder and chief executive of Dexter Capital Advisers.

But before India starts seeing the number of EVs rising on its roads and car makers such as Tesla enter the market, it needs to invest in charging infrastructure and address the issue of duties that push prices of these vehicles higher in an extremely price-sensitive market.

Mr Musk has long spoken of India as a country in which Tesla would be keen to have a presence. While he has spoken of the enormous potential of the market, he has always underscored the challenges that India presents.

In response to an EV fan's request on Twitter last month to bring Tesla to India, Mr Musk said that the company wants “to do so” but “import duties [in India] are the highest in the world by far of any large country! Moreover, clean energy vehicles are treated the same as diesel or petrol, which does not seem entirely consistent with the climate goals of India.

“We are hopeful that there will be at least a temporary tariff relief for electric vehicles” and if Tesla “is able to succeed with imported vehicles, then a factory in India is quite likely”, he said in his reply on Twitter.

Tesla did not respond to The National's requests through email and Twitter for comment on its plans for India.

Tesla has already written to India's transport and industries ministries, urging them to cut the import duty on electric cars to 40 per cent from the current levy rates of 60 to 100 per cent, according to Bloomberg. The car maker is not the only one calling to reduce duties. South Korea's Hyundai, which has an 18 per cent share of the car market in India, is also calling for lower duties, along with Germany's Volkswagen.

In a blow to car makers, junior minister Krishan Pal Gurjar last month told parliament that “no such proposal is under consideration”. He, however, said that the government was working on adding more charging stations to its network.

However, on Monday, Reuters reported that India is looking at cutting import taxes on electric vehicles, citing two unnamed senior government officials.

The stakes for car makers are high in India and Tesla is unlikely to give up easily on its ambitions to set up a base in a country of more than 1.3 billion people.

“India, being one of the large car markets, remains one of the favourite destinations for all the global auto giants,” says Mitul Shah, head of research at Reliance Securities.

“The Indian government is also happy to have such a global player have a manufacturing hub in the country, which would be beneficial to both going forward.”

Analysts believe that if Tesla does set up a factory in India, it could give an enormous boost to the EV industry.

“I believe Tesla’s arrival might be a game-changer for the EV industry and might start an all new era in the automotive industry,” says Mr Patidar.

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Currently, India's electric vehicle market is lagging behind that of China, where Tesla launched its first factory outside of the US in 2019.

In July alone, Tesla sold 8,621 China-made vehicles in the local market and 28,138 cars in the month of June.

But in India, in total, only 5,905 electric cars were sold in the past financial year, up from 2,814 the previous year, according to the Society of Manufacturers of Electric Vehicles, with Mahindra and Mahindra and Tata Motors being among the main manufacturers. Otherwise, the vast majority of electric vehicles that are sold and manufactured in India are scooters.

However, efforts are under way to accelerate the shift towards electric vehicles.

“The Indian government has been putting in policies prioritising the shift towards electric mobility,” says Tanushree Banerjee, co-head of research at Equitymaster. These include a production-linked incentive scheme to incentivise local manufacturing of electric vehicle batteries – the most expensive component that is currently largely being imported.

Local manufacturing of such parts could help to bring down costs dramatically.

“Compared to conventional vehicle prices, EVs are pricier by 50 to 80 per cent, which makes it a bit difficult for mass consumers to adopt,” says Mr Shah.

“The Indian consumer is price sensitive and affordability [factor in the country] is lower due to relatively low per capita income.”

“A lot needs be done in terms of product performance, technology, localisation and cost effective manufacturing to make it mass class vehicle,” he adds.

However, with Tesla models starting at $40,000, it will always be a bit too expensive for India's mass market, analysts say.

“It's pricing would be a challenge in the Indian market even if the duties are reduced,” says Mr Agrawal. “Tesla’s products would be appealing for only the top 1 per cent of customers due to its pricing and hence, it's [sales] volumes are expected to be very low in India.”

There's a lot for Tesla to consider, when entering the Indian market and one of the other major factors, apart from its higher price point, is whether it should tie up with a local partner.

“Tesla is a pioneer in the EV space and its speed of innovation and execution is way ahead of any Indian auto maker and while it may not need any partner for technology and manufacturing … given the complexities of the Indian market, laws and a hard-to-crack distribution, it may actually be a good option for Telsa to partner with an Indian player,” Mr Agrawal says.

There have been rumours that a tie-up between Indian conglomerate Tata Sons and Tesla could be on the cards. But the The Times of India in March quoted Tata chairman N Chandrasekaran as saying “there is no dialogue with Tesla”.

Tata Motors, which is already involved in manufacturing electric cars in India, is also the owner of Jaguar Land Rover. In March, it launched its first electric vehicle for the Indian market, at a price of 10.5 million rupees ($141,000).

Whether Tesla starts manufacturing in India alone or with a partner, there will be challenges to tackle, experts say.

“The lack of skilled personnel in [the] electric vehicle segment is a significant challenge for both foreign and domestic EV manufacturers looking to set up capacities,” says Ms Banerjee.

It may be a bumpy road, but given the scope for growth once the industry does pick up pace, the rewards could be high.

“Over a period, we expect Tesla to succeed in India,” says Mr Shah.