Electric Cars of the East, Part 5: Tesla in the East (or) Size Matters, Right?
Discussing Tesla's Fortunes in China and Predicting its "Place" in India
In Part 1 of this series, we zipped through the automotive history of China and India, in Part 2, we discussed their “growth stories”, in Part 3, we understood what EVs are in these parts and in Part 4, we fleshed out the prime drivers’ actions and effects in these countries. In this Part, we’ll… finally… discuss Tesla’s love affair in Asia and contextualize its prospects in India.
If you, dear reader, have been under a rock the past few years: Tesla is kind of a big deal in the BEV space now. With a cumulative production of 1.365 million vehicles from 2015 till 2020 and sales of 1.342 million vehicles in the same period, it’s probably fair to call it a “juggernaut” (“Juggernaut” is an Indian word, by the way).
Over the past 5 years, the company’s production volumes have nearly matched its sales volumes, leaving very little inventory and indicating strong consumer demand for its products:
Over the past 8 years, Tesla’s sales, with respect to product mix, graduated from Model S/X to being predominantly driven by its cheaper Model 3/Y:
In 2019, the Model 3 alone accounted for 14% of all BEV sales in the world. Furthermore, its sales volumes was 3X that of its nearest rival in terms of sales. In the Top 5 list of EV models sold in 2019, 3 out of 5 were, of course, Chinese. However, the Model 3 sold almost as much as the other 4 together.
Following its entry into China, both via imports and subsequently by production, Tesla went on to become the Number 1 EV seller in the first half of 2020, with a market share of 21% (compared to 6% a year earlier). It’s expected to continue to dominate market share in China due to reasons driven home in Part 4 (heh, “driven” because we’re talking about cars).
In October 2020, Minister Gadkari confirmed Tesla’s India entry plans by issuing a statement: "American auto major Tesla will have its distribution facility (read: sale centres) for its cars in India from next year and (after) considering the demand it would look into setting up of manufacturing here. India has the potential to become the largest EV producer in the world in the next five years".
The Chief Minister of Karnataka - which is also home to India’s Silicon Valley, i.e. Bengaluru - tweeted in January 2021 that Tesla is initiating operations in India by starting with an R&D unit in Bengaluru. The tweet was withdrawn after the company asked the Chief Minister’s office to hold off on making an announcement until talks regarding the company’s deployment in India were finalized. However, it was confirmed that Tesla has registered an Indian subsidiary in Bengaluru and appointed directors for the same, in keeping with Indian laws.
Tesla’s “finalization” of talks comes in the backdrop of a couple of moves being mulled by the Indian Government to shore up the country’s potential in the automobile space.
A Quick-ish Roundup on India’s Protectionist Measures
In September 2020, the Indian Government on Friday stated that import duty on cars and completely- and semi-knocked down assemblies (“CKD” and “SKD” respectively) would be raised, warning foreign carmakers to reduce the amount of royalty payments that they charge their subsidiaries.
A “CBU” is a “Completely Built Up” unit; it signifies a vehicle ready to be used in most respects. A “CKD” is generally specified as being characterized by a value higher than or equal to 40% of the equivalent CBU. On the other hand, an “SKD” is essentially a “working”/”finished” vehicle that has been knocked down into a very limited number of parts. The former necessarily requires extensive assembly in a plant environment that employs a substantial number of workers while that isn’t necessarily the case with the latter.
Currently, import duties on PVs’ CBUs with a Customs Value or CIF (“Cost, Insurance and Freight”) greater than $ 40,000 attracts a 100% import duty. PVs in “CKD” form containing engine, gearbox or transmission mechanism in pre-assembled form but not mounted on a chassis or a body assembly attracts a 30% import duty. PVs in “SKD” form with its transmission mechanism in a pre-assembled form but not mounted on the chassis also attracts a 30% import duty. PVs in “SKD” form with its transmission mechanism in a pre-assembled form but not mounted on the chassis attracts 25% import duty. However, given the wide variation in “SKD” styles, the total duty could go up to 40.8% or even beyond.
It also bears noting that the rates levied doesn’t distinguish between “conventional” PVs and BEVs, a move the Society of Indian Automotive Manufacturers welcomes as it gives an edge to domestic manufacturers.
A hike in the CKD and SKD import duty will certainly impact the consumer prices of luxury/premium marques such as Mercedes-Benz, BMW, Audi, Skoda, Volkswagen, Lexus (or Toyota) and even certain models of Honda, with the aforementioned companies privately confirming to reporters that fresh investments in domestic assembly facilities may be hit since the hike in prices will push down demand.
In the course of this announcement, the Minister for Heavy Industries mentioned that he will take up the idea of reducing GST on PVs with the Prime Minister and Finance Minister. However, given the vociferous opposition by domestic manufacturers to a move that could tilt the scales towards foreign carmakers importing CKDs/SKDs in bulk, this isn’t likely to be fruitful.
Industry representatives also pledged to reduce dependence on foreign players - predominantly Chinese - for components within the next 4-5 years. As of FY 2019-2020, electronic auto components and steel accounted for around $5 billion of auto component imports worth $13.7 billion.
