In this week's and the year's first FinMail, we will look at Tesla's Entry into India's Automobile Industry and why it took so long. We will further discuss Import Duties and their role in International Trade. Plus, we take a brief look at the Electric Vehicle Ecosystem in India.
Nitin Gadkari - Road, Transport, and Highway Minister, on Tuesday, announced that Tesla is going to begin operations in India from early 2021. In the initial phase, Tesla will import finished cars to India as CBU - Completely Built Units and if everything goes well and Tesla sees growth in India, it will also consider opening an assembly and manufacturing plant in India as well.
It's not the first time, that Tesla's Entry has been in the news. It's been a long wait for Elon Musk and the Tesla Fans to be able to see Tesla's cars on Indian roads but somehow couldn't.
Back in 2016, Musk announced on Twitter that Tesla is soon going to enter Indian Markets with Tesla Model 3 and there were even pre-bookings opened for the same. But however, something didn't work out and Tesla paused the bookings and decided not to launch it. The reason could have been heavy custom duties or maybe lack of infrastructure or maybe the government regulations or all of them.
And then back in October when a Twitter Account asked a question - When Tesla is coming to India and to which Musk replied,
"Next year for sure"
and on 29th December 2020, Nitin Gadkari announced that Tesla will soon begin to sell cars in India.
Tesla is first going to enter the Indian Market with its most affordable car, Tesla Model 3. But Tesla's most affordable car is not affordable for the people of India and it actually ranks in the higher premium segment. The Tesla Model 3 will be priced at around ₹55-60 lakhs in India after Import Duty and other relevant taxes.
₹55-60 lakhs for a car might not seem to be a huge deal for some but when it is considered from the point of view of India's Car Market, it is too much. According to a report on GaadiWaadi, the average price of a car sold in India during the year 2018 was ₹7.7 Lakhs with an upper limit of ₹29.5 Lakhs.
And considering the price point of 'Tesla's most affordable car', priced at upper ₹60 Lakhs, it is almost 8 times the average price and 2 times the highest price range of cars sold during 2018.
But when we researched on the Tesla Website, the most affordable version of Model 3 is priced at $36,490 which converts to around ₹27 Lakhs. (Assuming 74₹ = 1$).
So what is to be noted here is that, the custom duty or import tariffs is even more than the original price of the car. To own a car like Tesla you need to pay more to the government than to Musk itself.
Import duty on Tesla is whopping ₹33 lakhs, almost 125% of the car value.
But why such a heavy duty is levied?
For that we need to understand what are Import Tariffs and why are they levied.
International Trade (IT) has enabled the availability of finding all types of products and services around the world.
International Trade is a trade or an exchange of products, services or capital between countries.
So IT is beneficial in one way that you could enjoy those delicious Swiss Chocolates from Switzerland in India and the rest of the world could enjoy our sweet Alphanso Mangoes. When we Indians purchase Swiss Chocolates, it is considered an import for us and an export for Switzerland. And in the same way, when we send Alphanso Mangoes to the USA, it is an export for us and an import for the Americans. It is a win-win situation for all.
But on the other side of International Trade, there are disadvantages to it as well. Let us consider a scenario.
What will happen if the Swiss Manufacturer starts to sell its chocolates heavily in India?
Because there are good cocoa reserves in Switzerland, it is possible that Swiss Chocolates could be available at low prices in India. And because the Swiss Manufacturer has reasonable rates for his chocolates, he will be in direct competition with the Indian Chocolate makers. And if the Swiss chocolates are sold at lower rates, the demand for them will increase and Indian Chocolates will see lower demands. As a result, Indian manufacturers would have to lower their prices to match with Swiss Chocolates even if they face losses or else shut down their businesses. Slowly and steadily if there are no low-price alternatives to the Swiss Chocolate, Indian manufacturers would have to exit the market because of lower profit margins and competition.
As a result, our import bill will also rise and money will start flowing out of the country instead of staying within the country. There are chances that because of huge import bills our national debt will also rise and people will start getting unemployed.
International Trade is beneficial but in many cases, there is a potential threat to domestic industries being shut down in an absence of a rein that controls the foreign businesses in establishing monopoly or business advantage. And thus to prevent that, the government interferes and establishes barriers in the form of duty, taxes, rules, policies, etc. The government cannot ban all imports totally as we have to export our goods as well. And thus some barriers are established to provide an edge to the domestic businesses. Such barriers are called Trade Barriers and are categorised into 3 types.
1- Tariffs: Tariffs are a kind of taxes that are levied on Imported products or services. Such taxes help protect domestic businesses against foreign Businesses gaining market control and also helps the government to Generate extra income.
