Elon Musk’s biggest test in making Tesla cars affordable: India

India’s commerce and industry ministry was quick to respond when Musk tweeted his concern about the 30 percent local sourcing requirements through the country’s “Make in India” Twitter handle, and said that India’s foreign direct investment (FDI) policy does not mandate any minimum sourcing of components by auto manufacturers.


Further, India’s minister for road transport and highways, Nitin Gadkari, is trying to woo Tesla by offering land near ports to set up a manufacturing unit in the country, according to local media reports.

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India’s customs regulations and its graded tariff structure may serve as an imposing barrier for Tesla to overcome without manufacturing locally in India. Automakers are required to pay a hefty import duty, as much as 100 percent of the cost of the vehicle, to import cars.

Foreign-made cars worth up to $40,000 attract an import duty of 60 percent, and 100 percent if the value is greater. Sen said global auto manufacturers in the luxury market, like Porsche, Ferrari and Lamborghini, are playing by those rules to sell their cars in India.

“Doing trade [in India] is a tricky thing,” Sen said. “If a company wants to just export vehicles through local dealers or distributors, they will only have to pay import duty,” he said. “But if a company wants to enter India as a single-brand retailer, then they will have to source 30 percent of products locally within a certain number of years.”

The only way around the roadblock is a local production facility. “All foreign EV makers should set up an assembly plant [in India] to get the benefit of bringing vehicles in completely knocked-down condition at 10 percent import duty,” Sen said.

Tesla’s timing of an India debut comes down to a choice between waiting for the electric vehicle movement in India to gain muscle and maturity or going all-in to get ahead of the game and capture the marketplace while helping it grow.

— By Vikram Barhat, special to CNBC.com

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