Back in 2018 as Tesla chief Elon Musk took over the direct oversight of his best-selling Model 3’s production, he summed up his emotions in a tweet that has proven to be almost prophetic today. “I’m back to sleeping at factory. Car biz is hell,” Musk wrote on X as he missed his quarterly target of producing 2,500 Model 3s per week. While the American automotive firm did catapult Musk to become the richest man in the world with a net worth of more than USD 300 billion, the “hell” that he once spoke of is probably still giving him sleepless nights as Tesla sees a global capacity glut, slowed deliveries, price cuts and competition from local players in China which has forced the company to slash 10% of its total workforce, nearly 14,000 employees.
As the CEO of Tesla, Musk grapples with a tumultuous global landscape, his eyes are set on a new frontier: India, a market that, at this point, presents both promise and peril for Tesla. Since, Musk has postponed his April 2024 India visit to later in the year citing “very heavy Tesla obligations,” experts say that he should use this time to perhaps better understand the nuances of the Indian market. During the India visit, Musk was expected to announce an investment of USD 2 billion to USD 3 billion, for a factory in India. There was also talk of focusing on space exploration and satellite-based services from India using Starlink that could be a potential disruptor in providing digital access to remote parts of the country. Whether India needs Tesla or it’s the other way around, it’ll all depend on how Musk calibrates his next move.
Trouble in paradise
Amidst the perpetual need to “reduce costs and increase productivity,” Tesla’s stock has seen a staggering 35% decline in 2024, prompting Musk to declare, “About every five years, we need to reorganise and streamline the company for the next phase of growth.” In Q1 CY24, the company’s revenue declined by 9% YoY to USD 21.3 billion. According to the company, volumes were impacted due to an uncertain macroeconomic environment, Model 3 update in the Fremont factory and Giga Berlin production disruptions. This year, it expects volume growth to be “notably lower” compared to last year.
“Our global EV sales continue to be under pressure as many carmakers prioritise hybrids over EVs. While positive for our regulatory credits business, we prefer the industry to continue pushing EV adoption, which is in-line with our mission,” Musk said in the investor call last month.
Talking about Tesla’s upcoming vehicle line, Musk hinted at producing more mass-market models that will “be able to be produced on the same manufacturing lines” as Tesla’s current lineup. “We’re expecting to make more affordable models which will have aspects of our next-generation models and our current models. These will be produced in our current production lines. Tesla is aiming to fully utilise its current production capacity and to achieve more than 50% growth over 2023 production before investing in new manufacturing lines,” he said. In a change of strategy, Musk has promised to manufacture more pocket-friendly cars at existing plants, while postponing his Mexico and India investment plans.
EV demand is dwindling in its top markets like the US and China. According to Kelley Blue Book, nearly 2,69,000 electric vehicles were sold in the United States in the first three months of this year, representing a 7.3 % decrease from the final quarter of 2023. Tesla’s market share has also fallen from 62% in 2023 to 51% now. According to data from China Passenger Car Association, also, the number of Tesla vehicles both made and sold in the county slid for two consecutive quarters from a year earlier. According to former Managing Partner McKinsey and Arthur D. Little India and South Asia, Tesla’s success has mostly been in the developed markets where there’s been a healthy level of subsidy. “The biggest challenge for any EV is the initial entry cost of the vehicle. The second reason was the novelty of buying an EV. But people have begun to realise these vehicles don’t have a significant resale value. They’re responding aggressively to these challenges by cutting prices,” he said.
“They had a fantastic growth trajectory for the last few years but they’ve had limited models. Their problem is that to keep this momentum growing, they need more models. In China the Chinese incumbents are doing great. So, they need scalable growth outside China and countries like India have a big growth potential,” Pedro Pacheco, Vice President of Research in Gartner’s CIO Research Group said. Pacheco says the problem is that Tesla became a victim of its own success.
Experts also point out that now that Tesla is looking to step outside developed economies like the US, China, Europe, Canada, Japan, etc., the only option is to expand to emerging markets like India which make 25% of all global vehicle sales. “The formula that Tesla has used for the rest of the world might not work in India because it has challenges like lower income for most of the population, infrastructure issues, strong local producers, etc. India is a more difficult market than China or other developed markets,” Felipe Munoz, Global Automotive Analyst, JATO Dynamics said.