2- Quotas: Quotas are kind of a number limit that is placed on products or services. For example, the government of India could place a quota on Swiss Chocolates stating that only 10,000 boxes of 100 gm each of Swiss Chocolates could be imported in a particular month. The limit of 10,000 boxes is a type of quota.
3- Non Tariff Barriers: Such barriers are not in form of money but are barriers in form of various regulations and policies. The government could decide a range of measures that a foreign business needs to follow like obtaining licenses, certificates, sanctions, etc.
Now that we have understood Import Tariffs, we get that the extra cost of almost 125% of the car's original price is the import Tariffs that you need to pay to the government. This is done so that Tesla doesn't have a competitive advantage over Indian Car Manufacturers. That being said and understood, India is moving towards a greener option. Fuel cars spread more pollution in the environment and cause more global warming. And electrical cars are a better alternative for helping curb the pollution and thus the government has been spreading its importance and also providing benefits to those who own an Electrical Vehicle.
Benefits passed on by the Government to Electric Vehicle Owners
Current benefits that are provided by the Government on owning an Electric Car include:
Road tax exemption is usually 4-10% of the cost of the car plus ₹3000 of registration fees.
Loan Interest deduction up to ₹1.5 Lakhs is allowed in Income Tax.
Also, subsidies are provided up to ₹30,000 on each Electrical Vehicle owned.
So it can be seen that the government does want to promote more ownership of Electrical Vehicles and thus bringing a big brand to India will help the government promote this initiative.
Is India's Electrical Vehicle Infrastructure is ready for Tesla?
Let us take a look.
As per one survey, there were just 150 electric charging stations in India until 30th December 2019 which is significantly less with respect to India. Although, the infrastructure for the electrical vehicle's ecosystem is on the rise.
In November 2020 Nitin Gadkari announced that the government is planning to set up 69,000 EV Charging kiosks at petrol pumps across the country to induce people to go electric. As per one report on Money Control, the government is also planning to have electric charging stations every 25 km on both sides of the highway as well as in various cities. It is about time for us to see Electric Cars on roads soon as well as Charging Station. And with the entry of Tesla, the ecosystem of electric vehicles is going to accelerate further because of the hype and brand value it brings.
Current Electric Vehicle Industry Scenario
Now that we have taken a brief look at the Infrastructure let us now consider Tesla against its peers and its affordability in India.
As mentioned earlier the Tesla Model 3 is going to cost around ₹55-60 lakhs in India. The price might make the targeted market of Tesla smaller because there are lower-priced electric cars available in the market currently which includes
Tata Nexon - ₹14 Lakhs
Tata Tigor - ₹12.59 Lakhs
MG ZS EV - ₹20.88 Lakhs
Hyundai Kona Electric - ₹23.83 Lakhs
Mahindra eVerito - ₹11.41 Lakh
These prices are entry-level on-road prices.
These are the cars that are already in the market and we expect more variants and models by various car companies in the coming years because of the shift to EV.
Let's take a look at the sales numbers of these EVs between
April 2020 and September 2020,
Tata Nexon - 1151 Units
Tata Tigor - 100 Units
MG ZS EV - 514 Units
Hyundai Kona Electric - 100 Units
Mahindra eVerito - 9 Units
Total Sales - 1874 Units
The sales figures are not that huge, but a rising trend is definitely there, and thus the future is bright for Tesla as well as other Electric Car Manufacturers. There are existing players in the markets shifting to EV Cars like Tata or Mahindra and there are upcoming new players as well like Pravaig Dynamics. As far as Tesla's sustainability is concerned in the Indian Market, it is starting with CBU- Completely Built Units and thus has no extra cost as such. From the growth perspective, Tesla's market will be niche, which is affluent people and those drawn by Tesla's brand name because, even when Tesla had opened pre-bookings back in 2016, there were people who paid money for it, and that even included Paytm's CEO, Vijay Shekhar Sharma, and Popular wearable fitness band brand Goqii's CEO, Vishal Gondal amongst others.
Whatever be the case, sooner or later electric cars are the future and Tesla will have to earn its share of income from the World's Largest Emerging Automobile Market to Survive. Because Tesla is competing with a higher price and it doesn't attend to the mass but a very niche portion of the market. Even the people who can afford a Tesla would give it a thought because of the developing Infrastructure.
Will Tesla be able to set its foot in the market or will Tesla stay as the company that sells Imported Cars in India?
Let us know your thoughts. Tweet to us - @yourfinman