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Why Tesla's 20-million electric vehicle goal could next take Elon Musk to India

Key Points
  • Tesla reported its fifth consecutive quarter of profits on Wednesday, but operating expenses jumped 33% to over $1 billion as Tesla constructs new factories in Austin, Texas and Brandenburg, Germany, and it continues to ramp its Shanghai, China, plant.
  • Tesla CEO Elon Musk said of new factories, "we’ll start off very slow at first and then become very large.”
  • Tesla's global ambitions run to as high as 20 million vehicles by 2030, and Musk also has recently been talking about entering India, which could reach 10% of Tesla demand within the next decade.
A Tesla Model 3 vehicle set to be delivered to a company employee moves off an assembly line during a ceremony at the company's Gigafactory in Shanghai, China, on Monday, Dec. 30, 2019. Tesla spent over $1 billion in the most recent quarter on factories, including one in Germany, and Elon Musk has hinted that India could be the next target.
Qilai Shen | Bloomberg | Getty Images

Tesla and its CEO Elon Musk are focused on building out factories around the world to complement its Fremont, California, electric vehicle plant where the company started. The EV maker spent over $1 billion in the past quarter including on new factories in Austin, Texas, and Brandenburg, Germany, and Musk commented after its Wednesday third quarter earnings that he is "amazed" by the progress at the Shanghai, China, Gigafactory. Tesla thinks it can reach 20 million vehicles by 2030.

"I'm not saying for sure we'll hit 20 million vehicles," Musk told analysts and investors on the conference call. "But it does seem like a good goal to have because that would mean that we're replacing 1% of the global fleet per year."

One question more Tesla watchers have been asking about that global EV revolution is, when will India become a part of it?

The topic of an India entry for Tesla did not come up during Tesla's earnings call on Wednesday, but recently Musk did Twitter-tease Tesla's imminent foray into the Indian market. For the past few years, the billionaire auto and energy tycoon's default Twitter response to Indian fans asking about Tesla's India launch plans has been "soon" or "next year."

He said that in 2017, repeated it in 2018, then again in 2019 and more recently on Oct 2. Musk's October tweeting assured Indian supporters the company would be in India "next year for sure" along with a "thanks for waiting" acknowledgement. 

The Twitter comments sent Indian fans into a tizzy. "The advent of Tesla India will give an exponential and unprecedented push to the EV market in India," wrote one user. "Have to get a Tesla even if I have to sell my wife," joked another fan.

Expectedly, Musk's comments also touched off an explosion of fawning pieces in the local media.

Of course, the truth is Tesla has not entered India contrary to Musk's past Twitter proclamations. And few Tesla experts were surprised.

But could this time be different?

With manufacturing pace ramping up at its plants in U.S. and China, growing profitability, a healthy cash flow, a cheaper car on the way, and battery prices falling, Tesla has never been better positioned to conquer new markets, including India.

So convinced are some analysts that the tweets are finally going to become reality, they believe the big India announcement could be weeks away.

Why 2021 could be India's year for Tesla

Craig Irwin, an analyst with Roth Capital, says details of Tesla's India launch could be made public towards the end of the year.  "We have channel checks from a couple months back that indicate the entry into the Indian market is very high probability for 2021, with a probable announcement in late 2020," he said, claiming that "Tesla is in the process of selecting a site for a manufacturing facility in India." 

"Channel check" is industry parlance for conversations with trusted contacts and proprietary research.

It helps that after years of burning through piles of cash, the EV maker is finally profitable. This quarter's earnings were the fifth-straight profitable one for the company and it had a cash balance of over $14 billion, and free cash flow of $1.4 billion in the quarter. But it is planning to spend.

Musk said after the earnings report that in 2021 and 2022, Tesla plans to spend far more than it previously forecast — $2.5 billion, especially on new factories and expansion.

