Elon Musk’s recent comments on the challenges facing Tesla Inc in India sparked a wave of excitement in the country, with politicians of various colors falling down on each other to welcome the world’s most valuable automaker to their respective states. fell on each other. Heavy and open-ended promises of support and concessions. What has been puzzling about this flood of investor-friendly allegations is that most of these politicians fail to demonstrate even the slightest compatibility on the quality of investments from Tesla, and the nature, rationale, and scope of incentives Huh. They are ready to provide. While a high-profile deal with a major investor can be a valuable tool for political signalling, unless these investment deals are skillfully crafted, they will deliver on the promise of creating an “electric vehicle hub”. are unlikely to do so, on which they are based.
Despite skepticism about the net carbon impact of electric vehicles (EVs), given that they use energy that can be generated in a clean or impure way, they are widely recognized as a technology vehicle through the global auto industry. seen as a harbinger of change. Their development is likely to generate many positive externalities that could change the dynamics as we know it. Therefore, cultivating a strong and well developed EV industry is a laudable and essential objective of our industrial policy.
However, this objective cannot be achieved through investments in import-dependent assembly plants with minimal local sourcing, as Tesla plans in India according to multiple reports. The development of a viable domestic EV industry will require wide dissemination of technical know-how and the development of an ecosystem of local component suppliers that can be leveraged by other domestic carmakers to compete with Tesla in the EV market.
Tesla has invested in China, and Shanghai’s deal with Tesla provides a classic template for how a ‘carrot and stick’ investment policy can lead to the development of a powerful EV ecosystem. When China began talks with Tesla, its local market was plagued by low-quality EVs (mostly hybrids) with limited capacity. Chinese policymakers were clear about how they wanted to use Tesla. The US-based company will have to develop Shanghai as its export hub and source locally. He argued that this would kill three birds with one stone. This will not only boost exports, but will also make local component suppliers more competitive and help them gain access to sophisticated manufacturing know-how. Ultimately, Tesla will pressure other local manufacturers to upgrade their standards and the adage will act as an aggressive catfish that forces other fish in the pond to swim faster. To achieve this, Tesla was provided with lavish incentives including cheap land, low-cost loans, subsidies, tax breaks and 100% ownership of the factory (a first in China where all foreign automakers are required to have domestic partners). . The sticks were also great. For example, Tesla will have to invest at least $2 billion over 5 years, and begin paying Chinese taxes of at least $323 million from 2023 onwards, failing which Tesla will be required to leave its factory to the Chinese government. will lose
China’s strategy has yielded unprecedented results. Shanghai is now Tesla’s largest and most important manufacturing facility. It sources 86% of its components domestically, compared to 73% for the California factory. Local component makers have garnered exceptional technical expertise, like the LK Group, which developed the largest casting machine in the world for Tesla. And the catfish effect has sparked a flood of new and more sophisticated models from local automakers, making China the EV mecca of the world.
This tells us why Tesla is now keen to enter India with imports rather than local manufacturing. A large proportion of production from the Shanghai factory is exported to the European Union. With Giga Berlin (Tesla’s German factory) and Giga Texas, Giga Shanghai will no longer need to export products to the European Union. In addition, Tesla faces stiff competition (and a dwindling market share) from established players like BYD in China, as well as upstarts like Nio. With the tax break set to expire in 2023, Tesla will also be constrained in competitive pricing of its output from the Shanghai plant. That’s why it wants to use its Shanghai plant to export to other Asian countries, including India, and is lobbying for lower import duties rather than incentives to manufacture locally.
Indian policy makers and various politicians should be aware that domestic manufacturing is crucial for the country to take advantage of our growing demand for cars and develop new production capacities. Even free-market economies such as the US under radical free-trade adherents such as President Ronald Reagan hammered Japanese automakers with quotas and tariffs to force them to manufacture vehicles in the US.
India should also use Tesla as a catalyst to set off a chain reaction that will transform domestic EV manufacturing, rather than surrendering our vast market for visionary political gains. Instead of serving Elon Musk with ballads without any incentives and open promises right now, Indian politicians should run a hard bargain for one giga Ludhiana, giga Hyderabad, giga Kolkata, giga Bengaluru or one giga Chennai.
The original Tesla (Nikola) is said to have remarked, “A new idea should not be judged by its immediate consequences.” Nor should a new investment be made.
Diva Jain is a director and a ‘probabilist’ at Arjav, who researches and writes on behavioral finance and economics. His Twitter handle @DivaJain2 . Is
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