‘As Promised’: Tesla’s Entry in the Indian Market | By Aryan Gangwar

Billionaire Elon Musk posted a two word confirmation “As promised” on Twitter to confirm Tesla’s entry in India in 2021. In its course of entering the Indian market, Tesla has incorporated its Indian entity in Bengaluru and has set up an office on the Upscale Lavelle Road locality of the city. It has also named three directors for its operations in India which includes the Chief Executive of Xenon Automotive and Clear Quote, two startups in the technology-based automotive solutions space.

After this confirmation by Elon Musk, there are two different segments of people with strong opinions on Tesla’s entry in India. One segment thinks that most of the country’s population is poor and therefore there is no market for Tesla. The other segment thinks that India will provide a good market for Tesla despite the prevailing poverty. The main idea behind this school of thought is that the company is not aimed at selling cars to the entire population but to a small and wealthy section of the population. India also has one of the largest untapped automobile markets in the world, of which green vehicles account for less than 1% of the total number of vehicles in the country. This presents a huge opportunity for sustainable transportation companies like Tesla. Tesla’s entry could very well be the tipping point of the Electric Vehicle (EV) revolution that looms large.

EV Adoption in India

In the present scenario, EVs are not ‘trending’ enough to draw the attention of the urban middle class which is the only segment with the economic capability to afford these vehicles. Possible reasons for this are lack of proper infrastructure, lack of knowledge about technological advancements and the high prices of these EVs (which are expected to come down in the future). The automotive market is the fastest growing market in the world but EVs are still perceived as novelties which are not of much use in today's world. Before 2010, India was also largely indifferent to e-mobility. It was only in 2010 that the Central Government half-heartedly attempted to incentivize EVs. For a large part of the previous decade, e-mobility policy revolved entirely around subsidies and piecemeal budgetary allocation. There was no serious effort put into formulating a long term strategy to build a sustainable e-mobility ecosystem. Although the government has taken many steps to subsidize EVs, they are still quite expensive. This is because the distorted tax structure on batteries pushes their prices up even after subsidization. The lack of government support has created a big challenge for startups in the e-mobility space to survive and made auto majors wary.

It was not until 2019 that the Central Government showed some intent in charting an e-mobility roadmap. The FAME 2 scheme, led by the Transport Ministry and NITI Aayog, was given a sizable budgetary allocation of Rs 10,000 Crores. The GST council has also lowered tax on EVs. This is consistent with Nitin Gadkari’s ambitious statement of achieving 100% e-mobility by 2030. Many companies like Tata, Morris Garages, Hyundai etc. have entered this sector since then.

Impact of Tesla’s Entry on India’s Electric Vehicle Ecosystem

Tesla may initiate its India plans with the launch of its best-selling, most affordable Model 3 EV. Tesla’s plan is to implement a direct sales strategy in India. This means that Tesla will bank upon digital sales and import cars via the Completely Built Units (CBU) route i.e. in the initial phase of its entry there will be no manufacturing plant in India and Tesla will import completely built cars from abroad and sell them to Indian customers. In India, Tesla will only have its Research and Development (R&D) centre for innovation and technological advancements. Since these cars will be facing a very high duty on import, the Model 3 EV is expected to cost upwards of Rs 55 Lakhs in India. Also because of this CBU strategy, there will be no benefit to any Indian auto component manufacturers.

In the short to medium term, there will not be a significant change in the Indian market. Since the EV ecosystem in India is still at a nascent stage. The EV charging infrastructure remains underdeveloped and is mainly restricted to Tier-1 cities. The supply of intermediary goods which are required for making EVs including special batteries is heavily dependent on imports. This drives up the end consumer cost of purchasing EVs and therefore limiting its mass adoption in a market with highly elastic demand. Another reason for not having any significant growth in the EV ecosystem is that the majority of the Indian population belongs to low or middle income families which do not trust new and emerging technologies easily. A typical ideology they believe in is that “We must let others use a new product first and if it is any good, we will adopt it” and because of this thinking, companies and investors do not foresee a large market for EVs in India. However, we cannot deny the other issues regarding automobiles in India- rising pollution and the burgeoning fuel import bills. The government has been pushing the Indian auto industry to shift to electric alternatives by throwing in a variety of incentives to both the investors and the consumers to encourage the adoption of green vehicles. Eventually, Tesla will also set up a manufacturing unit in India to bolster its indigenous production and market capabilities, as well as to strengthen its global supply chain.

In the long run, this entry will lead to innovation and emergence of new and advanced technologies. Tesla has global recognition as a successful EV brand. Once its premium EVs enter the Indian market, there will be a drastic increase in the competition among automobile manufacturers to capture the leading position in the market. This competition will not only force manufacturers to diversify their operations but it will also benefit customers through better quality and lower prices. But such changes will take place only in the long run. Tesla has defined a new era for the global automobile industries by completely changing old school automobile practices. In doing so, it has proven its potential to become a much needed boost to India’s EV industry. However, the benefits it brings will only begin to manifest in the long run.

Challenges and How to Overcome Them

One of the major challenges is that the current cost of manufacturing EVs is extremely high because of which the end consumer price is also very high. The ex-showroom price of an entry level EV in India is more than Rs 10 Lakhs, and so, the country’s market for four wheeler EVs revolves around the upper middle class and affluent consumers of metropolitan and Tier-1 cities. To make four wheeler EVs more accessible and affordable for mass consumers, auto manufacturers will have to decrease the price by at least 50-70%. This decrease in price will only be possible if they can bring down the battery cost which accounts for about half of the total cost of manufacturing an EV. This critical need-gap will drive incumbent auto manufacturers to join hands with local battery start-ups and established global players. Similar investments will also be made to develop the Indian EV charging infrastructure. Leading car makers such as MG Motors India and Tata Motors have already tied up with other players in the energy space to provide their customers with multiple options to charge their vehicles, either at home or through a stationary/mobile EV charging station. We can expect a boost in these investments after Tesla’s entry into the Indian market.

Currently, Indians are not ready to deal with such high and advanced technologies which are Tesla's expertise. This could be another major challenge for Tesla. There is, therefore, a need to suspend the autopilot features among others before entering the Indian market. Further, if Tesla enters via the CBU (Completely Built Units) route, their cars can attract taxes up to 100% in terms of import duty or other tariffs which unreasonably increases the price of EVs for end-users. Therefore, it would not make much sense to go forward with the CBU strategy. A possible modification for Tesla is to adopt the CKD (Completely Knocked Down) route instead of the CBU route. The CKD route means that the company imports parts from abroad and sets a small manufacturing unit in India where they can assemble these vehicles. This way, they can reduce the import duty and the cost of production to some extent and, in some sense, this will also make the cars more affordable, thereby attracting a relatively larger number of customers as compared to the market it would attract through the CBU route.

Conclusion

Transportation plays a major role in the growth and development of any country. But the cost of such development is quite high due to rising pollution and high fuel imports. Therefore, EVs are a necessity in today's modern world. India could provide a good and stable market for Tesla and Tesla might also become the leading EV firm in the market. But all of this will take time as the present conditions are quite unfavourable for firms to expand their market in India.