The demand picture has changed and now with Giga 3 build out in China, Berlin and Austin, India is next.
Dan Ives
Wedbush Securities

"For Tesla, it's different this time because they have more money than they've ever had and with the [Model] 3 and Y out, Musk may have more time to focus on expanding there [India]," said Morningstar equity analyst David Whiston, adding that if Musk "wants to do it and can get a good relationship with [Indian Prime Minister Narendra] Modi like he has with the Chinese government then it's more likely to work out."

Vivek Wadhwa, a distinguished fellow at Harvard Law School's Labor and Worklife Program, has been exchanging emails with Musk over the years about India, and said the Tesla CEO has expressed his intentions of entering the Indian market. "There is no better time than now, given that his battery costs have dropped and he is expanding his manufacturing capabilities," said Wadhwa, author of The Driver in the Driverless Car: How Our Technology Choices Will Create the Future.

Musk's recent India tweet could hold the key to the automaker's plans for the second-largest economy in Asia. In the last week of September, Reuters reported that NITI Aayog, a federal think tank chaired by Prime Minister Modi, shared a proposal for offering $4.6 billion in incentives to companies setting up advanced battery manufacturing facilities. The proposal is currently being reviewed by the Indian government.

Following this, Elon Musk tweeted about Tesla's India foray next year, noted Tokyo-based Atsushi Kawahashi, senior director, automotive, at J.D. Power. "If it [the NITI Aayog proposal] goes through, it will attract EV battery makers and manufacturers, including Tesla, who may consider not only selling cars, but also setting up their gigafactories in India," Kawahashi said.

Tesla did not respond to multiple requests for comment.

Tesla's India opportunity

India's potential as a lucrative market is undeniable. For Tesla, India represents a big opportunity. Just how big is difficult to determine.

"India will be as big as China, and maybe even bigger as there are no trade or geopolitical conflicts impacting the background," said Roth Capital's Irwin.

India has a large population and Musk wants to bring Tesla everywhere so people can stop using internal combustion engine vehicles and reduce carbon monoxide emissions, said Whiston, alluding to Indian government's renewable energy ambitions.

Dan Ives, managing director at Wedbush Securities, said Musk has had a few false starts in the past, but contends India is and will remain a high priority for Tesla and its CEO in the coming years. "The demand picture has changed and now with Giga 3 build out in China, Berlin and Austin, India is next," he said, pointing to EV demand and the population growth in India as indicative of a massive market.

According to Ives' projections, in five years India will represent 10% of overall demand for Tesla.

What also considerably increases India's relative attractiveness is the uncertainty posed by the ongoing U.S.-China trade spat and China's questionable intellectual property regime.

"I am sure Elon [Musk] is worried about the tensions between the U.S. and Chinese government," Wadhwa said. "Tesla could be kicked out at a moment's notice. The Chinese government would not hesitate to do this once it has stolen whatever technology it needs from Tesla."

Musk praised the China factory and its team on the earnings call, saying, "In terms of capacity build out, we're making progress on three major factories. We're continuing to expand Shanghai significantly, which is going incredibly well. The Tesla China team is just, I mean, incredibly good. Super smart, work hard. It's like I'm always amazed by how much progress the Tesla China team makes. It's beyond all reasonable expectations."

Kawahashi said balancing optimism about Tesla's India prospects while tempering expectations is key. "While Tesla is likely to have a huge appeal among Indian car buyers, it will be up against formidable challenges," he said. "The Indian car market is extremely price and value conscious, with about 70% of the sales below Rs. 1 million (about $14,000)." 

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Given its current product range, Tesla is likely to enter the premium segment — Model 3 sells for around $40,000 in China — where there will be fewer buyers, he added.

Wadhwa said Indian consumers are highly sensitive to price, but "everyone who can afford one will want one."

For India to be the next big market, a key would be to price models at the $25,000 level, something Musk has promised for 2024, he said.

Despite a similar population size, Tesla's volumes will be limited in India compared to China, according to Kawahashi, but added, that "India volumes may be higher than that of other markets where Tesla is planning to expand over the next few years."

