Tesla faces long road to success in India even as New Delhi weighs tax cuts for EVs

India appears set to lure Tesla into setting up operations in the country with hefty import duty cuts, a move that could supercharge its EV industry. However, the iconic electric carmaker is likely to face a long road to success in the hugely promising but challenging market, analysts say.

New Delhi levies an import duty of 100 per cent on vehicles that cost more than US$40,000 and most of Tesla's models are priced higher. The Austin-based firm has been lobbying the Indian government to lower duties for the last two years.

As part of a new policy, the Indian government is reportedly considering allowing international car manufacturers to import battery-powered vehicles at duty rates as low as 15 per cent if they commit to eventually building them in India.

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Expectations of a duty cut to smooth Tesla's entry path rose this week after Indian Commerce Minister Piyush Goyal visited Tesla's factory in Fremont, California, and posted on social media that he was "proud to see the growing importance of auto component suppliers from India in the Tesla EV supply chain".

The signs of a breakthrough for the US carmaker came in June when Tesla CEO Elon Musk said the company was looking to invest in India "as soon as humanly possible" following his meeting with Prime Minister Narendra Modi during the leader's latest visit to the United States.

Puneet Gupta, director of mobility at S&P Global, said any tax cuts were likely to be staggered over three to five years, with the long-term aim of "inviting a few big players to establish a base".

"India is trying to attract global players and Tesla is on their radar. If players like Tesla establish themselves in India, it will buoy the supply chains," he said.

Other global firms were keen too, as the country became the third-largest car market last year, he added.

Electric cars accounted for just 1.3 per cent of India's total car sales last year, according to Bloomberg NEF. The adoption of EVs has been held back by the high cost of cars, a dearth of models and lack of charging options.

The country's EV landscape is dominated by two- and three-wheelers. Only around 47,000 units of electric cars were sold in the financial year ended March, but volumes are expected to double this year, according to industry estimates.

India has been trying hard to expand the niche electric vehicles industry and has introduced production-linked incentives in the last two years. They include financial sweeteners such as tax breaks, cheaper rentals and discounted electricity charges linked to volumes of production. However, the uptake of electric cars has been limited, compared to two- and three-wheelers which can navigate the country's congested cities better and use battery packs that can be charged at home rather than charging stations.

The speed of adoption in two and three wheelers will remain much higher than four-wheelers, says Som Kapoor, an automotive consultant at Ernst and Young.

Lowering import duties will be vital to Tesla's chances of success in the cost-conscious market, but the measure would likely face resistance from local manufacturers who think such a move would be unfair to those who have already invested in building supply chains in the country, according to industry executives.

India, however, is keen to attract reputed global players and is likely to set a high minimum price to import complete vehicles to ease concerns about a flood of imports, analysts say.

Chinese EV firms such as Great Wall Motors and BYD have a suite of affordable cars that are likely well-suited for the Indian market, but observers say Tesla appears set to gain from political tensions between India and China, elevated since a border clash three years ago, that have marred the prospects of Chinese market participants.

"We would probably have seen more Chinese EVs on Indian roads, but the border tensions are proving to be a bottleneck. That is why India seems to be taking a different route to develop its electric vehicle industry," said an analyst, who asked not to be named due to the political sensitivity of the issue.

A proposal by BYD to invest US$1 billion in India appears to have fallen by the wayside as the company is no longer keen to pursue the approval, Reuters reported in August. In a further setback, BYD is facing an investigation over allegations that it underpaid import taxes in India.

BYD's pumping of the brakes might seem to give Tesla an open road to take the lead in India. But Suraj Ghosh, an independent auto analyst, said it was unlikely Musk's company would shake up the industry since Tesla's cheapest models would still cost around 5 million rupees (US$60,000) at concessional duty rates, far above the 1-1.5 million rupee price segment that accounts for a bulk of car sales in the Indian market.

However, it would still open the door to more people being able to afford their vehicles, enabling the company to test the market for designing products engineered for India, Ghosh added.

The trade buzz is that Tesla is already holding closed-door discussions with Indian officials about their plans to produce a US$24,000 model for the Indian market.

Lowering import taxes could facilitate the entry of other premium electric brands, boosting infrastructure development as well as its US$70 billion auto component sector, industry executives say.

"India's auto components industry is world-class and would be happy to welcome any global major wishing to manufacture vehicles in the country," said Vinnie Mehta, director general of Automotive Component Manufacturers Association of India.

Even if Tesla has trouble selling a sufficient number of cars in India, setting up operations there could allow it to increase its presence in other regional markets.

Krishna K Jasti, co-founder of EVRE, a firm that builds charging stations across India, said Tesla might "not hit the volumes they need for some time in" India, but argued the carmaker could ratchet up sales by establishing a manufacturing base and exporting to other nearby Southeast Asian countries to supplement their domestic market, a strategy that carmakers such as Hyundai used successfully in the past.

This article originally appeared on the South China Morning Post (SCMP).

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