Tesla's U-turn on India in search for new EV manufacturing destination

With plans to import and sell cars off the table, Elon Musk's flagship is exploring the challenging prospect of an assembly plant for a cheaper electric vehicle

A senior Tesla delegation, mostly from its supply chain function, met officials at the Prime Minister’s Office and the Commerce Ministry in New Delhi and, it is believed, executives of a Mumbai EV manufacturer over a two-day visit last fortnight.

Tesla’s tryst with India has been on and off for over two years. In May last year, the Elon Musk-founded company decided -- following rounds of talks, letter exchanges with the government, and a plethora of tweets from Musk – to shelve its India plans after it failed to convince the government to reduce high import duties so that it could test the waters by importing completely built units (CBU) cars.

Faced with tough opposition from Indian car makers, who contended that such a reduction would be unfair when there is a high localisation threshold for domestic competitors, the government asked Tesla to assemble the cars (completely knocked down or CKD operations) in India rather than import them from China as other global car companies such as Hyundai and Mercedes Benz were doing. The EV maker also failed to extract concessions for single-brand Tesla showrooms.

This time, multiple sources aware of the discussions said rather than CBU duty reductions, the Austin, Texas-headquartered multinational is looking for long term stability and clarity in the tax regime before investing in a CKD assembly plant. CKD assembly makes the car far more affordable, since the duty is 10 per cent against 70 per cent on the cost, insurance, and freight (cif) value of an imported car of less than $40,000 and 100 per cent on imported cars above $40,000. It is also looking at expanding its component supply chain from India and a possible lithium -ion battery unit.  

The India rethink is the result of Tesla's plans to make 20 million electric cars a year by 2030, an exponential jump from 1.3 million sold last year. Musk has also stated that to reach this goal it will require ten to a dozen-odd gigafactories around the world – from just five located in the US, China, and Germany.

Tesla is also, like other multinationals, looking to hedge its heavy dependence on China both for production and sales. Last year half of its cars were made in its Shanghai plant, and China accounted for one third of those sales. 

In a recent interview, Musk said the final decision on new locations would be taken by the end of the year. And when queried specifically on whether Tesla was interested in India for the new factory he quipped “definitely.”

Tesla's search for new assembly destinations is also driven by the fact that it is planning a compact EV, priced at half its best-selling Model 3, or around $25,000 (with CKD duty that would be less than ~25 lakh). The market for this car would be in Asia and Latin America, where governments are pushing for aggressive electrification. 

Many Indian competitors say it would be tough for Tesla to make cars at this price when it mostly makes cars over $50,000. “To reach price points of ~20- 30 lakh, Tesla has to do cost engineering, not feature engineering, which is what it is used to doing. Global manufacturers such as Daimler and even others have tried to do it but failed,” a senior executive of a leading automaker with EV plans, said, adding, “But if it does, competition in India will be more interesting.”

To do this, Tesla can leverage India’s large component base in the country to localise and pare prices further. A veteran in the car business who has run South Korean auto giants estimates that building an assembly plant would not require more than $100 million and they can easily buy tyres, seats and other components from India where it is already a global player. The company already sources differential gears from Sona for the globe and other components from Sandhaar’s Mexico unit.

But India has competition, South Korea being a front-runner. It has a large domestic market, is accelerating towards EVs, has an FTA with the US and access to fast-growing east Asian markets. In April, South Korean president Yoon Suk Yeol met Musk in Washington at the latter’s request to set up a gigafactory in the country, and the Korean government is on record on its intention to offer Tesla major concessions.

Then there is Indonesia, where Tesla has been looking at setting up a battery and EV plant leveraging the huge availability of local nickel mines, a key raw material for batteries that it wants to secure. In Mexico it has already announced its sixth gigafactory.

So what does India offer? The Indian luxury car market is very small at around 37,000 -38000 ICE (internal combustion engine) cars, which grew at over 50 per cent in 2022 over the previous year, much quicker than the overall market. But in 2022, only 40,000 electric cars were sold, mostly by Tata Motors.

But analysts suggest that the nature of this market could change dramatically in three or four years with car makers from Hyundai, M G Motors, Volkswagen, Tatas, Ola Electric, BYD, and Volvo lining up launches. Some 10 to 15 per cent of the 3.8 million car market would be electric, still less than the government’s target of 30 per cent, but reasonable enough to attract new investment.

Tesla could also negotiate with the government for the production linked incentive (PLI) scheme for electric vehicles and components by tying up with component makers and making India a hub for its global supply chain.   

Ahead of that, however, the government has requested the Tesla team to talk to successful global players who are making India into a manufacturing base. It will also have to rebuild its India team since most of those involved in the earlier project earlier have left or moved to the US.

Starting from scratch, Tesla could learn from the experience of Apple, which was initially snubbed by the government for its proposal to sell second-hand refurbished mobiles in India. Since then, after months of tough negotiations, it has become a model of the PLI scheme.

As much as the Indian government, Tesla also has to deliver stability in strategic planning. A senior executive of the country’s component association said Tesla held detailed discussions to invite component players from India to the US to understand what components they needed to source. That plan was abruptly shelved.

Musk, with his persistent tweets on high Indian duties, alienated the domestic industry, which predictably lobbied hard to block Tesla. Now, the question is whether Tesla and Musk are ready to negotiate patiently like Apple had done to make India a worthwhile EV manufacturing destination.