The South Asian nation has bilateral agreements with many of these countries and, therefore, could become a production hub. "They [Tesla] are in a strong position as right now in the EV market it's Tesla's world and everyone else is paying rent," Ives said.

A great deal of Tesla's India story could be driven by whether or not the company chooses to set up local manufacturing. With a large production base in neighboring China, and investments in multiple other factories in years to come, Tesla may be tempted to export some of its cars across the border to India to get things off the ground.

Wadhwa said Musk could choose that option, but it would be a mistake. "I don't think he understands geopolitics," he said. "A better strategy would be to import the required components and build an assembly plant in India."

That's because it would get Musk tremendous support from the Indian government, which is critical to building a new market. "Otherwise, he may end up getting frustrated by the bureaucracy," Wadhwa said.

Moreover, recent military standoff between India and China has also made importing cars from China extremely unlikely. Current import duties and the Indian government's decision to impose stricter rules for imports from China, India's biggest source of imports, all but foreclose on that possibility.

Leaning into China to sell EVs in India

If Tesla entered India in 2021, they'd have to export cars from China or the U.S. to start with, said Morningstar's Whiston. "For a long time Tesla's vehicles in India will be the domain of the very wealthy, so that probably means not enough volume to justify building a plant there, at least for now," he said, but added the EV maker "may not want to deprive China of what China production they can make [therefore] anything is possible with a bit more time."

Irwin said eventually, production would be based in India. "We see this as a near certainty," he said.

"We expect Tesla to break ground on a factory in India by summer of 2021," Ives said, adding that by the end of 2021, India could become a manufacturing hub, building out its production arm replicating its China model. "We could see two factories in India by 2023," he added. 

Tesla CFO Zachary Kirkhorn said on the earnings call that the company is "prioritizing where in the world we send our production. And there's different factors to that depending upon when different product changes are made, what the logistics routing looks like, different things going on in different markets. But we are in a position where we need to prioritize."

Kawahashi said the Government of Karnataka (a state in southern India) is already in talks with Tesla to have the R&D and manufacturing unit in Bengaluru, the state capital.

Karnataka is not the only contender, said Anjali Jaiswal, senior director of international program, India Team, at Natural Resources Defense Council (NRDC). "Several of the state EV policies have strong incentives for setting up manufacturing and gigaplants, including Telangana and Gujarat," she said.

The projections could prove overly ambitious, but Kawahashi is convinced Tesla has the wherewithal to pull it off. "Tesla set up their Shanghai plant in record time," he said. "It took 168 working days (about 6 months) from permits to hooking up the electricity at the facility, so they have the capability to deliver against tight timelines."

It helps that India is working hard to shake off its image as a country of Kafkaesque bureaucracy, imbued with red tape, government apathy and lack of political will. To its credit, India jumped to 63rd place among 190 nations, from being ranked 77th in 2019, in the 2020 World Bank Study on Ease of Doing Business.

While China ranks 33rd, far ahead of India, Kawahashi said given the Indian government's willingness to support EVs — 11 Indian states already have their EV policies in place — it is "possible for Tesla to meet the 2021 timelines."  

Traffic jam in Noida, India. India's national and various state governments are increasing incentives for electric vehicle manufacturing and sales, which could entice Tesla to make India a future focus of its ambitious global production roadmap which includes new plants in China and Germany.
Sunil Ghosh | Hindustan Times | Getty Images

"Regulatory [hurdle] has been tricky due to import duties, and this has probably delayed a focus on India, but those issues will likely resolve fast with Tesla building a facility there," Irwin said. "Indian government policies are accommodative, and we hear there is a bake off going on right now, with different states in India competing to land the factory with incentive packages." 

Ives said there could be some regulatory stipulations around local manufacturing that Tesla may have to navigate, but he doesn't see that as an obstacle that can't be overcome. "Regulation and demand were the issues in the past, but we believe there are open arms in India now for Tesla which could bring another 5,000 to 7,000 jobs to the country," the Wedbush analyst said.

