The Electric Vehicle (EV) story in India is entering a very promising next stage of growth. News of the potential entry of Tesla in the Indian market -to sell and more importantly, to produce- have been a regular thing in the economic press. Just this week, the Economic Times reported an attempt by Tesla to negotiate a favorable tariff scheme in the coming months to secure their commitment to local production in the future, about two years down the line. This is a typical situation for foreign companies in any industry. Under the “Make in India” general policy, access to the Indian market usually requires establishing local manufacturing assets. The alternative is to import with tariffs that easily make the product uncompetitive.
Tesla’s attempt, it seems, was rebuffed by the Indian government, citing a preference for a common scheme for all the local and foreign manufacturers regarding subsidies and incentives. This lack of preferential treatment poses a dilemma for Tesla and other foreign EV automakers: How attractive is the EV car Indian market to them really?
On one hand, addressable market in absolute numbers is interesting. India is the second largest market in the world in passenger car sales, with close to 4 million cards sold per year. Moreover, only 1 in 12 Indian households own a car, leaving a lot of room for growth. Penetration of electric cars is still very low as EV cars constitute only 1.5% of the total cars sold but cost sensitivity and incentives from the government are bound to push EVs very strongly in the coming years. In particular, air pollution in many of the Indian metros is so high that the government is wholeheartedly subsidizing the EV purchases (of course, if the source of electricity for the EV is burning coal, the pollution problem might remain). The EV market in India has been growing above 25% CAGR in recent years.
On the other hand, let us name all the factors that would seem to go against Tesla winning in the Indian market. First, as always, is the extreme price sensitivity of the Indian consumer. Local automakers know that the mass market allows a price around INR 10 Lakh (about 12,000 Euro), which is light years away from the cheapest Tesla model (40,000 USD or INR 33 Lakh). In fact, Tesla’s prices would put the company's cheapest model straight in the luxury market. Second, the Indian consumer is not very sensitive to car looks and design. Take a ride on any Indian road and you will likely only see plain-looking white cars. That is another of Tesla’s attributes that would likely lose power in this market. Third, Indian traffic is slow and roads are quite choppy. Let’s just say it’s an infrastructure that is not built to show off the car’s speed and power. Fourth, the well-known lack of charging infrastructure, with many ideas and efforts in place but still in its initial stages of development. Finally, the Indian market is dominated by well-entrenched local automakers that also see the potential of the EV transformation. They possess trusted brands, distribution and repair networks and know how to produce in India. The car market is more concentrated in India than in other regions, with the top 5 brands getting an aggregate 86% of the market, while the top 5 brands in Europe get only 68% and the top 5 brands in the US get 61%. Tesla would therefore be fighting much more formidable opponents.
In other words, currently there seem to be two ways in which a brand can win Indian consumers. In the mass market, you must make a car that can go from point A to point B with the minimum cost and fuss. In the luxury market, you must project status. Tesla does neither right now, though the second one is likely more attainable, perhaps with a younger generation of consumers. This luxury segment however is a relatively small (only 50,000 electric cards sold in total in 2022!) opportunity with a mid-to-long term horizon.
In fact, right now, the vehicle markets in India that offer a much bigger opportunity are the two-wheelers and the three-wheelers (both rickshaws and transport utility vehicles). This is where the majority of the Indian market is and thus, where the majority of the effort (from the government, from the brands, etc) will be put in the coming years.
So if cracking the demand side might be challenging for Tesla, what about the supply side? Can India become a prime location for Tesla’s global manufacturing of cars and/or components?
Of course in general India is becoming more and more attractive as a manufacturing location but the case for Tesla is weak. Tesla has chosen so far locations not based on cost but rather based on tech capability and market access. There is the generic argument of establishing presence in India as an alternative to China. But Indian manufacturing capability is still far from what the US, Germany or China can offer so what is the use of building in India for a company that produces only about 1.3 million cars a year, already has multiple locations and has a small addressable market in India itself? It seems that the most plausible answer is simply subsidies. If the benefits of a presence in India do not seem terrible great, at least get the cost to be very low.
And from the moves and the decisions that Tesla is making, it is hard not to think that Tesla is simply playing the subsidy game with India, with maybe a secondary long-term goal of planting a small flag here just to keep the options open for the future.