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Tesla India Launch: Elon Musk Company May Enter Indian Markets in Early 2021

Editor, TRANSFIN.
Jan 4, 2021 11:39 AM 5 min read
Editorial

Tesla may be (finally) coming to India.

Transport Minister Nitin Gadkari recently said that the US electric vehicle (EV) manufacturer would be available in India from early 2021.

It would begin “first with sales for its vehicles” and, based on demand, might also scale up to set up manufacturing facilities as well.

Down Memory Lane

This development follows rounds of talks between Gadkari and the Elon Musk-led company, which has also been courted by the Karnataka and Maharashtra state governments.

To be fair, a Tesla entry has been in the offing for a long time now. Back in 2016, bookings for the Tesla Model 3 had already commenced. Two years later, the company was in discussions with the Government to build a local factory.

But in all previous instances, the carmaker stayed away, citing infrastructure and regulatory roadblocks.

 

What’s in It for Tesla?

Entering India’s large and competitive auto market would be in line with Tesla’s increased focus on expanding global sales beyond the US and Europe. Only last year, the company began producing vehicles outside the US (in Shanghai).

The company has also had an electric 2020 (pun intended). Its market cap has surged above $600bn, it entered the benchmark S&P 500, its valuation rose to more than that of the nine largest car companies combined, and its share price has risen relentlessly.

Tesla India Launch: Elon Musk Company May Enter Indian Markets in Early 2021Tesla’s wallet is now fat enough to fund an international expansion. For such growth companies, it typically becomes paramount to continue demonstrating growth in sales (or even a promising growth outlook) to justify elevated valuations. India offers that growth runway to a great extent.

 

India’s Eagerness for EV

Courting Tesla would also be in line with India’s clean energy aspirations. The Government has been actively pushing for EV adoption, with Gadkari saying India should "take the lead in producing electric vehicles".

Billions of dollars in incentives have been proposed to help car companies go electric, incentivise R&D and localise manufacturing of components. (Significantly, this includes batteries such as lithium-ion batteries (LIB), which on average account for almost 40% of EVs’ manufacturing cost base.)

Last year, the GST rate for zero-emission vehicles was cut to 5% from 12% whilst ₹10,000cr was shelled out through the Faster Adoption and Manufacturing of Electric Vehicles (FAME) scheme. In August 2020, the Government allowed registration (and sale, impliedly) of electric vehicles in India without pre-fitted batteries.

Some states have announced specific targets for EV adoption. For instance, New Delhi - one of the most polluted cities on the planet - aims to achieve an EV market share of 25% across all new vehicle sales by 2024. Andhra Pradesh aims to turn 11K state buses electric by 2029. Uttar Pradesh wants to electrify 70% of its public transport by 2030.

Meanwhile, NITI Aayog, the official policy think tank, is working with different ministries to develop massive factories for lithium-ion batteries (on the lines of Tesla’s GigaFactory).

 

What’s in It for India?

Adopting EV technology is crucial for India. Its major cities constantly rank as among the most air-polluted regions in the world, which takes a heavy toll on economic productivity and human lives.

The goal is also a strategic one, since the country is heavily dependent on oil imports and is thus a constant victim of the notoriously fickle oil markets. According to NITI Aayog, the oil import bill could be slashed by as much as $40bn in the next 10 years if electric vehicles were to be widely adopted.

 

Roadblocks, Ahoy!

While Tesla’s imminent entry and the Government’s eagerness to champion EV adoption are no doubt welcome, one should not miss the forest for the trees and ignore ground realities. India’s path to EV omnipresence is fraught with obstacles.

Much of the problem is infrastructural in nature. Besides the serious lack of sufficient charging points (in-home and public), the country is heavily dependent on Chinese imports for manufactured cell components and modules. In fact, as per an analysis by BloombergNEF, as of early 2019, there were 316 gigawatt-hours (GWh) of global lithium cell manufacturing capacity. China was home to 73% of this capacity, followed by the US, far behind in second place with 12%.

A lack of indigenisation in EV manufacturing implies margin dilution for companies. It also means dependence on out-of-control geopolitical factors - akin to India’s oil dependency. Moreover, India-China relations are at an all-time low today, and relying on an adversary to achieve your targets is not exactly sound logic, is it?

To bridge the battery deficit, the Government had launched the National Mission on Transformative Mobility and Battery Storage to formulate and launch a Phased Manufacturing Program (PMP) to localise production across the entire EV value chain. If all goes according to plan, the cost of batteries could be brought down to $76 per kilowatt hour (kWh) from $276 per kWh, thereby making EVs more affordable for consumers. (More on this here.)

Speaking of consumers, another challenge is market size. Petrol and diesel vehicles outsell even LPG/CNG ones. Available electric models - like Hyundai’s Kona, Tata Motors’ Nexon and MG Motor India’s ZS - experience lacklustre sales.

Much of this has to do with the lack of adequate infrastructure and the price tag of EVs. If you look at Tesla, the Model 3 sedan - the most affordable car in the carmaker’s lineup - will reportedly be the first car to enter India and this will be done through the completely built unit (CBU) route. It may be priced at about ₹55-60L - which does not exactly scream widespread and immediate adoption. Particularly so considering the economy is still recovering from a COVID-induced recession and consumers’ willingness to loosen purse strings is somewhat questionable.

Then there are the high import duties, an issue Musk had complained about earlier. In February this year, the Government increased customs duty on imported CBUs of commercial EVs to 40% from 25%. This was done with the aim of boosting local production, but it’s not difficult to see why it might turn away global manufacturers like Tesla or make their models too expensive.

By 2030, India hopes to achieve EV sales penetration of 30% for private cars, 70% for commercial cars, 40% for buses, and 80% for two- and three-wheelers. This is a tall order if the existing problems are not addressed and resolved. Tesla’s interest in India shows that the market has potential. To tap it, effective action is needed. This will involve allocating a lot of capital - not great news for a fiscally strained exchequer - but the social and economic benefits of an EV future are worth footing the bill.

FIN.

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