If the Indian government wanted to force a plant, Tesla would have to decide if they wanted to take the risk of insufficient volume for several years due to limited demand, said Whiston, but added "it'd be foolish for the government to insist on that because stores and service can still bring new jobs to India."

Musk said on the earnings call that its sales and service and distribution system is in "something in the order of 40 countries," and "it will be over 100 countries." 

India's road conditions and self-driving

Tesla will have to contend with the usual speed bumps along the road. India's notoriously lagging infrastructure, poor road conditions and other bottlenecks are not going to improve overnight. In fact, one frequent concern aired by Tesla's Indian fans is that the battered roads and absence of clear lane markings could compromise Tesla's autopilot capabilities.

"All I can say is I'm skeptical autopilot would work properly all the time," said Whiston, adding he doubted "autopilot could work on any road or dirt path in the country even once there's full autonomy in other parts of the world."

It isn't just the roads. "I don't think that the Tesla developers in Silicon Valley have imagined an elephant or a monkey on the road," said Wadhwa, referring to frequent traffic disruptions encountered on Indian roads caused by stray cattle. He felt confident, though, Tesla "cars would work well on the highways there."

Available EV charging stations and infrastructure in India also have some catching up to do. "The United States and China don't have enough EV charging and India is just getting started with charging stations," Jaiswal said.

Given the Tesla market in India is currently for the uber wealthy, "the bigger priority for the Indian government is two- and three-wheelers, which make up the vast majority of the market," she noted.

The Covid-19 economic downturn and struggling Indian economy could be another issue as government stimulus around the world has been influenced by the budget shortfalls and public health priorities.

Jaiswal likens what India could pull off in the fast-moving EV market with what it accomplished in the field of telecommunications. "Just think of the mobile phone market and the leapfrog India made there," she said. "Indian automotive companies are competitive, and the workforce is some of the best, as evidenced by India's prominence in the current auto parts manufacturing market."

India recently displaced Germany to become the fourth-largest automobile market in the world, behind the U.S., China and Japan.

New EV initiatives

One of the most tangible signs that support the theory of Tesla's imminent expansion to India is the slew of favorable EV regulations and policy initiatives the Indian government has rolled out in recent times.

Providing a monetary nudge towards EV adoption, the government recently unveiled significant income tax rebates for consumers who buy electric vehicles. In its most recent Goods And Services Tax (GST) Council meet, the government slashed the GST rate on electric vehicles from 12% to 5%, just the tax boost the auto industry needed to fuel EV sales.

In another landmark move, the Modi administration approved the Faster Adoption and Manufacturing of Electric Vehicles in India Phase II, or FAME India Phase II, program with an allocation of Rs.100 billions ($1.4 billion) for a period of three years, ending in 2022, to accelerate EV adoption. The program proposes setting up 2,700 charging stations across the country ensuring there is at least one charging station in a grid of 3 km by 3 km. Approvals have been granted for setting up 1,050 charging stations by 22 government and public sector entities in 65 cities, according to the NITI Aayog's annual report.

An NITI Aayog report provides a 15-year roadmap for electrification of vehicles in the country. The roadmap stipulates India could save a staggering $60 billion in energy costs and one gigaton of carbon emissions by 2030 by adopting more electric and shared mobility. Local media outlets also report that the Union Minister for Road and Transport, Nitin Gadkari, recently urged automakers to cut back on imports, raise exports, and make India a global manufacturing hub for automobiles and auto components.

These policy moves suggest the government is "supportive and anxious to bring Tesla to India," Ives said.

Manufacturing is a huge priority for national and state EV policies, in line with the Make in India push. India is already a burgeoning auto manufacturing market that both private and government players want to support as the world shifts to EVs.

"Both national and state governments are eager to attract international EV auto companies," said Jaiswal. "In the latest round of policies and in light of the Covid-19 economic downturn, state and national governments are working hard on favorable policies for international EV companies, such as Tesla, while protecting local jobs and sourcing requirements remain a major focus."

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