Tesla’s investment in India’s EV industry

Category: AI Asia
Posted by Lea Hogg

In the wake of Tesla’s plan to establish a $3 billion electric car plant in India, there are a number of challenges the company may face in its venture.

Tesla’s move comes after New Delhi lowered tariffs on higher-priced imported EVs for companies that commit to manufacturing in the country within three years. This tariff cut was a concession Tesla had been pushing for as a precondition to investing.

Tesla is considering various sites with a view to establish the plant by late April, focusing on states with existing automotive hubs, including Maharashtra and Gujarat in the west and Tamil Nadu in the south. Some car makers have plants in Haryana state neighbouring New Delhi, and Tesla might also scout potential sites around the capital. However, the focus of Elon Musk’s company would be on the other three states because they have ports, making it easier to export cars.

Challenges of expanding into the Indian EV market

India has one of the highest tax rates for cars in the world, including a 28 percent Goods and Services Tax (GST) and additional charges ranging from 3 percent to 22 percent. Although subsidies for electric cars exist in places like New Delhi, they may not be sufficient for more people to afford Tesla’s cars.

Additionally, the upper limit for an EV to qualify for subsidies in India is Rs 15 lakh. Given this, Tesla’s expensive offerings will not qualify for EV subsidies in the country. Therefore, Tesla’s volume of sales in India will likely be marginal.

The Indian EV market is currently in a growing phase and its value could shoot up to $206 billion in the coming decade. However, Tesla will face competition from other manufacturers who are also looking at developing electric cars. The Indian auto market is characterized by high volumes and low margins. This could pose a challenge for Tesla, which is known for its premium pricing.

India’s efforts to boost EV demand fall short in front of China, which has heavily subsidized EV purchases and state-owned companies have invested billions in building charging stations.

Potential game-changer for India

A confirmed Tesla investment would be a major boost for Prime Minister Narendra Modi’s government ahead of a general election that begins this month. Modi has earmarked billions of dollars’ worth of government subsidies to promote manufacturing, including in critical industries such as EVs.

Tesla has told Indian officials it is considering building a smaller car than its current models in the proposed new factory, which would be priced at less than $30,000. It could then sell the model in India and export to south-east Asia, the Gulf, Africa, and southern and eastern Europe.

The carmaker is developing a new cheaper vehicle to go on sale late next year, but has not yet said where the car — which has been dubbed “Model 2” by Tesla observers — will be manufactured. The potential expansion of Tesla’s global factory network comes as growth in global EV sales slows. The group is also building a plant in Mexico that is expected to come online in 2026.

One of the people familiar with Tesla’s plans said the company was considering beginning with a $2 billion -$3 billion investment in the Indian car plant. Suppliers would invest billions more, making this one of India’s biggest inward foreign investments. The company expected the factory to reach production of as many as 500,000 cars a year when it reached full capacity. Tesla might later also look at setting up its own battery plant, following the “gigafactory” model it has followed at its plants in California, Texas.