Will India Give Tesla a Pass on Local Sourcing and Import Tariffs?

The electric-car maker has a compelling case it can make with the Indian government.

Evan Niu
Evan Niu, CFA
Jun 16, 2017 at 10:35AM

In many ways, India is a tough country for multinationals to crack, particularly those that want to have a retail presence. The Indian government has long held a policy that requires single-brand retail stores owned by foreign companies must locally source at least 30% of the total value of products sold. This foreign direct investment (FDI) policy was revised in 2012 by the country's Department of Industrial Policy and Promotion (DIPP). Of course, the goal of this policy is to encourage foreign investment in the country.

Tesla (NASDAQ:TSLA) is now eyeing the Indian market, but that local sourcing requirement is a difficult hurdle to clear. Even Apple has spent years trying to figure out how to better address the Indian market directly with its own retail presence. CEO Elon Musk previously expressed that he was hoping Tesla could launch in India as soon as this summer.

Tweet, tweet, on the Street 

Musk said earlier this week on social media that Tesla is seeking "temporary relief" from the Indian government in order to expand in the country. Much like neighboring China, India also imposes substantial import tariffs on imported cars.

A couple years ago, Musk noted that import duties are "prohibitively high," although it was unclear if he was speaking of China or India. For reference, the Indian import duty rate on a Model S is 125%, according to Pitney Bowes.

Following the tweet above about the 30% local sourcing requirement, Make In India, a government program tasked with encouraging domestic investment and innovation in the country, attempted to clarify.

The requirements are intended for retailers and do not necessarily apply to manufacturers. However, Tesla's direct sales model means that it is both a retailer and a manufacturer, in which case the local sourcing requirement should apply. Tesla isn't anywhere near manufacturing cars locally, but once it does, it shouldn't need to worry about either the sourcing requirement or the import tariff. But that's a few years and several billion dollars away at this point.

Theoretically, Tesla could sell its cars wholesale without any sourcing requirements, but it would still be subject to the import tariff. Considering Tesla's commitment to direct sales, it seems the local sourcing requirement will continue to apply if Tesla hopes to eventually open retail stores in India.

Front of a Tesla store

Tesla's retail stores mean the local sourcing requirement applies. Image source: Tesla.

The optimistic case for temporary relief

As far as whether or not the Indian government will give some relief, that remains to be seen. The good news is India has a stated goal of aggressively transitioning to electric vehicles (EVs) in order to reduce carbon emissions, hoping to shift 100% of all car sales to EVs by 2030; India's National Electric Mobility Mission Plan calls for 6 million to 7 million EV and hybrid sales by 2020. We're not just talking about a consumer electronics device.

Tesla is one of the largest EV makers in the world, behind only China's BYD in terms of unit volumes, so it's hard to imagine India hitting its goal without making some concessions with Tesla. There are plenty of EVs in the pipeline from other automakers, but many still don't take EVs seriously and only produce compliance cars. As part of the Paris Climate Accord, India pledged to reduce carbon emissions by 33% to 35% by 2030.

In terms of opportunity, the luxury car market in India is quite small (just 35,000 units last year), so like in other parts of the world, Tesla's Model 3 will be critical in driving unit volumes at more affordable price points. India is expected to become the third-largest vehicle market in the world within a few years.

Tesla has a compelling case that it can make to the Indian government in helping it reach its goals. Hopefully, India sees it that way, too.