Should Tesla Motors Set Up A Manufacturing Plant In India?

Tesla

India is very keen to have luxury car manufacturer Tesla open its manufacturing hub in the country. During September 2015, India’s Prime Minister, Narendra Modi, visited Tesla Motors’ campus in Fairmont, California and expressed interest in the company’s cutting edge technology and development. He was particularly interested in the solar Powerwall technology that could be beneficial in India’s rural areas as well. However, he was unable to persuade Tesla CEO, Elon Musk who believed China offered better prospects.

 

Why Is China More Promising Than India?

The Tesla CEO emphasized that setting up a plant in China would be more advantageous for various reasons:

  • China offers lower shipping costs and import fee than India.
  • Currently, China is the world’s largest car market, with approximately 20 million cars sold in 2015.
  • China is actively encouraging low emission, energy efficient green vehicles, which offers the perfect playing field for Tesla’s electric cars.
  • The Chinese government is also offering incentives on the purchase of electric cars to encourage more people to adopt energy efficient vehicles.

 

India’s Second Attempt

In 2016, India continued to persuade the American manufacturer to accept its proposal of establishing a production facility. This time around, Tesla has not refused the proposal and is willing to explore and negotiate it further.

 

What’s in it for Tesla

Accepting the offer could lead to several opportunities as well as challenges for Tesla. Some opportunity areas include:

  • The wage rate in India for skilled as well as unskilled labor is one of the lowest when compared to international standards. In fact, its production-related labor costs are estimated to be 75% less than China. China is known for offering cheap labor, however, India’s wage rate is far less, providing a lucrative incentive for companies to open industrial plant and production facilities in India.
  • India has a talented pool of skilled engineers that can be leveraged to push manufacturing innovation forward. Some of the best talents in the country include Electromechanical Technicians, Electronics Technicians, etc. which could be great assets. Moreover, there is no dearth of programmers and developers in the country. If there is a lack of skilled manufacturing workers, this could be mitigated by corporate funded manufacturing skills training or other online technology courses.
  • India has a significant geographical advantage in terms of trade routes. The transit time by sea to Europe and other Asian countries is relatively shorter, about 22 days from Mumbai, India’s financial and commercial capital. Short transit times increase the turnover ratio for inventory and also reduce freight expenses. The Government of India is also offering land at strategic locations near major ports as an incentive. This is very beneficial to Tesla as it makes the car manufacturer’s import and export endeavors leaner and more efficient.
  • India is a huge market for automobiles. A Tesla manufacturing hub is estimated to boost the domestic demand even further as the import duty will be reduced making the pricing more competitive.

 

What problems could Tesla face?

Some major challenges for Tesla include:

  • India offers a huge market for automobiles. However, upon further probing one will discover that the demand and consumption of passenger cars in India is much higher than luxury cars. The reception of electric cars in India has not met with overwhelming success in the past. If Tesla can pull this off, it is likely to become the first to receive nationwide success in the launch of electric cars in India.
  • From an infrastructure point of view, India lacks an efficient supply of electricity to power the production process and the final product, in this case, electric cars. Frequent power outages could be extremely detrimental for efficient utilization of resources.
  • The Foreign Direct Investment norms and import duty in India are not very favorable to Tesla
  • India also has a major pollution problem, far worse than China
  • The current political and regulatory environment in India is not conducive for luxury car manufacturers such as Tesla

Looking at both opportunities and pitfalls from an investor point of view, one can safely conclude that it would not be profitable for Tesla to make this move of setting up a manufacturing plant in India at this point in time. India is a fast developing nation. Perhaps, few years down the line it would become more attractive to Tesla to explore this opportunity.

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