Reality check
The Indian market presents a stark contrast to Tesla’s traditional strongholds in developed markets, where substantial subsidies and a penchant for novelty drove EV adoption at scale. However, in India, where the lowest entry price for an EV remains relatively high at Rs 12-15 lakh, affordability poses a significant barrier to mass adoption. With EVs typically priced 20% higher than conventional vehicles, Tesla must confront the challenge of aligning its pricing strategy with the economic realities of the Indian consumer base. Munoz is not expecting big volumes from India for Tesla. “India expansion could be a solution to their current problems because they need other sources of growth and profit, but luxury vehicles made up less than 3% of EV sales in India last year. Exports would be an option, but in the second phase. The first phase would be about exploring the market, understanding the competition among others,” he said. Tesla is not a direct competitor of Tata Motors, Mahindra & Mahindra or MG in India. On the contrary, these brands are helping Tesla to arrive because they’ve done the job of creating initial momentum of EV adoption, experts point out.
India’s infrastructural deficiencies pose a formidable obstacle. The lack of a robust charging infrastructure exacerbates range anxiety, a pervasive concern among Indian consumers. Unlike in developed markets, where Tesla’s proprietary charging network is well-established, navigating India’s nascent infrastructure landscape necessitates innovative solutions and investments.
Regulatory landscape
Tesla’s possible foray into India coincides with the government’s ambitious EV policy aimed at fostering domestic manufacturing and attracting global investments. However, stringent regulations and high tariffs on imported vehicles compel Tesla to navigate a labyrinth of bureaucratic hurdles. Adhering to local content requirements and maintaining competitiveness present a delicate balancing act for the EV giant. The government on March 15 approved the E-Vehicle policy to promote India as a manufacturing destination. The policy seeks to promote India as a manufacturing destination for EVs and attract investment from reputed global EV manufacturers. Under the policy, a company will be required to make a minimum investment of USD 500 million or Rs 4,150 crore. It will also be entitled to various tariff concessions. Meeting these conditions will qualify them for a concessional duty of 15%, down from 70-100% (depending on the import price). Carmakers that meet these requirements will be allowed to import up to 8,000 EVs that cost USD 35,000 or more every year.
Just like the Chinese government made significant changes to its policy to make it favourable for Tesla to enter, there seems to be a similar story at play in India, too. Experts say that Musk could eventually arm twist the government to get favourable policy support. “The government seems to be besotted with him. Tesla’s entry in India is over-hyped. Tesla needs India more than India needs Tesla. No doubt it was an iconic brand that disrupted the EV space when it entered. But the speed at tech has evolved, to me, Tesla is another legacy electric manufacturer today,” branding expert Avik Chattopadhyay, Co-founder, emot.ai said.
He believes it will be the likes of Xiaomi, Vinfast, Tata Motors, and others who can actually challenge conventions and really disrupt the market today. “The more he [Musk] reads about India, the more he will recalibrate his plans, especially when it comes to the product offer. He’s looking at a 10 million unit market in India which will not happen before 2050 because the rate of growth is not there. He has to hedge his risks in India,” he said.
Patience vs. Profitability
According to JATO’s Munoz, localisation will be their biggest challenge when they enter India. “India has proven to be a very tough market. It takes a lot of time to start making money here. Not all carmakers are willing to wait. Tesla has the money but I’m not sure if they have the patience to start making money after so many years of operation. It’ll be interesting to see what Tesla does in India differently than what legacy automakers like Ford and GM couldn’t,” he said.
Pacheco, too, says that the company needs to change its strategy radically. “I don’t believe Tesla will be a mass player in India. The problem is the price bracket. But it can bring several important advantages to the Indian market. Tesla cars are the best examples of what software can do. And many Indian consumers love technology. Tesla also brings in its own charging network at scale. That will not be a strong limitation for them,” he said.
Tesla’s production of a mid-priced car (priced around Rs 20-25 lakh) is being speculated for India and experts feel that at the end of the day, they’ll compete with ICEs luxury car makers since the EV ecosystem is still very nascent in the country. “The thing about Tesla is that they’re very different from other manufacturers. They’re very good at pivoting rapidly. That’s what they’re expected to do in the Indian market,” he said.
Maitra, too, doesn’t expect the company to make a lot of profit within 3-4 years of its India entry. “They have to have 10-15 year lenses on the market. They will have to have a mass market car because without that I don’t see the investment scaling. The market is there, one has to be patient. 25% of all auto manufacturing is exports. That’s another big opportunity.
According to a report by Bain and Company, India’s luxury market is forecast to expand to 3.5 times its current size, reaching the USD 85 to USD 90 billion mark by 2030, although luxury cars still represent just over 1% of the overall Indian car market. Unlike Tesla’s meteoric rise in established markets, India demands a strategic approach characterised by the sobering reality of a long gestation period. Sooner or later, when Musk embarks on a high-stakes journey, the road ahead promises to test Tesla’s mettle like never before.
This feature was first published in Autocar Professional’s May 1, 2024 issue.
