The Tesla Tussle
What does the Tesla non-investment mean for India?
Posted on Jun 08, 2022 | Author RAJAN KATOCH
The other day, someone I know called from Singapore to breathlessly ask about how Elon Musk’s decision not to invest in manufacturing Tesla is being seen in India. Frankly, I hadn’t thought much about it. Yes, there were media reports, mostly in the economic papers, that Elon Musk had tweeted about not wanting to locate Tesla production in India.
I guess when the richest man in the world decides to invest or not to invest somewhere, it is a story.
So what is this story? Last September, the Government of India announced a Production Linked Incentive (PLI) scheme to encourage the manufacturing of Electric Vehicles (EVs) in India. Subsidies of upto 18% were offered for large scale manufacturing of EVs. Some said even then that the high turnover qualifying limits were intended attract big players (like Tesla). For the record, Tesla manufactures high tech, high end electric cars that are very popular in the American and Chinese markets. Outside the U.S., Tesla has recently set up a manufacturing unit in Shanghai, China and is setting up another in Berlin, Germany.
For some months, there were news of invitations from several State Governments to Tesla to establish a plant in their State. Elon Musk also indicated interest, and discussions apparently took place with Government representatives on the prospective Tesla investment. Apparently, Tesla indicated its preference to first import its cars and test the waters before committing to investment in manufacturing in India. However, matters did not work out.
Why didn’t they work out? Well, the only reason on record is a cryptic tweet by Musk himself. Responding to a tweet asking whether a Tesla manufacturing plant is coming up in India in the future, Elon Musk tweeted: “Tesla will not put a manufacturing plant in any location where we are not allowed first to sell and service cars.”
That’s strange! There is actually no restriction on anyone being allowed to sell or service cars. The reason given appears to be only a part of the story. So what was the problem?
It seems that the real reason is that Musk was wanting an exemption or reduction in import duty before bringing in cars for sale in India. The Government did not agree to this. As transport minister Nitin Gadkari put it succintly, Tesla was welcome to set up shop in India, but “making in China and selling here is not a good proposition.”
One might wonder, why couldn’t the Government give the duty concession if it were to lead to a high tech investment from the world’s leading electric auto maker? This is because such an exemption would disrupt the tariff regime which has bred a thriving domestic auto industry. Under this regime, 100% import duty is to be paid on cars valued at above $ 40,000 (about Rs. 30 lakhs). All of Tesla’s models are in this price range.To promote value addition and employment in the country, lower duties (15–30%) are levied on foreign manufacturers importing knocked down car components and assembling them in India. For the foreign investors fully manufacturing in India, there is a level playing field with domestic industry.
This regime has worked well, with over US $ 30 billion (over Rs. 225,000 crores) of foreign investment in the auto sector in the last twenty years, according to official reports. Auto majors like Suzuki, Hyundai, Volkswagen have made sizable investments in manufacturing plants. High end manufacturers like Mercedes, BMW have opted for the assembly route. Foreign investors have invested huge amounts on the assurance of a reasonably protected domestic market. While trade policies are always subject to change, any changes would apply to all. Government could not have possibly jeopardized the favourable investment climate in the auto sector, nor could it have found any public interest in giving a duty exemption for one particular manufacturer for importing expensive cars. That too, presumably from China, and affordable only for the very rich.
The limited clientele also means that from a business point of view manufacturing Tesla in India doesn’t make too much sense. There is talk of the Tesla investment in Shanghai, but there is just no comparison with the EV market in China. For example, the China gigafactory has the capacity to produce 500,000 EVs a year. The Chinese market for the product is huge; more than 3 million EVs were sold in 2021. In contrast, the total EV sales in India in 2021 was just 15,000 units, mostly of small cars.
For Elon Musk, the best bet for the Indian market was therefore to import from China the limited numbers of Tesla cars that may be required in India. For the Government, getting Tesla to India was interesting only if it was going to help build a manufacturing base in the country. It wasn’t interesting if all that was on the table was imports, and that too only on the condition of being exempted from duty.
So there was no meeting ground, with good reasons.
It was all a storm in a teacup, after all!
(First published in Rising Kashmir, 8th June 2022)