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Tesla's Indian journey - the whys, the whats and the hows

Akshat Tiwari

Strategy, Consulting | IIM A | BITS Pilani

发布日期: 2021年3月19日

Elon Musk, innovator and marquee investor, through his renowned ventures, including Paypal, Tesla, SpaceX, The Boring Company, has disrupted status quo in those sectors. As Tesla’s CEO, he brought about radical changes in an otherwise change-resistant automotive industry. Since 2003, Tesla has been among the pioneers of fully-electric production vehicles and driverless car (Autopilot) technology.

In July 2020, Musk had tweeted that Tesla will look at another Gigafactory in Asia, outside of China. Thereafter, Tesla applied for two business licenses in India under the names “Tesla India Motors and Energy Private Limited” and “Tesla Energy Private Limited.”

It has now established a fully-owned subsidiary in Bengaluru on 8 Jan 2021, a unit called “Tesla India Motors and Energy Private Limited” owned via Tesla Motors Netherlands BV and has appointed three directors – Vaibhav Taneja as chief accounting officer, entrepreneur Venkatrangam Sreeram and David Jon Feinstein, a technical recruiter from the United States. Further, it plans to set up a research and development (R&D) unit and eventually, a manufacturing facility for its electric vehicles (EVs) in the country. Tesla is also in talks with other states of India like Maharashtra, Gujarat, Tamil Nadu and Andhra Pradesh to further spread its operations across the country.

What does Tesla’s move translate into? Let’s find out.

Tesla will probably begin operations in India as a sales company importing its vehicles into the country as completely built units (CBUs). It plans to import, distribute, sell, service, and maintain EVs and stationary energy storage systems and equipment, including solar panels in the world's fourth largest auto market.

Indian EV ecosystem

India’s EV market is expected to touch ? 50,000 crore by 2025, financial services firm Avendus said in a report in July 2020. Of this, battery, motor and controller together can be a ? 15,000 crore opportunity for India by 2025. Avendus expects over 3 million EVs to be sold in India, majority of them being two and three wheelers. “We all accept that the future is electric, it is now time to embrace electrification as an opportunity to create a self-reliant and cleaner India,” the report said.

Despite ranking as the fifth largest auto market in the world (behind the US, China, EU + UK + EFTA & Japan), India's massive population of 1.3 billion people means it actually has one of the lowest cars in use-per-capita.

Here, plug-in refers to battery-electric + plug-in hybrid vehicles (2020 figures are estimated by IDTechEx). The largest barrier to the adoption of electric vehicles is the higher upfront price, which is, therefore, an even higher barrier in India.

EV Sales in India for FY 2019-20

The EV market in India is currently dominated by the more budget-friendly Tata Nexon EV, MG ZS EV and the Hyundai Kona. The only premium EV currently sold is the Mercedes-Benz EQC, with the Jaguar I-Pace to be launched soon.

Tesla plans to import and sell the Model 3 in India for around $65,000-$75,000 — roughly double the price in the U.S. market, sources familiar with the plans said. And Tesla CEO Elon Musk had himself expressed concern about India's high import taxes on cars (details on import duties provided in later section).

Tesla’s entry in the nation comes at a time when India is revving up its charging infrastructure for a wider acceptance of electric vehicles. Last November, the government even invited bids for establishing advance chemistry cell battery storage facilities in the country.

Tesla’s major markets could initially be Bangalore, Delhi and Mumbai followed by other cities like Hyderabad, Chennai, Pune and others based on the demand for EVs. The company controls its network in other markets through the “owned-and-operated” model i.e. selling its cars via the showrooms/centers that Tesla owns and these centers are handled by Tesla employees. A parallel approach is employed with after-sales support service too. For India too, the “owner-and-operated” model can be deployed.

Why Netherlands based ownership and funding?

Tesla is currently registered in Palo Alto, California, and Tesla Motors, the Netherlands, is one of its subsidiaries. Netherlands is one of the top choices among high-profile US-based companies since the country offers favorable tax rates, while offering a robust intellectual property protection framework.

Tesla India Motors and Energy Private Limited (CIN: U50100KA2021FTC142975) has its registered address is in Lavelle Road, Bengaluru. Its authorized share capital is ? 500,000,000 and paid up capital is ? 100,000. According to an Economic Times report, Tesla Motors Amsterdam is the parent of the Indian subsidiary and not the US arm i.e. Tesla’s division in the Netherlands will be the entity routing the company’s investments in India.

