Can Tesla kickstart India's electric revolution?

Some say that barriers to entry are just too great

Can Tesla kickstart India's electric revolution?

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In case you missed last week’s story, check out my feature on why the US wants India as an ally, and why energy and water may soon become defence issues in the region. This is particularly relevant as we wait to see hear from President Biden on whether his strategy will align with that of his predecessor.

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Tesla store in Washington DC. Image credit - Wikimedia Commons

The world’s most valuable carmaker is entering India, and experts hope it will disrupt its struggling electric mobility sector. Tesla, whose shares overtook the world’s largest car manufacturer Toyota in July, has been pondering entry into one of the biggest global markets for a while.

In a 2018 tweet, Tesla CEO Elon Musk answered Indian fans saying that while he would have loved to expand sales in the country, the moment wasn’t right due to India’s challenging regulatory bite - which imposes high penalties on foreign imports.

Would love to be in India. Some challenging government regulations, unfortunately. Deepak Ahuja, our CFO, is from India. Tesla will be there as soon as he believes we should.May 30, 2018

Tesla fans and clean mobility enthusiasts across India can now cheer on as the carmaker has registered a subsidiary in the city of Bangalore, with a view to distributing cars produced in China at first, and if demand picks up establishing a manufacturing unit. But can Tesla make a real difference to the country’s clean transportation market? And can India beat China, where the carmaker already has a manufacturing unit it built in just 168 days, and become a new production hub for the most sought after electric car?

Ready or not

The “challenging government regulations'' have not gone away, and Tesla faces a bumpy road ahead. With 30 million workers in the car manufacturing sector, India is the fifth biggest car making hub, and cannot afford to lose its edge. While it wants to attract foreign businesses, the government also needs to protect its manufacturing base, and eventually convince Tesla to open its own factory and employ Indian workers. However for the time being the company seems more interested in scoping Indians’ interest in purchasing a made-in-China version of its iconic, eco-friendly car.

Importing fully built cars into India is still a costly business - in the latest Union Budget last February, the finance minister Nirmala Sitharaman increased basic custom duties on ‘completely built units’, such as a fully built Tesla, to 40 percent of the unit’s price, from a previous 25 percent.

And sources within the EV industry say that the next budget will see a further increase to 50 percent for complete units. So a regular Model 3, which costs about $35,000, would end up costing more than $50,000. With such a markup, “how will Tesla cope?”, my source asks.

Analysts also say it will take time for India to develop a robust EV environment, setting up networks of vendors, testing facilities, research and development and more, and that could make foreign companies hesitant to invest heavily.

Electric car sales are growing in India, with Tata Motors covering about 80 percent of the market, thanks to affordable prices, says Alok Ray, assistant director with the Society of Manufacturers of Electric Vehicles (SMEV). “We expect that total E-car sales will be double last year's sales,” he says. But despite a promising trend, the market remains tiny for players like Tesla, says Gopal Jaidka, founder and director of Jaidka Power Systems, an electric scooters manufacturer.

For now, high prices mean Tesla won’t compete with local makers, but it remains to be seen how its presence will impact other companies that have committed to India. “I personally see trouble as their sales are bound to be impacted going ahead,” he says.

Tesla’s strategic role

With 50 to 60,000 vehicles sold every year, electric mobility in India has not been picking up as it should, says Abhishek Saxena, EV and climate change specialist with the government’s policy branch NITI Aayog. If you look at other countries, he says, sales growth becomes exponential quite quickly, building on initially relatively small pools.

While the government has previously banked on auto rickshaws and scooters, which still take the lion’s share of India’s electric market, its strategy to kickstart an EV revolution in India is becoming more holistic. Low speed vehicles, often powered with lead acid batteries, don’t grant a very good performance, Saxena explains. “With that bottom up approach it takes a long time to disrupt the market and achieve high penetration.” But in the US, Tesla set out to compete with top brands such as Audi and Chrysler from the start: “They wanted to show that their new product was one of the best and not a cheap alternative.”

Think of the first iPhone, Saxena says. When it was launched in 2007, it was a premium product beyond the reach of most people. But ten years later, 3.8 billion people use a smartphone across the world. “The world has shifted to smartphones, but it doesn’t rely on Apple iPhones,” which to date remain too expensive for many, he says.

With its device, Apple ushered in a disruption that benefited the whole industry, and Tesla could do the same by entering the Indian space. “People may not be buying Tesla but when they see [a Tesla signature Model 3] on the streets, when they see a demonstration, the impact [on public perception] is going to be huge,” he says, “and this would push other brands such as Hyundai, Maruti or Mahindra to make their compatible and cheaper versions.” When an aspirational product enters a new market, he says, “it actually expands the whole pie, rather than capturing it for itself”.

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