Reduction of dependence on Chinese firms is of particular importance to the India, currently locked in geopolitical tensions with its eternal neighbour (the tensions are relatively recent, especially when in comparison to the almost 4,000 recorded years of benign and mutual esteem between the two cultures, pesky invasion attempts by Mongols notwithstanding).
In the same month, government think tank NITI Aayog proposed to offer up to $4.6 billion in incentives to firms setting up advanced EV battery manufacturing facilities with at least $122 million to be offered in FY2021-22. Importantly (especially for the likes of Tesla), India’s current import tax rate of 5% for certain types of batteries (including for EVs) are to be held steady until 2022, after which it is to be raised to 15% to boost domestic manufacturing. NITI Aayog’s proposal further stated that the annual domestic demand for battery storage and market size - estimated in 2020 to be less than 50 GWh and worth just over $2 billion - could grow to 230 GWh and more than $14 billion in 10 years.
In December 2020, the state of Gujarat confirmed that the country’s first lithium refinery will be set up by Manikaran Power, one of India’s largest power trading and renewable energy companies. The same company had inked an agreement to tap Australia’s Mount Marion lithium mine the previous year*. This project is expected to help Gujarat secure the raw material supply for domestic manufacturing of lithium batteries to further promote EV manufacturing in India. China, Hong Kong and Vietnam are the leading sources of imports of lithium batteries into India.
*There are presently no reliable estimates for lithium ore availability in India. It is assumed to be low to non-existent.
While China accounts for 80% of the world's lithium-ion cell production, India has introduced stricter investment rules for Chinese companies. Thus, the main foreign beneficiaries would be the likes of South Korea’s LG Chem and Japan’s Panasonic Corp along with Indian EV makers such as Tata Motors and Mahindra. It bears noting that Panasonic is the primary battery tech partner for Tesla.
India for Tesla (or) Tesla for India
When it comes to India, a key distinction between “premium” and “standard” is “size”. Most “standard” models, i.e. models with wide market reach and moderate pricing bands, are smaller in size when compared to “premium” brands (with models like Mini Cooper, BMW Mini, et al being exceptions).
Under the assumption that “size” is a key determinant towards estimating segment (i.e. budget, high-end, luxury, et al) and thus winnowing down the likely competitors based on category (i.e. compact, sedan, sedan/crossover, SUV, sports car, et al), I apply a filter with 5% tolerance on both ends of the listed wheelbase of over 160 models available for purchase in India (either right now or available via import) to determine the most likely competitors for Tesla models in terms of size and then further divide the list of competitors on the basis of approximate price along three bands: “In the Region” to signify approximately the same price or thereabouts, “Leftwards” signifying price being substantially lower than the Tesla model being compared and “Rightwards” to signify the opposite.
Tesla Model 3
As per reports, the Tesla Model 3 is expected landfall in India as early as June 2021. Given that there are no Tesla facilities completely operational right now, they’re likely to arrive as CBUs. The Model 3 is priced at approximately ¥ 270,000 in China and has a U.S. starting price of approximately $38,000 (which is close to the China price). This translates to ₹ 30 lakhs (note: a “lakh” is one hundred thousand). The same report that highlighted the Model 3 landfall date also reported a price of ₹ 60 lakhs, which makes sense given the CBU import duty.
The Model 3, given its wheelbase of 2,875 mm and vehicle profile, would qualify as a “sedan”. The likely Indian competitor matrix within the same vehicle category is thus:
Note that there are currently no competing products in the BEV space in India for the Model 3. But also note the fact that Jaguar has a presence “in the region”. Tata’s Jaguar Land Rover (JLR) manufactures at least two of the models listed here in India. JLR also has the I-Pace BEV with an advertised WLTP-derived range of 470 km. If it manages to transfer the transmission tech over to the XE or F-Pace (or alternatively build a sedan equivalent on the I-Pace platform and manufacture in India), it will be a prime competitor to the Model 3. Manufacturing in India gives it an additional pricing advantage (i.e. no CBU import duty).
The items marked with (*) indicate models that aren’t in the market: Tata has recently announced that it intends to “electrify” its entire product portfolio. The Tata Safari Electric, although an SUV, has a very meaningful history with India and the EVision is an all-electric sedan based on the Tata Harrier’s OMEGA-ARC platform.
Outside of that, the purported Tesla-killer Volkswagen ID.3 is also likely to be a very viable option if imported into VW’s India-based assembly plants in “CKD”/”SKD” form.
Tesla Model S
The Tesla Model S is reported to make landfall sometime in July 2021. It is priced at approximately ¥ 734,000 in China and has a U.S. starting price of approximately $75,000 (which is actually a bit farther than the China price, thus indicating either a “premium” status or that it is imported into China). The U.S. price translates to ₹ 56 lakhs. However, the same report that highlighted the landfall date reported a price of ₹ 1.5 crores (note: a “crore” is 10 million), which is nearly 3X the U.S. price. Considering this equivalent to adding the U.S. price twice on top of the CBU import duty, it’s likely that this will be priced and marketed as a “premium” model, just as with China.