Tesla has chosen the tax-friendly jurisdiction of the Netherlands to route its India investment. This route would help avail tax benefits related to capital gains and dividend payments.

The India-Netherlands treaty

Netherlands and India share a very long and stable income tax treaty, and it has never been renegotiated. Under the current India and Netherlands ‘agreement for avoidance of double taxation and prevention of fiscal evasion’, investments by Dutch companies get an exemption from capital gains when shares in Indian companies are sold by the Dutch company to a non-Indian buyer, subject to certain riders. As per the treaty, the sale of unlisted shares of an Indian company is taxable only under very limited circumstances in India.

“With the amendment of India’s tax treaties with Mauritius and Singapore, there are hardly any choices for getting capital gains tax exemption on FDI transactions.” said Deloitte India partner Rajesh Gandhi, as per Economic Times.

Lower dividend taxes and withholding taxes

Netherlands has a strong treaty network (including a good treaty with the USA) and its domestic law also favours multinational corporations. The Dutch domestic laws provide a fair bit of advantage from a tax planning perspective. The companies gain an edge in the rates for dividend taxes and withholding taxes if they choose to invest via the Netherlands.The India Netherlands treaty also provides for a lower withholding tax rate on dividends that a Dutch company may receive from an Indian company.

What sits in the Tesla pipeline for India?

Tesla sales teams are currently working on building custom sales and production orders for the India market, ensuring orders are complete and validated once the configuration is finished. Here are the models expected to arrive in India, very soon.

There’s no word on whether the Autopilot functions would accompany these cars, as such functions would have to pass through several regulatory hurdles before being put to use in the world’s second most populated country.

What can be a good way forward?

Indian market is heavily price-conscious. The low GST rate and tax relaxations in India could come in handy while purchasing the zero-emission vehicles (GST on EVs is 5% while that for non-EVs is 28%). The import duties, however, can be a major deterrent if a Completely Built Up (CBU) vehicle is being imported and can go as high as 100% over and above the Cost, Insurance and Freight (CIF) value.

As we can see, the import duty for Semi Knocked Down (SKD) vehicles with pre-assembled battery packs, motors, motor controllers, chargers, power control units, energy monitor contractors, brake systems, and electric compressors that aren’t mounted on a chassis or a body assembly is only 15%, which is 45% lower than the 60% for a CBU car.

Reduce product price by assembling SKD kits locally with a domestic partner

The approximate price for the Model 3 can be lowered by ? 13-15 lacs when assembled locally. Also, the Model S may cost ? 60-70 lacs less while the Model Y may cost ? 45-55 lacs less if assembled locally.

Local assembly of these models will empower Tesla and make it the predominant brand in the admittedly rather small 50,000 cars/year India luxury car market. A 25% market share would roughly translate into 12,500 cars per year. Setting up a plant for local assembly with a domestic partner will be a good starting point for Tesla. Tata Motors holds good promise here since it has global brands in its portfolio and a promising technology infrastructure already in place.

Make a bus for India through a sub-brand or independent brand

Indian regulations favor commercial vehicles. Also, the public transport system needs a shot in the arm for reducing pollution. Bus sales in India are dominated by a small number of local companies: combined, Ashok Leyland and Tata Motors command over 80% of the market. Electric buses generate 27% more revenue and 82% more profits than diesel buses per day (Indian Institute of Science) and as much as 25 tons of CO2 emissions can be cut every year for every diesel bus replaced by an electric bus. India has conducted a number of small pilots in various cities with electric buses, but the market is still at a very nascent stage. Big commitments from governments in 2019, such as the 7000 buses mandated by the FAME-II purchase subsidy are a good start, but have not yet resulted in a significant increase in sales, with only 600 electric buses sold for FY20. Moreover, the government's FAME-II policy does not subsidize private electric cars - only commercial ones. Technology-wise there’s a transition underway from lead-acid batteries, which currently dominate for low cost but are highly toxic and not disposed of safely. With the transition to Li-ion comes challenges because of the high temperatures of 45 degrees C in the summer, and the culture to leave vehicles parked out in the hot sun when charging or residing at home or work.

Having a commercial vehicle in its portfolio targeted at improving the public transport will attract interest from various state governments and pile up revenues significantly. However, Tesla should create a sub-brand or an independent brand to launch commercial vehicles lest repelling the loyal fandom of the Tesla brand in India.