The Model S, given its wheelbase of 2,959 mm and vehicle profile, would qualify as a “sedan”. The estimated price makes the likely Indian competitor matrix within the same vehicle category very heavily skewed:
There are virtually no models (save the EQC and the Panamera), “in the region” but plenty of competitors “leftwards”. Considering the overlap between the “In the Region” models for the Tesla Model 3 and the “Leftwards” models for the Tesla Model S, BEVs of these common models made by Tesla’s competitors would give them twice the advantage, i.e. they can effectively counter both the Model 3 and Model S.
Tesla Model X
The Tesla Model X is reported to make landfall sometime in January 2022. It is priced at approximately ¥ 781,000 in China and has a U.S. starting price of approximately $80,000 (which is actually a 35% less than the China price, thus indicating either a premium status or that it is imported into China). The U.S. price translates to ₹ 60 lakhs. However, the same report that highlighted the landfall date reported a price of ₹ 2 crores, which is more than 3X the U.S. price. Thus, like the Model S, it’s likely that this will be priced and marketed as a “premium” model, as in China.
The Model X, given its wheelbase of 2,964 mm and vehicle profile, would qualify as a “SUV”. The estimated price makes the likely Indian competitor matrix within the same vehicle category or equivalent as heavily skewed as with the Tesla Model S:
I’ve given a little bit of leeway to the matrix here: given the very high price expected for this model. In the “Leftward” column, I’ve included the Kia Carnival (which is, strictly speaking, an MPV). Similarly, I’m considering the Porsche sports cars to be “in the region” while the Rolls-Royce luxury saloons plus the Bentley Continental tourer are being considered viable “rightwards” competitors.
Why? Well, at ₹ 2 crores, I don’t imagine the Model X to be battling its way up and down the Himalayas or mucking about muddy jungle riverbanks any time soon. After a certain price point, “premium” models are basically competing with each other across categories: the price tag in itself is a reason for ownership.
Tesla Model Y
The Tesla Model Y is reported to make landfall sometime in January 2023. It is priced at approximately ¥ 350,000 in China and has a U.S. starting price of approximately $42,000 (which a little above the China price, thus indicating that it is predominantly exported from China). The U.S. price translates to ₹ 32 lakhs. Interestingly, though, the same report that highlighted the landfall date reported a price of ₹ 50 lakhs, which is below the U.S. price + CBD import duty. Given the faraway date and the fact that the estimated price is approximately the China price + 30%, it can be expected that this will be sent over from China in “SKD”/”CKD” form. Also, even more interestingly, this implies that the Tesla plant in India would have to be completed by 2022.
The Model Y, given its wheelbase of 2,891 mm and vehicle profile, would qualify as a “SUV”. The likely Indian competitor matrix within the same vehicle category would be:
Given that the Model Y is the 2nd-cheapest model in the Tesla inventory, some leeway has been accorded in the “leftwards” column here: MPVs such as the Mahindra Marazzo and the Toyota Innova Crysta have been added as likely competitors. Also, the Tata Safari Electric (once again, a model with substantial brand equity in India) is being considered as the primary contender here, despite a difference of 150 mm in wheelbase length. Even if the Tata Safari doesn’t win out on size, the I-Pace is a very strong and immediate contender here.
It bears noting at this point that, outside of the Tata-JLR ecosystem, almost none of the other carmakers currently have a substantial BEV-focused offering for the Indian market that competes with the Tesla catalogue in size.
What Does India Mean for Tesla?
If India is an export hub for CBUs, Tesla faces an uphill battle. Its “premium” segmentation leaves it vulnerable to virtually every major foreign carmaker’s exports. With the same import duties but not nearly the same density in sales/service networks as the other more-seasoned foreign players, there’s a very real prospect of Tesla not automatically being on top of the pyramid; this isn’t 2017 any more.
If India becomes an assembly hub for China- or even Berlin-origin CKD/SKDs, it faces virtually the same amount of pressure from German carmakers who now have nearly-similar-priced offerings as well as assembly plants in India.
If India becomes a production hub, it has ready primary competition from “local hero” Tata-JLR who have already committed to electrifying their entire extensive product range and have a string of historical manufacturing as well as assembly plants.
Tesla’s European challenge - Giga Berlin - also could invite a tit-for-tat by the VW Group in India as well as the U.S. If the VW Group does show up in India with just its ID.3 and ID.4 models, that’s pressure on top of that from the Tata-JLR combine who are certainly unwilling to concede their own home turf to either of them.
In the end, for Tesla in India, it could boil down to either cutting per-unit profits to the bone or even eating cost to gain market share (which will affect cost recovery of plant investment) or producing a range of India-specific models (which will cost R&D as well as affect cost recovery) and then trying to gain market share. It’s Hobson’s choice, really.
Yes, dear reader. India’s not for beginners.
This brings us to the end of Part 5. The next entry is the series conclusion where I provide some background about the future of EV batteries, posit some possible moves that Tesla could try to level the field in India and flesh out (just a little bit more) India’s “local heroes”. Stay tuned and hit “Subscribe” here if you haven’t already!